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, leveraging low borrowing costs and high equity premiums during bull markets to expand its BTC holdings.
Introduction
The post-election momentum for Bitcoin has brought its price close to the $100,000 mark for the first time in its 15-year history. While much of Bitcoin's supply remains in self-custody, the increasing maturity of Bitcoin has opened up more accessible investment channels, including 'crypto stocks'—publicly traded stocks that provide exposure or proxies for Bitcoin and other digital assets through traditional brokerage accounts. These companies range from Bitcoin miners like Marathon Digital (MARA) to full-stack operators like Coinbase (COIN) and MicroStrategy (MSTR), which is the largest corporate holder of Bitcoin with 386,700 BTC in its treasury. The recent launch of spot Bitcoin (BTC) and Ethereum (ETH) ETFs 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 its acquisition strategy and the risks and rewards of its approach.
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, with 488% year-to-date, surpassing the performance of other stocks in the S&P 500. Its performance far exceeds 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 closer examination.
Source: Google Finance
MicroStrategy: Software company or Bitcoin hoarding machine?
Some may be surprised to learn that MicroStrategy was founded in 1989 as an enterprise software company focused on business intelligence. However, in August 2020, co-founder and then-CEO Michael Saylor made a bold pivot to Bitcoin as 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 cap of approximately $90 billion. MicroStrategy's Bitcoin holdings far exceed those of other corporate treasuries, holding 12 times more than miners like Marathon Digital (MARA) and 34 times more than Tesla (TSLA).
Source: Coin Metrics Network Data Pro and BitBo Treasuries
MicroStrategy's most recent purchase occurred on November 24, when it bought 55,500 BTC, currently holding 386,700 BTC at an average cost of $56,761, representing about 1.9% of the current Bitcoin supply. Only spot Bitcoin ETFs exceed this level, holding about 5.3% of the supply, three times that of MicroStrategy. This strategy effectively transforms MicroStrategy into a Bitcoin investment vehicle, acting as a leveraged investment in Bitcoin. Michael Saylor himself describes the company as 'a capital operation that has securitized Bitcoin, providing 1.5 to 2 times leveraged equity.' As shown in the graph below, MicroStrategy's performance relative to Bitcoin reflects this approach, amplifying gains during upswings and amplifying losses during downturns.
Source: Coin Metrics reference rates and Google Finance
This leveraged approach inherently increases MSTR's volatility compared to BTC, often amplifying Bitcoin's price fluctuations by 1.5 to 2 times. In addition to Bitcoin exposure, MicroStrategy's stock price is also affected by broader stock market trends and investor sentiment towards Bitcoin, making it a high-risk, high-reward representative of that 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 buy Bitcoin through the issuance of convertible bonds. This is a fixed-income instrument that serves as a hybrid of debt and equity, convertible into a predetermined number of company shares at a future date.
By issuing these convertible notes in fixed income markets or directly to institutional investors, MicroStrategy is able to raise cash to quickly expand its Bitcoin holdings, and borrowing costs are typically very low. These bonds are attractive to investors as they offer the potential for equity conversion at a price above the issuance price, effectively acting as call options, and the growing demand for MicroStrategy's expanding Bitcoin reserves in a bull market further amplifies this. This creates a reflexive cycle: higher BTC prices drive MSTR stock premiums up, allowing the company to issue more debt or equity, thereby funding 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 Earnings Report
The table above highlights MicroStrategy's outstanding convertible notes, which are set to mature between 2025 and 2032. The company recently raised $3 billion through another convertible bond issuance maturing in 2029, with an interest rate of 0% and a conversion premium of 55%, bringing its total outstanding debt to over $7.2 billion.
Does MicroStrategy's BTC strategy carry risks?
While their strategy has been immensely successful thus far, one question remains: 'What could go wrong? Is this another bubble waiting to burst?' MicroStrategy has a market cap of around $90 billion, with its Bitcoin holdings valued at about $37.6 billion, and the company's current trading price is far above its net asset value (NAV) by approximately 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 drawn the attention of market participants who question how long this premium can be sustained and what consequences might arise if the premium collapses or turns negative.
Participants are also attempting to capitalize on the premium of MSTR stock by shorting it and buying BTC as a hedge. Due to some short positions being covered, the short interest in the stock has decreased from about 16% in October to about 11%. To assess the risk that MicroStrategy may liquidate some of its Bitcoin holdings and the impact of MSTR/BTC price and asset net value premium declines, monitoring the health of its legacy software business may provide better insight into its ability to service this debt.
Source: MicroStrategy Q3 2024 Earnings Report
While quarterly revenues from traditional business have remained relatively stable since 2020, operating cash flow has shown a downward trend. Meanwhile, cumulative debt has surged to $7.2 billion since 2020, thanks to the issuance of convertible bonds funding Bitcoin acquisitions, with debt growth accelerating during bull markets. This reflects the company's reliance on Bitcoin appreciation to maintain financial stability. Nevertheless, the relatively low interest costs of these bonds are likely borne by the software business. If bondholders convert their bonds into equity at a higher stock price upon maturity, much of the debt will be resolved without cash repayment. However, if market conditions worsen and MicroStrategy's stock premium declines, the company may need to explore alternative strategies to meet its obligations.
Conclusion
MicroStrategy's bold approach highlights the potential of Bitcoin as a corporate reserve asset. By leveraging its large Bitcoin reserves, the company has enhanced 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 will require closer scrutiny as market conditions evolve.
MicroStrategy's model could inspire broader adoption—not only within corporations but potentially at the sovereign level, further solidifying Bitcoin's status as a store of value and a premier reserve asset.
