In recent days, both the US stock market and the cryptocurrency market have been dazzled by MSTR. In the latest wave of Bitcoin market activity, MSTR not only led the surge but also maintained a premium growth against Bitcoin for some time afterward, with its price soaring from around $120 a week or two ago to the current $247.
Regarding MSTR's surge, most people in the market still interpret it as 'leveraged Bitcoin'. However, this does not seem to explain why MSTR's premium suddenly skyrocketed under the unchanged fundamentals of 'issuing bonds to buy coins'. After all, Microstrategy has been buying Bitcoin for many years, and such a premium increase has never been seen.
In fact, the recent surge in MSTR's premium, aside from 'issuing bonds to buy coins', is also attributed to another secret weapon of Microstrategy. This has had a tremendous impact on MSTR's fundamentals, and is even referred to by many analysts as Microstrategy's 'infinite money printer', making MSTR 'more valuable with each sale'.
Leveraged Bitcoin? It's an old topic now.
Microstrategy, as a company focused on business intelligence software, adopted an aggressive strategy starting in 2020: raising funds through bond issuance to purchase Bitcoin. This strategy began in August 2020, when the company announced the conversion of $250 million of treasury reserve assets into Bitcoin. The main motivation behind this strategy is to address challenges posed by declining cash returns, dollar depreciation, and other global macroeconomic factors.
To further expand its Bitcoin holdings, Microstrategy financed through some long-term bonds in the capital market in earlier years. These bonds usually have longer terms, most maturing in 2027-2028, with some even being zero-coupon bonds. This allows the company to maintain relatively low financing costs in the coming years and quickly use the proceeds from the bond financing to purchase Bitcoin, directly adding it to the company's balance sheet.
According to data from Bitcoin Treasuries, as of now, Microstrategy owns 1.2% of the total circulating supply of Bitcoin, making it the publicly listed company with the most Bitcoin holdings in the world, far exceeding Bitcoin mining companies like Marathon, Riot, and leading crypto trading platform Coinbase, which are more 'crypto-native' in business.
Through bond financing, MSTR continuously increases its Bitcoin holdings. This behavior not only increases the amount of Bitcoin on its balance sheet but also creates a significant driving force for Bitcoin's market price. As the proportion of Bitcoin in MSTR's asset portfolio continues to rise, the positive correlation between the company's stock market value and Bitcoin price further strengthens. According to MSTR Tracker, the correlation coefficient between MSTR stock price and Bitcoin price has recently surged to 0.365, reaching an all-time high.
This correlation makes investors willing to buy MSTR stock while being optimistic about Bitcoin, further driving the company's market value up. Of course, after four years of market and time testing, MSTR's 'leveraged Bitcoin effect' has long been a well-known topic. Whenever MSTR's price rises, people always explain it with the logic of 'issuing bonds to buy coins'.
However, in the recent Bitcoin market, MSTR's market price not only rose ahead of Bitcoin but also maintained an increasingly high premium against Bitcoin for a period afterward. This has left many investors puzzled: clearly, the fundamentals haven't changed, so why did the premium suddenly spike?
Premium issuance: 'more valuable with each sale', MSTR's cheat code.
First, let's take a look at how exaggerated MSTR's recent premium is. According to MSTR Tracker, MSTR's premium against Bitcoin surged between February and March of this year, roughly rising from 0.95 to 2.43 before retreating to around 1.65. The second surge began just before the recent rise in Bitcoin prices, climbing from 1.84 to a peak of 3.04, currently holding around 2.8.
It can be seen that although Microstrategy has been accumulating Bitcoin over the past four years, its NAV (Net Asset Value) premium has not shown significant growth, remaining at a 1:1 status for a long time.
So what exactly is the reason that has led to MSTR's premium skyrocketing? Could it be that the fundamentals of Microstrategy's 'issuing bonds to buy coins' have changed?
The answer is: Yes. This fundamental change is called 'premium issuance'. Since the second half of last year, Microstrategy has adopted a new way to buy coins, namely through issuing and selling its own MSTR shares to purchase more Bitcoin. This 'selling shares to buy coins' strategy might initially sound very foolish, as it could hurt the stock price and even threaten MSTR's 'leveraged Bitcoin' market position.
However, when you analyze the logical chain carefully, you will find that this new model of 'selling shares to buy coins' is simply MSTR's super flywheel and Microstrategy's infinite money printer.
First, it is necessary to explain the concept of 'net asset value premium' (NAV). Since MSTR holds a large amount of Bitcoin through bond issuance and the market has strong expectations for Bitcoin's future rise, the value of MSTR stock often exceeds the value of the Bitcoin it holds. This premium is called 'net asset value premium', which reflects the market's expectations for the company's future Bitcoin holdings expansion and serves as a support point for MSTR's continuous stock issuance to purchase Bitcoin.
