Article author: Mingdao
Source: Wu Says Real
On November 25, MicroStrategy announced it had acquired 55,500 BTC for approximately 5.4 billion USD, at an average price of 97,862 USD, achieving a 35.2% BTC yield for the quarter and a 59.3% BTC yield year-to-date. As of November 24, 2024, MicroStrategy holds 386,700 BTC at an average price of 56,761 USD, with an acquisition cost of 21.9 billion USD.
Let's talk about MicroStrategy's grand strategy today.
MicroStrategy has truly played out the largest golden egg in this cycle, achieving paper profits exceeding 15 billion USD in less than two years.
It is not just the triple arbitrage of stock, debt, and coin; the key is to turn the MSTR stock into a true Bitcoin in traditional finance (recently MSTR's trading volume exceeded that of Bitcoin ETFs combined), making it a 'faux to true' masterpiece.
Michael Saylor is neither from Wall Street blue blood nor an OG in the cryptocurrency circle; it's like a chaotic punch killing a master.
Here, I briefly discuss several key parts of his trading structure design:
Stock/Coin relationship
These two have two key flywheels; one is stock premium issuance, purchasing Bitcoin, driving Bitcoin up, enhancing its net asset and earnings per share, which is a linear leverage;
The second flywheel is financing to buy coins, accelerating profit growth, expanding valuation multiples (p/b, p/e increases), and stock prices jumping from linear to exponential leverage, with market value and stock prices rising faster than Bitcoin's price increase.
Stock/Debt relationship
MSTR's market value increase drives entry into more indices, more trading derivatives emerge, trading volume increases, lowering the financing costs of stocks and bonds, and the debt/equity structure further reduces the overall debt ratio.
MicroStrategy's convertible bonds are also a very refined design (full of Buffett's wisdom).
Convertible bonds are basically medium-to-long term debts (5-year term, at least spanning one cryptocurrency cycle), most of which are zero-interest, with no principal repayment during the period. This ensures there is no partial repayment and interest payment pressure during this period, further reducing the risk of debt default caused by falling coin prices.
Even more impressively, unlike traditional convertible bonds, the choice of converting to equity or cash repayment is in MicroStrategy's hands and not in the hands of convertible bondholders, fundamentally avoiding the problem of default due to the inability to repay convertible bonds at maturity (in the worst-case scenario, converting all to equity directly). This financing premium capability is extraordinary.
Although it is generally believed that issuing bonds increases the debt ratio and raises the risk premium, which is unfavorable for stock prices, this convertible bond essentially has complete control in MicroStrategy's 'debt or equity' tool. It is very friendly to stock prices/shareholders.
Coin/Debt relationship
The debt is denominated in USD, and from the perspective of a coin-based standard, purchasing power approaches zero, and the conversion conditions are under MicroStrategy's control; borrowing a 'debt' with purchasing power approaching zero to buy Bitcoin, which has purchasing power that is infinitely large, especially with a 0 default risk structure, is, in the long term, a losing proposition.
In both the cryptocurrency space and traditional finance, there have indeed been few experts who can play this triple arbitrage of stock/debt/coin so exquisitely.
Many people speculate whether MicroStrategy's outcome will be similar to the stock version of Luna. I believe the overall risk structure of the two is not comparable, let alone the so-called death spiral.
As for when the flywheel stops turning and when the music stops, the core is how long the high premium of stocks and single net coins can be maintained.
If the market trend breaks expectations, the supply of Bitcoin derivatives increases, and MicroStrategy's stock/coin premium shrinks to within 1.2, this financing will be difficult to sustain. But MicroStrategy will still be a big winner.
MicroStrategy's structural construction with long-term winning potential can truly rival Berkshire Hathaway in the traditional financial world.
From the premium level, MSTR reaching 1 trillion feels easier than Ethereum reaching 1 trillion.
A few final points. MicroStrategy currently has a 300% premium over Bitcoin, and participants in the secondary market face extremely high risks if they do not understand the variables involved; the continuously growing volume means the premium will only shrink rather than expand; sustained financing ability is one of the variables that turns the premium from virtual to real.
Moreover, it would be best if everyone learned from MicroStrategy; if a hundred listed companies adopt its Bitcoin standard, raising the overall cost of Bitcoin holdings will effectively help reduce its premium bubble.
