In the past few days, both the U.S. stock market and the crypto market have been dazzled by MSTR (MicroStrategy stock code). In the latest wave of Bitcoin's market, MSTR not only took the lead in the rise, but also continued to maintain a premium growth over Bitcoin for a period of time afterwards. Its price has also soared from US$120 a week or two ago to the current US$247.
Most people in the market still interpret MSTR's surge as "leveraged Bitcoin". However, this does not seem to explain why MSTR's premium suddenly soared when the fundamentals of "issuing bonds to buy coins" remained unchanged. After all, MicroStrategy has been buying coins for so many years, and has never seen such a high premium.
In fact, the recent surge in MSTR premium, in addition to "issuing bonds to buy coins", is also due to MicroStrategy's other secret weapon, which not only has a huge impact on MSTR's fundamentals, but has even been called MicroStrategy's "unlimited money printing machine" by many analysts, making MSTR "more valuable the more it is sold."
01 Leveraged Bitcoin? It’s a cliché
Microstrategy, a company focused on business intelligence software, has adopted a radical strategy since 2020: raising funds through bond issuance to buy Bitcoin. The implementation of this strategy began in August 2020, when the company announced that it would convert $250 million of treasury reserve assets into Bitcoin. The motivation behind this strategy is mainly to cope with the challenges of global macroeconomic factors such as declining cash returns and the depreciation of the US dollar.
In order to further expand its Bitcoin holdings, MicroStrategy raised funds through some long-term bonds in the capital market in the early years. These bonds usually have a longer term, most of which mature in 2027-2028, and some are even zero-interest bonds. This enables the company to maintain low financing costs in the next few years, and after obtaining bond financing, it can quickly use it to purchase Bitcoin and add it directly to the company's balance sheet.
According to data from Bitcoin Treasuries, as of now, MicroStrategy already owns 1.2% of the total circulating supply of Bitcoin, making it the publicly listed company with the most Bitcoin in the world, far exceeding Bitcoin mining companies Marathon and Riot, as well as leading crypto trading platform Coinbase and other companies that are more "crypto-native" in their business.
Through debt financing, MSTR has continued to increase its holdings of Bitcoin, which not only increased the number of Bitcoins in its balance sheet, but also significantly boosted the Bitcoin market price. As the proportion of Bitcoin in MSTR's asset portfolio continues to increase, the positive correlation between the company's stock market value and Bitcoin prices has further strengthened. According to MSTR Tracker, the correlation coefficient between MSTR stock prices and Bitcoin prices has recently surged to 0.365, setting a record high.
This correlation makes investors willing to buy MSTR stocks while being optimistic about Bitcoin, which further drives up the company’s market value. Of course, after four years of market and time testing, MSTR’s “leveraged Bitcoin effect” has long been a commonplace topic, and whenever the price of MSTR rises, people always use the logic of “issuing bonds to buy coins” to explain it.
However, in the recent Bitcoin market, the market price of MSTR not only rose before Bitcoin, but also maintained an increasingly high premium over Bitcoin for a period of time afterwards. This puzzled many investors: Why did the premium suddenly go up when the fundamentals remained unchanged?
02Premium issuance: "The more you sell, the more valuable it is", MSTR's cheat code
First, let’s take a look at how exaggerated the recent premium of MSTR is. According to MSTR Tracker, the premium of MSTR to Bitcoin surged between February and March this year, from about 0.95 to 2.43, and then fell back to around 1.65. The second rapid growth began on the eve of the recent rise in Bitcoin prices, from about 1.84 to a high of 3.04, and currently remains at 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 increased significantly, but has remained at 1:1 for a long time.
So what is the reason that caused the premium of MSTR to soar so quickly? Has the fundamentals of MicroStrategy's "issuing bonds to buy coins" changed?
Answer: Yes. This fundamental change is called "premium issuance". Since mid-to-late last year, MicroStrategy has adopted a new way to buy coins, that is, to buy more Bitcoin by issuing and selling its own MSTR shares. This "selling stocks to buy coins" strategy seems very stupid at first glance, which may not only hurt the stock price, but may even threaten the market positioning of MSTR's "leveraged Bitcoin".
However, when you carefully analyze its logical chain, you will find that this new model of "selling stocks and buying coins" is simply the super flywheel of MSTR and the infinite money printing machine of MicroStrategy.
The first thing that needs to be explained is 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 the future rise of Bitcoin, the value of MSTR stocks often exceeds the value of the Bitcoin it holds. This premium is called "net asset value premium". This "net asset value premium" reflects the market's expectations for the company's future expansion of Bitcoin holdings and becomes the support point for MSTR to continue to issue additional shares and then purchase Bitcoin.