On the other hand, when the price of Bitcoin rises, Microstrategy's market value also increases accordingly, forcing various index funds to consider increasing their purchases of MSTR based on weight, further driving up its price and market value.
At this point, due to the existence of 'net asset value premium', MSTR can begin its 'premium issuance' operations. By continuously issuing more shares, it gains more funds to purchase Bitcoin, pushing Bitcoin prices up, which in turn further enhances the company's market value and financing capability, making this cycle sustainable. This strategy creates a 'Reflexive Flywheel Effect'.
In Microstrategy's 'reflexive flywheel effect', the most exquisite aspect is that the issuance of new shares does not negatively impact MSTR's price; instead, it makes MSTR more valuable.
When Microstrategy issues new shares to purchase Bitcoin, the newly issued shares are usually traded at a price higher than their net asset value. Taking advantage of this premium, Microstrategy can acquire more Bitcoin than what each individual share actually represents when selling each MSTR share.
For example, if we calculate the correlation coefficient between MSTR and Bitcoin, 36% of the value of each MSTR share represents the Bitcoin backed by the company. In the absence of a premium, when Microstrategy sells MSTR, it can only exchange for 36% of a Bitcoin in the market. However, currently, the premium of MSTR against Bitcoin is around 2.74, which means that each time Microstrategy sells a share of MSTR, it can exchange for about 98% of a Bitcoin.
This means that the company can use funds higher than the net asset value of Bitcoin to increase its Bitcoin holdings, thereby expanding its Bitcoin position on the balance sheet. The core of this strategy is that MSTR enhances the speed and scale of Bitcoin holdings through high premium financing, and this speed far exceeds the previous 'issuing bonds to buy coins' pace.
Once the flywheel is established, the increasingly higher market value of MSTR is also included in the investment scope of the US stock index, attracting more incremental funds, generating more net asset value premium. One reason for MSTR's decoupling from BTC in the third quarter is that the market anticipates MSTR's inclusion in the Nasdaq 100 index, bringing in a significant amount of passive funds.
Investors in US stock indices will be 'forced' to invest in MSTR. Returning to the reflexive flywheel, a larger net asset value premium will emerge, allowing MSTR to raise more funds to increase Bitcoin holdings, driving up the price of Bitcoin and improving market optimism for MSTR. The company's weight in the index may increase, triggering further buying demand from index funds, forming a self-reinforcing positive feedback loop, ultimately creating an index buying pressure flywheel.
From a larger time dimension, the number of BTC held equivalently by each MSTR shareholder is continuously increasing, which not only enhances market recognition of MSTR as an 'alternative investment tool for Bitcoin', but also raises pricing expectations for MSTR.
There will be 'more MSTR in the US stock market'.
In recent weeks, Microstrategy CEO Michael Saylor has become increasingly high-profile, loudly proclaiming on various podcasts and news shows that 'there will be more MSTR in the US stock market' and 'MSTR's mechanism is simply an 'infinite financial silver note malfunction'.
Saylor believes that MSTR's 'reflexive flywheel' model has strong capital operation potential. This model can not only continuously accumulate Bitcoin but also maintain its growth through financing and rising stock prices, demonstrating how public companies can leverage asset premiums and capital market financing capabilities for long-term expansion. This model is not just a traditional 'buy and hold' strategy but an active approach to utilizing capital market advantages to expand the balance sheet. This mechanism could become a model for other companies to emulate, especially in resource-intensive or capital-intensive industries. In fact, many companies have emerged that mimic MSTR to perform partial asset operations.
Currently, this seemingly 'left foot stepping on the right foot' model appears to be quite feasible. According to current data, MSTR needs to issue $2.713 in stock for every $1 it uses to purchase Bitcoin. Many believe that it can only greatly 'outperform' Bitcoin by leveraging high debt, but in fact, MSTR's health is quite high. It is estimated that MSTR only faces liquidation risk if the price of Bitcoin falls below $700.
It appears that this mechanism is still functioning well. MSTR continues to increase its BTC holdings, but as this mechanism becomes more widespread, it will undoubtedly make the US stock indexes more affected by crypto assets and their related derivatives. This mechanism acts like a rope, tying the cryptocurrency market and the US stock market together, leading to profound changes in the market. For the cryptocurrency market, it undoubtedly introduces a large inflow of liquidity from the US stock market (mainly absorbed by BTC), while for the US stock market, it seems to exacerbate volatility risk.
According to Saylor's (MSTR founder) vision, by 2050, the price of Bitcoin will reach $500,000. He hopes that by then, MSTR will become a trillion-dollar company, better applying cryptocurrency to deeper aspects of people's lives. Whether this 'improved Ponzi scheme' model can function by then may need subsequent markets to test.
