The focus of MicroStrategy is to initiate a positive flywheel cycle, allowing Bitcoin and MicroStrategy's market value to become a perpetual motion machine for growth; delving into the details can reveal the intricacies of this model.
Written by: WOO
Background: Up nearly 500% since the beginning of this year, greatly outperforming Bitcoin.
It is well-known that MicroStrategy's CEO Michael Saylor is a fervent believer in Bitcoin, continuously accumulating coins regardless of bull or bear markets. Following Trump's victory, Bitcoin surged close to the $100,000 mark, and MicroStrategy, holding 386,000 Bitcoins, saw its stock price rise significantly, with an increase of about 500% this year, outperforming Bitcoin by 121%.
How does MicroStrategy's strategy work? Can MicroStrategy still rise? Is it a leveraged version of Bitcoin or the next Luna? Let's take a look with WOO X Research!
What strategy does MicroStrategy use to purchase Bitcoin?
Currently, most people's impressions of MicroStrategy are based on its Bitcoin purchases, but in fact, MicroStrategy is a technology company founded back in 1989, primarily providing data analytics solutions to help businesses with data analysis and decision-making.
In August 2020, CEO Michael Saylor recognized the value of Bitcoin and considered it a scarce digital asset with long-term appreciation potential that could combat inflation and preserve value, converting the company's $250 million reserves into Bitcoin, marking the beginning of MicroStrategy's aggressive accumulation of coins.
As of November 2024, MicroStrategy holds approximately 386,700 Bitcoins, accounting for 1.8% of the total global Bitcoin supply.
How do they do it?
1. MicroStrategy issues debt to purchase Bitcoin:
The company raises funds through issuing bonds (such as convertible bonds) and then uses those funds to purchase Bitcoin.
This is the starting point of the strategy, utilizing leverage to increase Bitcoin holdings.
2. Bitcoin price rises, MicroStrategy's market value increases:
As Bitcoin prices rise, MicroStrategy's asset value (a large holding of Bitcoin) also rises, driving the market capitalization of the company's stock growth.
3. Market value rises, increasing the weight of stocks in the index:
The increase in market capitalization has raised the weight of MicroStrategy's stock in financial indices (such as S&P 500, NASDAQ, etc.).
More index funds need to allocate MicroStrategy stocks, further driving up stock prices.
4. MicroStrategy issues stocks to buy Bitcoin:
After the increase in market capitalization, MicroStrategy capitalizes on the market demand for its stocks, issuing new shares at a premium to sell and purchase Bitcoin.
5. Bitcoin price rises, further driving market value:
Newly purchased Bitcoin increases the company's asset value and market capitalization as the price rises.
The growth in market capitalization further enhances the attractiveness of the stocks in the market.
6. MicroStrategy issues stocks again, repeating the cycle:
MicroStrategy exploits the rise in stock market capitalization to repeatedly issue new rounds of stock and purchase Bitcoin, forming a 'flywheel effect.'
The focus of MicroStrategy is to initiate a positive flywheel cycle, allowing Bitcoin and MicroStrategy's market value to become a perpetual motion machine for growth; delving into the details can reveal the intricacies of this model.
Currently, MicroStrategy has five convertible bonds in the market, with a principal value of $4.25 billion, maturing between 2027 and 2032, representing medium to long-term debt, and most of them are zero-coupon bonds, meaning that the principal does not need to be repaid before maturity, which also reduces the risk of default for MicroStrategy.
In terms of stock issuance, since the launch of the Bitcoin strategy, MicroStrategy has announced five stock issues, raising as much as $4.4 billion in funds.
Source: Bloomberg
Will MicroStrategy be liquidated when the cryptocurrency price drops?
On November 21, the well-known short-selling firm Citron stated: 'While Citron remains optimistic about Bitcoin, we are hedging through short positions in MSTR. We have great respect for Saylor, but even he must know that MSTR is overheated.'
So, is Citron's concern justified?
The design of the asset flywheel inevitably reminds one of Luna/UST, relying on two types of assets to drive prices up rapidly. It also raises concerns about whether a price drop in one of the assets would trigger a chain liquidation effect.
However, MicroStrategy's model is very different from Luna:
Low debt ratio: Currently, MicroStrategy's market value is about $75 billion, with bonds totaling $4.25 billion, representing a low proportion of overall liabilities in the company's financial structure, and maturing between 2027 and 2032.
No intention to sell Bitcoin: Well-known KOL @TheFlowHorse recently posted that if Michael Saylor sells Bitcoin, it would be the best trade ever. Michael Saylor replied that he will not sell Bitcoin.
Such a commitment also ensures that MicroStrategy's 'premium stock issuance' strategy can continue.
Premium returns to 2021 levels: As seen in the chart below, MicroStrategy maintained a premium status even during the 2022 bear market and did not drop below.
Currently, the green line is rising rapidly, indicating a reconstruction of market confidence in MicroStrategy's Bitcoin strategy, returning to the levels of the 2021 bull market.
Source: CryptoQuant
If Bitcoin crashes, the likelihood of MicroStrategy being forced to sell, leading to a chain reaction in stocks and cryptocurrencies, is very low, and the leverage is not as exaggerated as imagined.
Conclusion: MicroStrategy's success story has spurred a trend among Web 2 companies to accumulate BTC.
The success of MicroStrategy's Bitcoin strategic reserve strategy has led to other companies emulating it, including:
RUMBLE: A video sharing platform announces the purchase of up to $20 million of Bitcoin as reserves.
Interactive Strength: A fitness equipment company announces the purchase of $5 million worth of Bitcoin as reserves.
Hoth Therapeutics: A biopharmaceutical company announces the purchase of $1 million worth of Bitcoin as reserves.
There are countless other examples, with more and more companies (small-cap stocks) wanting to follow MicroStrategy's successful Bitcoin reserve model, but most are short-term gimmicks—first, because part of the strategy's success is based on capital intensity, and second, small companies using this strategy often face skepticism from investors and regulatory scrutiny.
But in any case, Bitcoin will be the biggest winner.
