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MicroStrategy founder Michael Saylor has become one of bitcoin's most outspoken supporters, boldly declaring, "There is no second-best option."
Since 2020, Saylor has accumulated over $30 billion in bitcoin purchases through his publicly traded company, with paper profits exceeding $14 billion, making MicroStrategy the enterprise holding the most bitcoin. This strategy has garnered praise from bitcoin extremists while also raising skepticism among traditional investors.
However, as MicroStrategy continues to raise billions of dollars—planning to add $42 billion in financing over the next three years—with a fourfold bet on bitcoin, external concerns are escalating. Will this brew another massive bubble? How will MicroStrategy's bold actions conclude if bitcoin prices fall?
1. Echoes of Trading Phantoms
MicroStrategy's bitcoin strategy bears similarities to one of the most notorious trades in the crypto space, the "GBTC premium trade." At the peak of this arbitrage trade, investors gained exposure to bitcoin through the Grayscale Bitcoin Trust (GBTC) because it traded at a price higher than the underlying bitcoin holdings' value. They borrowed against their GBTC shares and profited from the premium after the lock-up period ended.
This trade experienced a dramatic collapse in 2021 when the GBTC premium turned into a discount. Companies like Three Arrows Capital and BlockFi, which were over-leveraged or associated with leveraged clients, subsequently went bankrupt. A series of subsequent bankruptcies, including Genesis's, highlighted the risks of financial strategies built on fragile market imbalances.
Today, critics warn that MicroStrategy is walking a similar tightrope. But unlike leveraging the GBTC premium, MicroStrategy has carved a new path for leveraging bitcoin trades through its own stock and bonds—effectively transforming the company into a leveraged bitcoin proxy.
Some periods of MicroStrategy's bitcoin purchases
2. The Magic of Convertible Bonds
At the core of MicroStrategy's strategy is raising funds through issuing convertible bonds and stocks, which operates as follows:
Borrowing at low rates (0%), MicroStrategy offers bondholders bonds at extremely low or even zero interest rates.
Offering stock appreciation potential as returns, bondholders can convert their bonds into MicroStrategy stock when the stock price rises. This potential yield has attracted numerous institutional investors, including Germany's largest insurer, Allianz.
The funds raised from purchasing more bitcoin are immediately used to buy more bitcoin, further driving up the stock price.
This feedback loop has led to astonishing stock performance for MicroStrategy, with an increase of nearly 500% just in 2024. This strategy has been so successful that bond investors, attracted by the potential appreciation of the stock price, are willing to lend billions to the company at a 0% interest rate.
This is a compelling argument: why settle for the low returns of bonds when MicroStrategy can offer you the chance to double or even quintuple your investment? As Saylor stated in a recent investor conference call, bondholders are fleeing a world of "negative real returns" in pursuit of the potential gains offered by bitcoin.
Currently, MicroStrategy's strategy is operating very effectively, with rising bitcoin prices creating a virtuous cycle. But what happens if bitcoin's trajectory reverses?
MicroStrategy holds nearly 387,000 bitcoins, valued at approximately $37 billion, but its market valuation has exceeded $100 billion. This extremely high valuation largely depends on the assumption of continuous price increases for bitcoin. If bitcoin falls, the company's stock price—essentially a leveraged bet on bitcoin—could plummet significantly.
It is also worth noting that double-leveraged ETFs, like MSTU and MSTX, which focus on MicroStrategy, have further exacerbated market speculation based on MicroStrategy's bitcoin speculation.
All of this has driven massive bitcoin purchases. According to Fundstrat's research, MicroStrategy's buying volume actually far exceeded the total inflow of all bitcoin ETFs earlier this month. If the market begins to doubt MicroStrategy's ability to achieve its $42 billion financing goal, bitcoin prices could fall, further jeopardizing MicroStrategy's financing capabilities. Once this situation shifts, things could deteriorate rapidly. Similar situations have occurred during FTX's fundraising attempts when it needed funds the most and the state of Terra during its $40 billion collapse.
Despite Saylor repeatedly emphasizing that the company will never sell its bitcoins, this position may be difficult to maintain if debt pressures increase and bitcoin prices fall.
3. Historical Lessons
The cautionary tale of GBTC premium trading remains vivid. When market conditions change, this bubble can burst, exposing the fragility of leveraged strategies. Although MicroStrategy's approach avoids some of the pitfalls of GBTC trading—such as not relying on inefficient fund structures—it also faces a core risk: if bitcoin prices fall, leverage could amplify losses.
Saylor's steadfast belief in bitcoin may inspire confidence, but history shows that markets cannot rise indefinitely. Just as the 2023 collapse of Terra saw overconfidence in a "self-sustaining system" lead to $40 billion in losses, if bitcoin prices fall, MicroStrategy's stock could face a similar liquidation moment.
However, for bitcoin supporters who firmly believe that the U.S. government will soon follow suit and incorporate bitcoin into its strategic reserves, MicroStrategy's bet has the potential to become one of the greatest investments in history—either renowned as a "stroke of genius" or remembered for a "catastrophic failure."
