Author: Yohan Yun, CoinTelegraph; Translated by: Deng Tong, Golden Finance
MicroStrategy co-founder Michael Saylor has adopted an aggressive Bitcoin acquisition strategy that onlookers have viewed as either a brilliant vision or a reckless gamble.
The latter warned that MicroStrategy's heavy reliance on volatile assets such as Bitcoin is fraught with risks. A sharp drop in Bitcoin prices could put pressure on the company's balance sheet, exacerbating financial pressures and potentially undermining its ability to repay debts or raise additional funds.
Despite the risks, Saylor remains steadfast. The American entrepreneur said he has “no reason to sell the winners”.
MicroStrategy is the world's largest corporate holder of Bitcoin, with 447,470 Bitcoins held as of the publication of this article. These massive holdings increase the risk for the company and the entire Bitcoin ecosystem.
Funding for MicroStrategy's BTC purchases
MicroStrategy is nominally a business intelligence software company, but its aggressive accumulation of Bitcoin means it is essentially a Bitcoin financial company.
Saylor's Bitcoin buying spree began in August 2020 with a $250 million acquisition of company cash. He then turned to debt issuance, starting with convertible notes—debt that can be converted into equity. These notes typically have low interest rates and helped raise $650 million in December 2020, with subsequent issuances raising billions.
In June 2021, MicroStrategy issued $500 million in senior secured notes, offering higher interest rates and backed by company assets.
Recently, on December 24, 2024, MicroStrategy proposed to increase its common stock from 330 million shares to 10.33 billion shares and its preferred stock from 5 million shares to 1 billion shares. The plan offers flexibility to raise funds over time as needed, rather than issuing all new shares at once.
This aligns with the company's 21/21 plan, which aims to raise $42 billion over the next three years—half through stock sales and half through fixed-income instruments—to fund further Bitcoin purchases and explore initiatives like developing crypto banking or offering Bitcoin-based financial products.
A reckless Ponzi scheme?
David Krause, emeritus finance professor at Marquette University, stated that Saylor's strategy is "inappropriate."
He warned that a significant drop in Bitcoin's price could seriously affect MicroStrategy (MSTR), eroding shareholder equity, jeopardizing debt repayments, and potentially leading to financial distress or bankruptcy, triggering a sell-off of its stock.
Krause pointed out in a written statement, "As someone who has spent most of my career researching and teaching corporate finance and investment, and has served as [Chief Financial Officer] for over a decade, I firmly believe that treasury assets should consist entirely of liquid and low-risk securities, such as money market instruments."
MSTR's trading price is fundamentally above the net asset value (NAV) of its Bitcoin holdings. According to data from BitcoinTreasuries.net, on January 9, the company's Bitcoin holdings accounted for 51% of its market value.
When MSTR's trading price exceeds the net value of its Bitcoin assets, the company raises funds through debt or equity to buy more Bitcoin. However, Kruger warns that this strategy could dilute shareholder equity.
In theory, this method creates a cycle where the company's Bitcoin holdings elevate its market position and stock price, leading to further bond issuance and the purchase of more Bitcoin.
Some social media analysts have likened this cyclical strategy to a Ponzi scheme.
Financial analyst Jacob King stated, "This cycle will only work if BTC continues to rise. If BTC stagnates or crashes (which it indeed could), the cycle will collapse. This is unsustainable and a huge Ponzi scheme."
Source: Jacob King
In a recent media interview, Saylor compared this approach to Manhattan's real estate practices.
"Just like developers in Manhattan, every time real estate values rise, they issue more debt to develop more properties," he said. "That's why buildings in New York City are so tall, and this has been going on for 350 years. I call it economics."
Kruger has consistently criticized MicroStrategy's reliance on Bitcoin, stating in a recent paper that it does not meet the formal definition of a Ponzi scheme by the U.S. Securities and Exchange Commission.
Securities regulators describe a Ponzi scheme as "an investment fraud that involves paying returns to existing investors from funds contributed by new investors."
Gracy Chen, CEO of the cryptocurrency exchange Bitget, agrees with Kruger's analysis.
Unlike a Ponzi scheme that relies on funds from new investors to pay returns to early investors, MicroStrategy's approach depends on market-driven appreciation of Bitcoin value.
Chen pointed out, "This strategy is more akin to De Gaulle challenging the Bretton Woods system by converting dollars into gold. It exploits known weaknesses in modern monetary theory to profit from asset appreciation."
Saylor's Bitcoin blueprint has achieved undeniable success
As of the close on January 8, MSTR's stock price was $331.70, up about 2,200% since the company first purchased Bitcoin on August 11, 2020 (when it was at $14.44). During the same period, Bitcoin's price rose about 735%.
Whether or not people agree with Saylor's views, his plan has undoubtedly elevated MicroStrategy's cryptocurrency portfolio and stock performance, making the company a member of the Nasdaq 100 index in December.
While shareholder equity may face dilution, supporters argue that Bitcoin's long-term growth potential could offset these risks. Additionally, Chen pointed out that MicroStrategy's convertible debt structure could serve as a protective buffer during times of crisis.
"A long-term bear market could pose liquidity challenges and exacerbate debt management risks for the company. However, its unsecured convertible debt structure provides some protection against immediate forced liquidation," Chen explained.
The company has further reduced the risk of selling its Bitcoin holdings by raising funds through stock issuance, even during bear markets.
Bitcoin exit strategy
In short, MicroStrategy's mission is simple: continue buying Bitcoin.
The asset is a long-term strategic hold, a means to hedge against economic uncertainty, and a way to enhance shareholder value. It can also be used to obtain loans or raise funds for future business opportunities without liquidating its Bitcoin.
"It is possible to profit from the massive liquidity pool of Bitcoin," said Alexander Panasenko, head of product management at VixiChain. "When you hold liquidity in a significant amount of this inflation-resistant asset that can actually store value, you can just hold it and lend it to make money."
However, critics point out that Saylor lacks a clear exit strategy. Bitcoin extremists view Bitcoin as the ultimate exit from the traditional financial system, hence they see no need for it.
Stock dilution remains an imminent issue, but this strategy has largely benefited MicroStrategy and the broader Bitcoin ecosystem, inspiring imitators around the world.
"As long as [MicroStrategy] continues to spark discussions about the role of digital assets in the future economy, you will see new companies adopting it more broadly, revealing new strategies to leverage digital assets... this is really good," Panasenko said.
"If such proposals involving digital assets fail, it will cast a shadow over the entire industry, essentially setting us back."
