Author: Yohan Yun, CoinTelegraph; Translated by: Deng Tong, Jinse Finance
MicroStrategy co-founder Michael Saylor has adopted an aggressive Bitcoin acquisition strategy, which observers consider either a stroke of genius or a reckless gamble.
The latter warns that MicroStrategy's heavy reliance on volatile assets like Bitcoin is risky. A significant drop in Bitcoin prices could strain the company's balance sheet, intensifying financial pressures and potentially undermining its ability to repay debt or raise additional funds.
Despite the risks, Saylor remains steadfast. The American entrepreneur stated that he has “no reason to sell a winner.”
MicroStrategy is the world's largest corporate holder of Bitcoin, with 447,470 Bitcoins as of this article's publication. 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 come with 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 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 1.005 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.
Reckless Ponzi scheme?
David Krause, emeritus professor of finance at Marquette University, stated that Saylor's strategy is “inappropriate.”
He warned that a significant drop in Bitcoin prices could severely impact MicroStrategy (MSTR), eroding shareholder equity, jeopardizing debt repayment, 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 having served as [CFO] for over a decade, I firmly believe that treasury assets should be composed entirely of highly liquid and low-risk securities, such as money market instruments.”
MSTR's trading price is generally 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 is above the net asset value of its Bitcoin assets, the company raises funds through debt or equity to purchase more Bitcoin. However, Kruger warns that this strategy could dilute shareholder equity.
Theoretically, this approach would create a loop where the company's Bitcoin holdings enhance its market position and stock price, leading to further bond issuance and additional Bitcoin purchases.
Some social media analysts have likened this cyclical strategy to a Ponzi scheme.
Financial analyst Jacob King stated, “This cycle only works if BTC continues to rise. If BTC stagnates or crashes (which it indeed can), the cycle collapses. This is unsustainable and a massive Ponzi scheme.”
Source: Jacob King
In a recent media interview, Saylor compared this approach to Manhattan's real estate practices.
“Like developers in Manhattan, whenever real estate values go up, 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 been critical of MicroStrategy's reliance on Bitcoin, stating in a recent paper that it does not fit the SEC's formal definition of a Ponzi scheme.
Securities regulators describe Ponzi schemes as “an investment fraud that involves paying purported returns to existing investors from funds contributed by new investors.”
Gracy Chen, CEO of cryptocurrency exchange Bitget, agreed with Kruger's analysis.
Unlike a Ponzi scheme that relies on funds from new investors to pay returns to earlier investors, MicroStrategy's approach depends on market-driven appreciation of Bitcoin's value.
Chen pointed out, “This strategy is more akin to De Gaulle challenging the Bretton Woods system by exchanging dollars for gold. It leverages known weaknesses in modern monetary theory to profit from asset appreciation.”
Saylor's Bitcoin blueprint has achieved undeniable success
As of 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 priced at $14.44). During the same period, Bitcoin's price increased by about 735%.
Whether people agree with Saylor’s views or not, his strategy has undeniably enhanced MicroStrategy's cryptocurrency portfolio and stock performance, making the company a part 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 noted that MicroStrategy's convertible debt structure might serve as a protective buffer during a crisis.
“A long-term bear market could pose liquidity challenges and increased debt management risks for the company. However, its unsecured convertible debt structure provides some protection against immediate forced liquidation,” Chen explained.
The company’s method of raising funds through stock issuance further reduces the risk of selling its Bitcoin holdings, even during a bear market.
Bitcoin exit strategy
In short, MicroStrategy's mission is simple: continue purchasing Bitcoin.
The asset is a long-term strategic hold, a means of hedging against economic uncertainty, and a way to enhance shareholder value. It can also be used to secure loans or raise funds for future business opportunities without liquidating its Bitcoin.
“Profiting from the vast liquidity pool of Bitcoin is possible,” said Alexander Panasenko, head of product management at VixiChain. “When you hold a significant amount of this inflation-resistant asset that can actually store value, you simply 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 and therefore see no need for an exit.
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'll see new companies adopting it more widely, revealing new strategies for leveraging digital assets... it’s really great,” said Panasenko.
“If such proposals involving digital assets fail, it will cast a shadow over the entire industry and essentially set us back.”
