Written by: AY FundInsight
In 2023, MicroStrategy's story in the financial market resembles a labyrinth adventure of capital, filled with risks and ambitious calculations. Its market value soared from $1.8 billion at the beginning of the year to the current $111 billion, and the driving force and logic behind this are intriguing. As a company with Bitcoin as its core strategy, MicroStrategy's actions are not only a bridge between traditional financial means and the cryptocurrency market but also have profound implications for the future of the web3 industry. Aiying FundInsight will deeply interpret MicroStrategy's strategic logic in Bitcoin-driven, capital leverage, and governance transformation, as well as the insights this offers for the entire web3 financial ecosystem.
1. Bitcoin-driven: From marginal asset to core strategy
MicroStrategy's growth path is undoubtedly inseparable from its aggressive layout in Bitcoin. At the beginning of 2023, the company's market value was far below the value of its Bitcoin holdings, but through large-scale financing and a series of high-risk capital operations, its market value is now 3.55 times its Bitcoin holdings, equivalent to 5.9% of Bitcoin's market value.
Michael Saylor views Bitcoin as digital gold that transcends traditional currency, and based on this, he built the core logic of the company's growth. In the context of web3, MicroStrategy represents a new type of enterprise that uses digital assets as a foundational support, attempting to leverage the long-term appreciation expectations of Bitcoin to stimulate traditional capital markets' confidence in the future. As the price of Bitcoin rises, MicroStrategy's market value also rises, with the capital market placing high trust in its Bitcoin-driven premium.
However, the market's attitude towards this 'digital gold standard' strategy is not entirely uniform. Although some investors are confident about MicroStrategy's future, with some even believing its market value could surpass Bitcoin itself, this idea is not agreed upon by all rational investors. The decentralized spirit of web3 and Bitcoin's volatility make such speculation rife with uncertainty, after all, market confidence is not static.
2. Leveraged capital operations: The innovative combination of dilution and zero-coupon bonds
MicroStrategy's success lies not only in its choice of Bitcoin as a frontier asset but also in how it cleverly utilizes traditional capital market tools to obtain unprecedented capital leverage in innovative ways.
1. Equity dilution: The strategy of value dilution
Aiying FundInsight observes that MicroStrategy's financing methods mainly fall into two categories: equity dilution and zero-coupon bonds.
(1) The process and logic of equity dilution
MicroStrategy raised funds by issuing new stocks, with almost all proceeds used to purchase Bitcoin.
This approach formed a unique 'value dilution' logic, where although the company diluted the rights of existing shareholders, the market interpreted this dilution as an increase in asset value due to the expected appreciation of Bitcoin, thereby driving up the company's stock price.
Binding shareholder interests: After each stock issuance, the company immediately invested the funds into Bitcoin purchases, creating an instantaneous reinvestment of funds that tightly connects shareholder interests with the long-term appreciation of Bitcoin. This transmission effect in the financial market continuously enhances investors' confidence in the company's future. Many investors even see this as an indirect way to hold Bitcoin and are willing to pay a premium for this asset allocation model.
2. Zero-coupon convertible bonds: The game of capital return
(1) The strategy of issuing zero-coupon convertible bonds:
Another financing method for MicroStrategy is through zero-coupon bonds. In a recent financing round, MicroStrategy expanded the bond size from $175 million to $2.6 billion, with a zero coupon rate.
Return depends on stock price growth: The holders of these bonds do not receive traditional interest returns, but their returns are closely tied to the future growth of MSTR's stock price. They can be converted into MicroStrategy's common stock at some point in the future, meaning that investors' ultimate returns depend entirely on the increase in MicroStrategy's stock price, somewhat similar to employee stock options, which are also directly related to the value of the Bitcoin held by the company.
(2) Investors' high-risk gamble:
Investors undertake high-risk gambles. They choose to forgo regular interest income in favor of faith in MicroStrategy's future growth—especially its close connection with Bitcoin.