Can other assets (like eth, sol, meme) replicate the same strategy? The core of this strategy's establishment is having enough counterparties willing to accept similar convertible bond terms, and they accept it because more counterparties want to gain exposure to different risk combinations of Bitcoin.
Assets like eth/sol, in addition to liquidity, have added more economic models, technologies, and market risks, making operations much more difficult, but the potential returns are also significant; it is hard to say if a degen version of MicroStrategy can be created.
I feel like the manipulators are already rubbing their hands.
Without a doubt, the contributors to 40K-70K are Bitcoin ETFs, while the contributors to 70K-100K are MicroStrategy.
Now many people compare MicroStrategy to the Bitcoin version of Luna, which makes me a bit awkward because Bitcoin is my favorite cryptocurrency, while Luna happens to be my least favorite cryptocurrency.
I hope this post helps everyone better understand the relationship between MicroStrategy and Bitcoin.
First, a few conclusions at the beginning:
· MicroStrategy is not Luna; its safety net is much thicker.
· MicroStrategy increases its Bitcoin holdings through bonds and selling stocks.
· MicroStrategy's recent debt repayment date is in 2027, leaving us with a full 2 years.
· MicroStrategy's only soft threat is Bitcoin whales.
MicroStrategy is not Luna; its safety net is much thicker than Luna's.
Selling Bitcoin volatility
Michael Saylor once used a very straightforward analogy to summarize their operational model: MicroStrategy is a company that sells Bitcoin volatility.
It places Bitcoin, this 'reactor', at the core of its business, utilizing Bitcoin's volatility resonance and using different financial tools to tier the volatility and sell it to various players in the market.
This 'resonance' model has a very clear path:
1. Core volatility transmission
Bitcoin, as a core asset, transmits its price volatility outward.
2. Tiered volatility of financial instruments
* Lowest volatility: Senior bonds, with volatility between 5%-6% (similar to government bonds).
* Medium volatility: Convertible bonds, with volatility up to 85%.
* Highest volatility: Company stocks, multiple volatility superimposed states.
For example, the transmission of volatility between convertible bonds and stocks has an interesting mutual enhancement mechanism: the higher the stock volatility and liquidity, the stronger MicroStrategy's pricing power for its convertible bonds.
The core buyers of their convertible bonds are hedge funds that do not care about the directional performance of MicroStrategy's stocks but only care about whether its volatility is sufficiently drastic and whether liquidity is adequate.
Convertible bonds to large fixed income
The global annual issuance scale of convertible bonds is about 100 billion USD, with the US accounting for about 60 billion USD.
If MicroStrategy aims for a three-year financing target of 42 billion USD (half in fixed income, assuming all are convertible bonds), it needs to issue about 7 billion convertible bonds each year, accounting for 12% of the US market.
Currently, MicroStrategy's market share is about 5%-7%; with this pace, achieving the first-year goal seems not to be a problem.
But the capacity of convertible bonds is ultimately limited, while the 'large fixed income' scale reaches 25 trillion USD (250 times that of convertible bonds).
In the future, other fixed income tools available to MicroStrategy include:
* High-yield bonds (commonly known as junk bonds)
* Guaranteed unsecured senior bonds
* Secured senior bonds
* Credit loans
But to obtain a more competitive financing cost with these tools, MicroStrategy's debt needs a credit rating.
And the improvement in credit ratings is often related to entering mainstream market indices.
According to MicroStrategy's indicators, it is highly likely to join the S&P 500 this year, and there is a hope to enter QQQ by next June.
From capital appreciation to cash flow
In addition to entering indices and turning to large fixed income, MicroStrategy's next script may be to transform from a capital appreciation-type company holding Bitcoin into a cash flow company using Bitcoin as an operational asset.
Currently, MicroStrategy's Bitcoin assets have not generated cash flow. This asset structure poses an obstacle to the company's debt expansion due to the lack of cash flow to support interest payments and principal repayments.
If the future Bitcoin holding scale reaches 100 billion USD, assuming it can generate a 2% annual yield, there will be 2 billion USD in cash flow each year, which can easily support low-interest credit loans in the scale of tens of billions.
The prerequisite for achieving this goal is for large banks to enter custody and develop Bitcoin asset management businesses. According to current trends, this will be achieved in the next 3-5 years.