On the other hand, when the price of Bitcoin rises, the market value of MicroStrategy will also increase accordingly, which will force various index funds to increase their purchases of MSTR based on weight considerations, further driving up its price and market value.
At this time, because of the existence of "net asset value premium", MSTR can start its own "premium additional issuance" operation. By continuously issuing additional stocks, more funds are obtained to buy Bitcoin, which drives the rise of Bitcoin. The rise of Bitcoin further increases the company's market value and financing capabilities, so that this cycle can continue. This strategy creates a "reflexive flywheel effect".
The most subtle point in MicroStrategy's "reflexive flywheel effect" is that not only will additional issuance not have a negative impact on the price of MSTR, but will make MSTR more valuable.
When MicroStrategy issues additional shares to buy Bitcoin, the newly issued shares will typically trade at a premium to their net asset value. With this premium, MicroStrategy will be able to buy more Bitcoin than the actual Bitcoin behind the individual shares when it sells each MSTR.
For example, we use the correlation coefficient between MSTR and Bitcoin to calculate that 36% of the value of each MSTR share represents the Bitcoin endorsed by the company. Without a premium, when MicroStrategy sells MSTR, it can only get 36% of Bitcoin from the market. However, at present, the premium of MSTR to Bitcoin is about 2.74, which means that every time MicroStrategy sells one MSTR share, it will be able to get about 98% of Bitcoin.
This means that the company can use funds higher than the net assets of Bitcoin to increase its holdings of Bitcoin, thereby expanding its Bitcoin holdings on the balance sheet. The core of this strategy is that MSTR has increased the speed and scale of its Bitcoin holdings through high premium financing, which far exceeds the previous speed of "issuing bonds to buy coins".
After the emergence of the flywheel, MSTR, with an increasing market value, was also included in the investment scope of the US stock index, which attracted more incremental funds and generated more net asset value premiums. Part of the reason why MSTR decoupled from BTC in the third quarter was that the market pre-priced MSTR to be included in the Nasdaq 100 Index, bringing a large amount of passive capital inflows.
Investors in the U.S. stock index will be "forced" to invest in MSTR, returning to the reflexive flywheel, resulting in a larger net asset value premium, which will enable MSTR to raise more funds to increase its holdings of Bitcoin, drive up the price of Bitcoin, and increase the market's optimistic expectations for MSTR. The company's weight in the index may increase, which will trigger further buying demand from index funds, forming a self-reinforcing positive feedback loop, and generally forming an index buying pressure flywheel.
From a macro-level time perspective, the number of BTC held by each MSTR holder is increasing, which not only increases the market's recognition of MSTR as a "Bitcoin alternative investment tool", but also increases the pricing expectations for MSTR.
03「There will be more MSTR in the US stock market」
In the past few weeks, MicroStrategy CEO Michael Saylor has become increasingly high-profile, shouting on major podcasts and news programs that "there will be more MSTR in the US stock market" and "MSTR's mechanism is simply an 'infinite financial silver currency failure'."
Saylor (founder of MSTR) believes that MSTR's "reflexive flywheel" model has strong capital operation potential. This model can not only continuously accumulate Bitcoin, but also maintain its own growth through financing and rising stock prices, showing how listed companies can use asset premiums and capital market financing capabilities to achieve long-term expansion. This model is not just a traditional "buy and hold" strategy, but a way to actively use the advantages of the capital market to expand the balance sheet. This mechanism is likely to become an object of emulation for other companies, especially in resource-intensive or capital-intensive industries. In fact, many companies have indeed imitated MSTR to operate some of its assets.
At present, this model that sounds like "stepping on the right foot with the left foot" seems to be feasible. According to current statistics, MSTR will use $1 to buy Bitcoin for every $2.713 of additional shares issued. Many people believe that he can "outperform" Bitcoin to a large extent by going long on Bitcoin in the form of high leverage, but in fact, MSTR is very healthy. It is estimated that only when the price of Bitcoin falls below $700 per coin will MSTR be at risk of being liquidated.
At present, this mechanism seems to be operating perfectly, and MSTR continues to increase its holdings of BTC. However, when this mechanism is used more and more widely, the US stock index will undoubtedly be affected by more crypto assets and their related derivatives. This mechanism is like a rope that ties the cryptocurrency market and the US stock market together, which will bring about profound changes in the market. For the cryptocurrency market, it undoubtedly introduces a large amount of liquidity overflowed from US stock funds (mainly taken over by BTC), and for the US stock market, it seems to increase the risk of volatility.
According to Saylor’s (MSTR founder) vision, in 2050, the price of Bitcoin will reach $500,000 per coin. It is hoped that by then, MSTR will become a trillion-dollar company, pushing cryptocurrencies deeper into people’s lives and applying them better. Whether this model, which sounds like a “perfected version of a Ponzi scheme,” can work by then may require subsequent market testing.
