Author: Tanay Ved, Coin Metrics; Edited by: 0xjs@Golden Finance
Key Points of this Article:
MicroStrategy is a Bitcoin treasury company and a leveraged proxy for Bitcoin, amplifying BTC's upward and downward price movements.
The company currently holds 386,700 BTC (worth about $36 billion), accounting for 1.9% of the current Bitcoin supply, making it the largest corporate holder of BTC in the world.
MicroStrategy funds its Bitcoin acquisitions through convertible bonds, taking advantage of low borrowing costs and high equity premiums during the bull market to expand its BTC holdings.
Introduction
The momentum of Bitcoin after the elections has brought its price close to the $100,000 mark for the first time in its 15-year history. Although most of Bitcoin's supply remains self-custodied, its increasing maturity has also opened up more accessible investment channels, including 'crypto stocks' - publicly traded stocks that provide exposure or proxy to Bitcoin and other digital assets through traditional brokerage accounts. These companies range from Bitcoin miner Marathon Digital (MARA) to full-stack operators Coinbase (COIN) and MicroStrategy (MSTR), the largest corporate holder of Bitcoin, with 386,700 BTC in its treasury. The introduction of spot Bitcoin (BTC) and Ether (ETH) ETFs this year has further expanded channels for institutional investors.
In this week's Coin Metrics Network Status Report, we analyze MicroStrategy's performance, its Bitcoin holdings, and its role as a leveraged proxy in the crypto stock space, exploring the risks and rewards of its acquisition strategy and methods.
Crypto Stock Landscape
Although MSTR is not part of the S&P 500 index, it has outperformed with a return of over 700% since 2022, and 488% year-to-date, exceeding the performance of other stocks in the S&P 500 index. Its performance far surpasses major crypto stocks and tech stocks, such as Coinbase (COIN) or Nvidia (NVDA), thanks to its unique role as a 'Bitcoin treasury company'. Therefore, the strategy behind its performance is worth a careful study.
Source: Google Finance
MicroStrategy: Software Company or Bitcoin Hoarding Machine?
Some may be surprised to learn that MicroStrategy, founded in 1989, is an enterprise software company focused on business intelligence. However, in August 2020, co-founder and then-CEO Michael Saylor made a bold pivot to make Bitcoin the company's primary reserve asset as part of a 'new capital allocation strategy'. This transformed MicroStrategy into a Bitcoin hoarding machine. Four years later, it has become the largest single corporate holder of Bitcoin, with 386,700 BTC (worth about $36 billion) and a market capitalization of about $90 billion. MicroStrategy's Bitcoin holdings far exceed those of other corporate treasuries, being 12 times that of miners like Marathon Digital (MARA) and 34 times that of Tesla (TSLA).
Source: Coin Metrics Network Data Pro and BitBo Treasuries
MicroStrategy's most recent purchase was on November 24, acquiring 55,500 BTC, currently holding 386,700 BTC with an average cost of $56,761, representing about 1.9% of the current Bitcoin supply. Only Bitcoin spot ETFs exceed this level, holding approximately 5.3% of the supply, three times that of MicroStrategy. This strategy effectively transforms MicroStrategy into a Bitcoin investment tool, serving as a leveraged investment in Bitcoin. Michael Saylor himself describes the company as 'a funding operation that securitizes Bitcoin, providing 1.5 to 2 times leveraged equity.' As shown in the chart below, MicroStrategy's performance relative to Bitcoin reflects this approach, amplifying gains during upswings and magnifying losses during downturns.
Source: Coin Metrics Reference Rates and Google Finance
This leveraged approach inherently increases the volatility of MSTR compared to BTC, typically amplifying BTC price movements by 1.5 to 2 times. In addition to Bitcoin exposure, MicroStrategy's stock price is also influenced by broader stock market trends and investor sentiment towards Bitcoin, making it a high-risk, high-reward representation of the asset's performance.
Source: Coin Metrics Market Data Stream and Google Finance
How does MicroStrategy fund its BTC purchases?
How does MicroStrategy fund its massive Bitcoin purchases? The cornerstone of its strategy is borrowing money to purchase Bitcoin through the issuance of convertible bonds. This is a fixed income instrument that acts as a hybrid of debt and equity, which can be converted into a certain number of company shares at a predetermined price at a future date.
By issuing these convertible notes in the fixed income market or directly to institutional investors, MicroStrategy is able to raise cash to rapidly expand its Bitcoin holdings, with borrowing costs typically being very low. These bonds are attractive to investors because they offer the potential for equity conversion at a price higher than the issue price, effectively acting as call options, while the increasing demand for MicroStrategy's growing Bitcoin reserves during a bull market further amplifies this. This forms a reflexive cycle: higher BTC prices drive MSTR stock premiums up, allowing the company to issue more debt or equity, which funds additional BTC purchases. These purchases increase buying pressure, further driving up Bitcoin prices - and this cycle continues, reinforcing itself in a bull market.
Source: Microstrategy Q3 2024 Quarterly Report
The table above highlights MicroStrategy's outstanding convertible notes, which are due between 2025 and 2032. The company has also recently raised $3 billion through another convertible bond issuance maturing in 2029, with a 0% interest rate and a conversion premium of 55%, bringing its total outstanding debt to over $7.2 billion.
Is there risk in MicroStrategy's BTC strategy?
While their strategy has achieved tremendous success so far, a question remains: 'What could go wrong? Is this another bubble waiting to burst?' MicroStrategy's market capitalization is approaching about $90 billion, with its Bitcoin holdings valued at around $37.6 billion, and the company's current trading price is significantly above its net asset value (NAV) by about 2.5 times (250%). In other words, MicroStrategy's stock price is 2.5 times the value of its underlying Bitcoin reserves. This high valuation premium has raised eyebrows among market participants, who question how long this premium can be sustained and what might happen if the premium collapses or turns negative.
Participants have also attempted to exploit the premium of MSTR shares by shorting MSTR stock and buying BTC as a hedge. The short interest in the stock has decreased from about 16% in October to around 11% as some short positions were covered. To assess the risk of MicroStrategy potentially liquidating part of its Bitcoin holdings and the impact of a decline in MSTR/BTC price and asset net value premium, monitoring the health of its legacy software business may provide better insight into its ability to repay these debts.
Source: MicroStrategy Q3 2024 Quarterly Report
Although quarterly revenue from the traditional business has remained relatively stable since 2020, operating cash flow has shown a downward trend. Meanwhile, total debt has surged to $7.2 billion since 2020, due to the issuance of convertible bonds to fund Bitcoin acquisitions, with debt growth accelerating during bull markets. This reflects the company's reliance on Bitcoin appreciation to maintain financial stability. Nonetheless, the relatively low interest costs of these bonds are likely borne by the software business. If bondholders convert their bonds to equity at a higher stock price upon maturity, much of the debt could be resolved without cash repayment. However, if market conditions deteriorate and MicroStrategy's stock premium declines, the company may need to explore alternative strategies to fulfill its obligations.
Conclusion
MicroStrategy's bold approach highlights Bitcoin's potential as a corporate reserve asset. By leveraging its substantial Bitcoin reserves, the company has expanded its market performance, establishing itself as a unique proxy for BTC.
However, this strategy carries inherent risks related to Bitcoin price volatility and the sustainability of stock premiums, which need to be monitored closely as market conditions evolve.
MicroStrategy's model could inspire broader adoption - not only in corporations but potentially at the sovereign level, further solidifying Bitcoin's status as a store of value and premium reserve asset.