Ultimate goal: Bitcoin 'central bank'
Based on Bitcoin reserves, build a Layer 2 network and issue stablecoins.
MicroStrategy uses Bitcoin reserves to issue stablecoins, providing more flexible liquidity tools for the market, offering credit support for small and medium-sized countries, and further promoting 'Bitcoin national reserves' to more sovereign countries, realizing true Bitcoin monetary expansion.
By then, MicroStrategy should be renamed Grand Strategy.
15 billion USD grand strategy: Where will MicroStrategy send Bitcoin?
MSTR net value vs Bitcoin price
MicroStrategy was originally a software company with a lot of floating profits on its books, and it didn't want to invest in production anymore, so it began to shift from reality to virtuality, starting in 2020 to spend its own money to buy Bitcoin.
Later, MicroStrategy bought all the money on its books and began to leverage. Its leverage method is off-market leverage, determined to borrow money to buy Bitcoin in the form of issuing corporate bonds.
The essential difference between it and Luna is that Luna and UST print each other; in essence, UST is meaningless unanchored printing, barely maintained by 20% fake interest.
But MicroStrategy is equivalent to bottom dollar cost averaging + leverage, which is standard borrowing to go long, and it has bet in the right direction.
The popularity of Bitcoin far exceeds that of UST, and the impact of MicroStrategy on Bitcoin is significantly lower than that of Luna on UST. It's a simple truth; a daily yield of 2% is a Ponzi scheme, while an annual yield of 2% is a bank. Quantitative change leads to qualitative change, and MicroStrategy is not the sole factor determining Bitcoin, so it is definitely not Luna.
MicroStrategy increases its Bitcoin holdings through bonds and selling stocks.
To quickly raise funds, MicroStrategy has issued multiple debts, totaling 5.7 billion USD (to give everyone a clear understanding, this is equivalent to 1/15 of Microsoft's debt).
And almost all this money is used to continuously increase Bitcoin positions.
Everyone has used on-market leverage; you must take Bitcoin as collateral, and exchanges (and other users in the exchange) will lend you money. But off-market leverage is different.
All creditors only worry about one thing: failing to repay debts. Without collateral, why are people willing to lend money to MicroStrategy?
MicroStrategy's bond issuance is very interesting; in recent years, it has issued a type of convertible debt.
This convertible bond is very interesting; let’s take an example:
Bondholders have the right to convert their bonds into MSTR stock, divided into two stages:
1. Initial stage
· If the bond's trading price drops > 2%, creditors can exercise their rights to convert the bond into MSTR shares and sell to break even;
· If the bond's trading price is normal or even rises, creditors can sell the bonds on the secondary market at any time to break even.
2. Later stage
When the bonds are about to mature, the 2% rule no longer applies; bondholders can take cash and leave, or directly convert the bonds into MSTR stock.
Let's analyze this; it is generally a profitable business for creditors.
15 billion USD grand strategy: Where will MicroStrategy send Bitcoin?
If Bitcoin falls and MSTR has money, creditors can get cash back.
If Bitcoin falls and MSTR has no money, creditors still have a final safeguard, which is to convert to stocks for liquidation.
If Bitcoin rises, MSTR will rise, and creditors can give up cash for more stock returns.
In a word, this is a buy and sell with a high lower limit and a very high upper limit, and naturally, MicroStrategy successfully raised money.
Fortunately, no, it should be said that loyally, MicroStrategy has chosen Bitcoin.
Bitcoin has not let us down.
2024 MicroStrategy stock price trend
As Bitcoin rises, the Bitcoin that MicroStrategy accumulated early on increases in value. According to the ancient and classic principle of stocks, the more assets a company has, the higher its market value should be.
Thus, MicroStrategy's stock price has also skyrocketed.
MicroStrategy's daily trading volume now exceeds that of this year's absolute superstar, Nvidia. Therefore, MicroStrategy now has more choices.
Now MicroStrategy not only relies on issuing bonds but can also directly issue additional stocks for cash.
Unlike many meme coins or Bitcoin developers who do not have minting rights, traditional companies can issue additional stocks after following the relevant processes.
Last week, Bitcoin was able to rise from just above 80K to the current 98K, thanks to MicroStrategy's assistance. Indeed, MicroStrategy issued additional stocks, selling for 4.6 billion USD.
