Author: Yang Mindao (Founder of dForce)
Today, let's talk about MicroStrategy's grand strategy.
MicroStrategy has truly played the biggest golden egg in this cycle of the cryptocurrency market, with paper profits exceeding 15 billion dollars in less than two years.
It's not just the triple arbitrage of stocks, bonds, and coins; the key lies in turning the stock MSTR into a true Bitcoin in traditional finance (recently MSTR's trading volume has surpassed the total of Bitcoin ETFs), which can be called a masterpiece of 'borrowing the fake to repair the real'.
Michael Saylor is neither from a Wall Street blue blood background nor considered an OG in the crypto space; he is truly a chaotic fighter taking down the masters.
I will 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's rise, enhancing its net asset and earnings per share, this is linear leverage;
The second flywheel is financing to buy coins, accelerating profit growth, expanding valuation multiples (p/b, p/e increasing), stock prices jumping from linear to exponential leverage, market capitalization and stock price rising more than the price increase of Bitcoin itself.
Stock/bond relationship
MSTR's market capitalization rises, driving entry into more indices, more trading derivative products emerge, trading volume increases, reducing financing costs for stocks and bonds, the structure of being convertible to both bonds and stocks further lowers the overall debt ratio.
MicroStrategy's convertible bonds are also a very sophisticated design (full of Buffett's wisdom).
Convertible bonds are basically mid to long-term bonds (5 years, at least spanning one cryptocurrency cycle), most of which are zero-coupon, with no principal repayments during the period. This ensures that there is no partial repayment and interest payment pressure during the period, further reducing the risk of debt default caused by the downward spiral of cryptocurrency prices.
What’s more impressive is that, unlike traditional convertible bonds, the options for conversion to stock or cash repayment lie with MicroStrategy and not with the holders of convertible bonds, fundamentally avoiding the default problem caused by an inability to repay convertible bonds at maturity (in the worst-case scenario, it can all be converted to stock). This financing premium capability is extraordinary.
Although everyone generally believes that issuing bonds increases the debt ratio and raises risk premiums, which is unfavorable for stock prices, this type of convertible bond is essentially a 'convertible to bonds or stocks' tool where the initiative lies completely with MicroStrategy. It is very friendly to stock prices/shareholders.
Coin/bond relationship
Bonds are denominated in dollars, and from a currency standpoint, purchasing power tends to zero infinitely, and the initiative for the convertible conditions lies with MicroStrategy. Borrowing a 'debt' with purchasing power tending to zero to buy Bitcoin with unlimited purchasing power, especially with a structure of zero default risk, is a scenario that will not lose in the long term.
In both the crypto and traditional finance sectors for many years, I have indeed not seen anyone who can play the triple arbitrage of stocks/bonds/coins so exquisitely.
Many people speculate whether the end of MicroStrategy will be the stock version of Luna. I believe that in terms of overall risk structure, the two are not comparable, let alone the so-called death spiral.
As for when the flywheel stops turning, when the music stops, the core lies in how long the high premium of stocks and single stock net coins can be maintained.
If market trends break expectations, and the supply of Bitcoin derivative tools increases, if MicroStrategy's stock/coin premium narrows to below 1.2, this financing will be hard to sustain. But MicroStrategy will still be a big winner.
MicroStrategy's structural construction with a long-term winning perspective can truly be compared to Buffett's Berkshire Hathaway in the traditional financial world.
From a premium level perspective, MSTR reaching 1 trillion feels easier than Ethereum reaching 1 trillion.
A few final points. MicroStrategy currently has a 300% premium on Bitcoin; secondary market participants, if they do not understand the variables involved, face extremely high risks. The continuously growing volume means that the premium will only shrink rather than expand; ongoing financing capability is one of the variables that can turn the premium from virtual to real.
Additionally, it would be best if everyone learns from MicroStrategy; if a hundred listed companies adopt its Bitcoin standard and raise the overall holding costs of Bitcoin, it would collectively help reduce the premium bubble.