The nature of long-term bullish options: These bonds essentially resemble a long-term bullish option; investors can only profit when MicroStrategy's stock price significantly rises. This potential source of profit primarily depends on Bitcoin's price movements and the market's confidence in MicroStrategy's governance capabilities.
(3) The chain reaction of the capital market:
This financing method is not just about capital investment; it resembles a game of strategy with the future market. This game triggers a massive chain reaction, where every link propels overall growth, filled with a delicate balance between high risk and high reward.
The synergistic effect of equity dilution: MicroStrategy's bond financing strategy complements its equity dilution, forming a unique capital operation model. This model resonates in the financial market, continuously driving capital inflow through market confidence in the company's future, with the core of this game being a firm belief in Bitcoin and optimistic expectations for the future digital asset world.
3. Governance transformation: From Saylor's control to institutional governance
While expanding capital, MicroStrategy's governance structure has also undergone significant changes. Michael Saylor's fall from absolute control of voting rights marks the company's transition from a 'controlled company' to a more market-oriented and institutional governance model.
In the past, Saylor had the final say over company decisions through control of Class B common stock, which led to MicroStrategy being classified as a 'controlled company' by NASDAQ. However, with the large issuance of Class A common stock, the voting advantage of Class B shares was diluted, and Saylor's voting power dropped below 50%. As a result, the company was forced to establish an independent nomination committee, and board decision-making began to shift towards a more collective approach. This change not only means the company needs to respond more transparently to market scrutiny but may also bring more uncertainty to its future strategic decisions.
In the web3 ecosystem, the transformation of governance structure often represents a company's transition from the initial stage of aggressive growth to a more stable and sustainable development phase. MicroStrategy's case reflects the typical characteristics of this transformation: rapid expansion under individual leadership and gradual regulation under institutional governance. For the web3 industry, which pursues decentralized ideals, this shift is also an inevitable trend of internal checks and balances.
4. In-depth thinking from Aiying FundInsight
MicroStrategy's capital operation path has triggered Aiying FundInsight's in-depth thinking. Can such strategies be sustained, or how will they change the entire web3 financial ecosystem? Under Michael Saylor's leadership, MicroStrategy has almost recklessly pushed Bitcoin to the center of traditional capital markets. By combining equity dilution and zero-coupon bonds, the company boldly attacks the capital market, fully betting on Bitcoin's long-term value, but is this model a gamble of desperation or a forward-looking vision for future asset patterns?
From a deeper perspective, MicroStrategy, by leveraging the beliefs of shareholders and bondholders in Bitcoin, has transformed the company into a structured tool for indirectly holding Bitcoin. It not only relies on the market's perception of Bitcoin but also opens a new path in finance by linking traditional financing tools with digital assets. However, this path is fraught with risks and uncertainties, especially given the volatility of Bitcoin prices, which will dramatically amplify the leverage risks faced by MicroStrategy.
What is even more thought-provoking is the demonstration effect of this capital operation method on the overall web3 industry. Many companies may be inspired to imitate MicroStrategy by structuring their holdings and financing with crypto assets as the primary asset. However, without hedging mechanisms and diversified risk management, such strategies could likely bring systemic market risks. Although MicroStrategy's debt and equity dilution methods appear successful, the logic behind them is based on the premise of a continuously rising Bitcoin price. Once this premise wavers, the foundation of financing and growth will also be impacted.
Aiying FundInsight believes that MicroStrategy's case is both a profound experiment in new capital operations and a high-risk market gamble. It demonstrates how web3 companies can leverage traditional financial markets to expand their digital asset holdings, but it also reveals the significant risks inherent in such strategies. If the market ecology of crypto assets can continue to optimize in the future, MicroStrategy may become a pioneer of a new enterprise model; however, if market sentiment reverses, such high-leverage operations could become a huge risk hotspot. Aiying FundInsight will analyze MicroStrategy's debt structure and potential risks in the next discussion, so stay tuned.