PS: Companies with trading volumes exceeding Nvidia naturally have this liquidity.
Sometimes, you admire a company for earning great profits and need to respect its great ambition.
Unlike many cryptocurrency companies that sell off to liquidate, MicroStrategy maintains a full-scale approach as usual. MicroStrategy reinvested all the money obtained from selling stocks into Bitcoin, pushing Bitcoin to 98K.
So far, you should have understood MicroStrategy's magic:
Buy Bitcoin → Stock price rises → Borrow to buy more Bitcoin → Bitcoin rises → Stock price further rises → Borrow more debt → Buy more Bitcoin → Stock price continues to rise → Issue more stocks for cash → Buy more Bitcoin → Stock price continues to rise...
Presented by the great magician MicroStrategy.
MicroStrategy's recent debt repayment date is in 2027; we still have at least 3 years.
As long as there are magicians, there will be times when the magic is revealed.
Many MSTR shorts believe we have now reached the standard left side and even suspect it has reached the Luna moment.
However, is the reality really like this?
According to recent statistics, MicroStrategy's average cost for Bitcoin is 49,874 USD, which means it is now close to floating profits of 100%; this is a super thick safety net.
Let's assume the worst-case scenario; even if Bitcoin currently plummets by 75% (which is almost impossible), dropping to 25,000, what will happen?
MicroStrategy borrows off-market leverage, with no liquidation mechanism at all. Angry creditors can convert their bonds into MSTR stocks at the designated time and then angrily dump them into the market.
Even if MSTR is smashed to zero, it still does not need to be forced to sell these Bitcoins because the earliest debt MicroStrategy borrowed needs to be repaid — astonishingly in February 2027.
You better watch out; this is not 2025, nor 2026; it’s Tom's 2027.
In other words, we must wait until February 2027, and if Bitcoin plummets, if no one wants MicroStrategy's stocks anymore, then MicroStrategy will need to sell some of its Bitcoin in February.
All things considered, there are still more than 2 years left to continue playing music and dancing.
This is the magic of off-market leverage.
You might ask, could MicroStrategy be forced to sell Bitcoin due to interest?
The answer is still negative.
Due to MicroStrategy's convertible bonds, creditors generally have a guaranteed profit, so its interest is quite low. For example, this particular one maturing in February 2027 has an interest rate of 0%.
Creditors purely seek MSTR's stock.
Furthermore, the interest on the several debts it issued later is also around 0.625% and 0.825%, with only one at 2.25%, which has a minimal impact, so there is no need to worry about its interest.
15 billion USD grand strategy: Where will MicroStrategy send Bitcoin?
MicroStrategy's main bond interest, source: bitmex
MicroStrategy's only soft threat is Bitcoin whales.
At this point, MicroStrategy has become mutually causal with Bitcoin.
More companies are preparing to start learning — the great maneuver of Bitcoin's David Copperfield (Saylor).
For example, a listed Bitcoin mining company MARA has just issued 1 billion USD of Bitcoin convertible bonds, specifically for bottom fishing.
Therefore, I think shorts should be cautious; if more people start to follow MicroStrategy, Bitcoin's momentum will be like a runaway horse, as there is a vacuum above.
Therefore, now MicroStrategy's biggest opponent is only those ancient Bitcoin whales.
Just as many people predicted earlier, the Bitcoin in the hands of retail investors has already been handed over, after all, there are too many opportunities, such as the meme trend; I just don’t believe everyone is empty-handed.
So there are only these whales in the market; as long as these whales do not act, this momentum is difficult to stop. If they are even luckier, the whales and MicroStrategy form some small tacit understanding, enough to push Bitcoin toward a greater future.
This is also a significant difference between Bitcoin and Ethereum: Satoshi theoretically owns nearly a million early-mined Bitcoins, yet there has been no news; while the Ethereum Foundation, for some reason, sometimes particularly wants to sell 100 ETH to test liquidity.
As of the date of writing, MicroStrategy has already achieved a floating profit of 15 billion USD, relying on loyalty and faith.
Because it is making money, it will increase its investment; it can no longer turn back, and more people will follow suit. According to the current momentum, 170K is the mid-term target for Bitcoin (not financial advice).
Of course, we are used to seeing conspiracy groups design conspiracies every day in memes, and occasionally seeing a genuinely top-notch plan really makes one admire it.