Can other assets (like eth, sol, meme) replicate the same strategy? The core of this strategy's validity is having enough counterparties willing to accept similar convertible bond terms, and the reason they accept is that more counterparties wish to gain exposure to different risk combinations of Bitcoin.
Assets like eth/sol, in addition to liquidity, are layered with more economic models, technology, and market risks, making operational difficulty much greater, but potential returns are also significant, and it’s possible to create a degenerate version of MicroStrategy.
I feel that the players are already itching to start.
Following the previous article, today I will talk about the upgrade script from 'MicroStrategy' to 'Grand Strategy' (pure speculation).
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 as the 'reactor' at the core of its business, utilizing Bitcoin's volatility resonance, and uses various financial instruments to tier and sell volatility to various players in the market.
This 'resonance' model has a very clear path:
1. Core volatility transmission
As a core asset, Bitcoin's price volatility transmits to the outer layers.
2. The stratification of financial instruments' volatility
Minimum volatility: priority bonds, volatility between 5%-6% (like government bonds).
Medium volatility: convertible bonds, volatility up to 85%.
Maximum volatility: corporate stocks, multiple overlapping states of volatility.
For example, there is an interesting mutual enhancement mechanism in the volatility transmission between convertible bonds and stocks: the higher the stock volatility and liquidity, the stronger the pricing power of MicroStrategy's convertible bonds.
The core buyers of their convertible bonds are hedge funds, which do not care about the directional performance of MicroStrategy stocks but only care whether their volatility is sufficiently intense and whether liquidity is adequate.
Convertible bonds to large fixed income
The global annual issuance of convertible bonds is approximately 100 billion dollars, with the United States accounting for about 60 billion dollars.
If based on MicroStrategy's three-year financing target of 42 billion dollars (half for fixed income, assuming all are convertible bonds), approximately 7 billion convertible bonds need to be issued each year, accounting for 12% of the U.S. market.
Currently, MicroStrategy's market share is about 5% to 7%, and at this pace, completing the first-year goal seems to be no problem.
But the capacity for convertible bonds is ultimately limited, while the scale of 'large fixed income' reaches 25 trillion dollars (250 times that of convertible bonds).
In the future, other fixed income tools that MicroStrategy may choose:
High-yield bonds (commonly known as junk bonds)
Secured, uncollateralized priority bonds
Collateralized priority bonds
Credit loans
However, to obtain more competitive financing costs on these tools, MicroStrategy's debt requires credit ratings.
The improvement in credit ratings is often related to entering mainstream market indices.
According to MicroStrategy's indicators, this year it is highly likely to join the S&P 500, and it is expected to enter QQQ by June next year.
From capital appreciation to cash flow
In addition to entering indices and transitioning to large fixed income, the next step for MicroStrategy may be to shift from holding Bitcoin as a capital appreciation company to treating Bitcoin as an operational asset cash flow company.
Currently, MicroStrategy's Bitcoin assets have not generated cash flow. This asset structure poses a barrier to the company’s debt expansion due to the lack of cash flow to support interest payments and principal repayments.
If in the future, Bitcoin holdings reach 100 billion dollars, assuming it can generate 2% annualized returns, there will be 2 billion dollars in cash flow each year, easily supporting a low-interest credit loan of 10 billion dollars.
The premise for achieving this goal is for large banks to enter custody and develop Bitcoin asset management services. According to current trends, this will be realized within the next 3 to 5 years.
Endgame: Bitcoin 'central bank'
Building a second-layer network based on Bitcoin reserves to issue stablecoins.
MicroStrategy uses Bitcoin reserves to issue stablecoins, providing more flexible liquidity tools for the market, offering credit support to small and medium-sized countries, further promoting 'Bitcoin national reserves' to more sovereign countries, achieving true Bitcoin monetary expansion.
By that time, MicroStrategy should also be renamed Grand Strategy.
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