MicroStrategy has taken a simple yet unusual approach to business: borrow as much of a depreciating asset as you can to accumulate as much of an appreciating asset as you can.
Bernstein analysts laid out the fundamentals of MicroStrategy’s unique Bitcoin model as the firm announced Monday a whopping $5.4 billion purchase of the cryptocurrency. This brings the firm’s Bitcoin holdings to 386,700, a total value of $37 billion.
The self-proclaimed Bitcoin treasury company ultimately does three things: take money from its software business (which rakes in about $500 million in yearly revenue), borrow money through loans that it can convert into stocks, and sell new shares.
All of that then gets poured into more Bitcoin onto the company’s balance sheet.
Thanks to its Bitcoin strategy, MicroStrategy’s stock is up more than 3,000% since August 2020, today changing hands for $380. The stock hit a high of $543 on November 21.
Over the past 12 months, Michael Saylor’s MicroStrategy has gobbled up more Bitcoin than the entire network will even produce during the next 12 months.
Now, with MSTR being the best-performing stock in the S&P 500 and the top placeholder for risk-adjusted returns, investors are beginning to ask questions about how the model works.
‘Bitcoin yield’
Saylor actually coined the term “Bitcoin yield” to show investors how much more of the cryptocurrency each share represents over time.
Think of it like earnings on a stock. Thus, this model approach has lured investors into purchasing his company’s stock.
“Wouldn’t you like to get 5.5% on your Bitcoin balance without converting it to dollars?” Saylor said in a recent interview with Saifedean Ammous, author of “The Bitcoin Standard.”
“It’s pretty close to risk free,” Saylor said.
Ammous did push back on that view, however.
“It only works with fiat,” Ammous said, adding the yield in traditional finance comes from institutions being able to print money. “That game stops in Bitcoin.”
Back in December 2020, when MicroStrategy first implemented the strategy, investors owned 0.6 bitcoin per share.
Now, because the company has bought more Bitcoin by issuing new shares and debt at higher prices, each share represents about 1.5 Bitcoin, which translates to a 25% annual growth rate, said Bernstein analysts.
Ultimately, investors gain because the strategy works to give them more Bitcoin exposure per share over time.
MSTR premium
Of course, investors are wise to question how much extra ― and why ― they should pay for MicroStrategy shares compared to just buying Bitcoin directly.
At the moment, investors are paying roughly a 189% premium for MSTR over Bitcoin. The historic average sits at 61%.
There are three reasons investors are agreeing to accept the premium, said Bernstein analysts.
First, the Bitcoin exposure is leveraged. MicroStrategy borrows money to buy more Bitcoin, which allows it to accumulate more than if it used its cash alone. This means that over time, each MSTR stock comes with more Bitcoin tied to it.
Secondly, the borrowed money has a minuscule 0.5% interest rate with five- to seven-year payment terms.
And MicroStrategy is the known player in this field as there are few publicly traded companies that offer Bitcoin exposure ― with the added value of being led by one of Bitcoin’s most prominent promoters in Saylor.
Three scenarios
Bernstein offered three scenarios for MicroStrategy moving forward.
The base case is that MicroStrategy doubles its current Bitcoin holdings to 4% of the total supply. They currently control nearly 2%. The firm also sees Bitcoin rising to $200,000 in 2025, and further to $1 million per coin in 2033.
Meanwhile, the bull case is that MicroStrategy triples its holdings to 6% of the network’s total supply. That would translate to more than 1.2 million Bitcoin, surpassing the stash of Bitcoin creator Satoshi Nakamoto. The price predictions remain the same as in the base case.
In the bear case, MicroStrategy would increase slightly its current holdings to 2.5% of the total supply. Bitcoin’s price would peak at $200,000 in 2025 but is “followed by an elongated bear market,” said Bernstein.
The bear case would mean the company would be forced to liquidate its Bitcoin holdings.
What if Bitcoin crashes?
Saylor’s strategy also involves long-term loans that don’t require Bitcoin as collateral.
This means that the firm can’t be forced to sell if the price drops.
Long-term loans protect against short-term price drops, and when MicroStrategy borrows money, lenders can convert the debt to shares at a higher price. And if Bitcoin’s price falls precipitously, they can sell new shares to reduce their debt levels.
In fact, that’s what the company did when Bitcoin fell to $16,000 in 2022.
To be sure, Saylor’s strategy does involve risk (both financial and political), even if it has been tagged as the greatest corporate finance story of the 2020s.
“Playing with massive leverage is always a dangerous thing,” said George Kikvadze, executive vice chairman at Bitfury. “Once there is a correction in BTC (and yes, there will be a correction), MSTR, the downside will be much more violent.”
Pedro Solimano is a Markets Correspondent at DL News. Got a tip? Email him at psolimano@dlnews.com.
