Original text | Alvis, Mars Finance
Historically, whenever a traditional industry reaches its peak, some groundbreaking companies often emerge, finding unique 'production methods' in the market cracks and attracting capital through distinctive strategies.
These companies rarely 'produce' actual goods but concentrate resources on a core asset—much like how the past Shell Oil Company maintained valuation through oil reserves, or how gold mining companies dominate prices through gold extraction and reserves.
The latest financial report from MicroStrategy once again reveals a company that is not known for 'production', yet has broken traditional valuation rules through massive investments in Bitcoin, becoming the largest and most unique Bitcoin holder in the world.
From Software Company to Bitcoin Whale: The Transformation Path of MicroStrategy
MicroStrategy announces $42 billion capital plan including $21 billion ATM equity offering and a target of raising $21 billion in fixed-income securities. Join us at 5pm ET as we discuss our quarterly results and #Bitcoin Treasury Company plans. $MSTR https://t.co/eXYELbN1Dm
— Michael Saylor (@saylor) October 30, 2024
MicroStrategy (MSTR), originally built on business intelligence software, saw its founder Michael Saylor hit the gas in 2020, directly entering the 'fast lane' of Bitcoin. From that year on, Saylor no longer kept the company focused on traditional 'production', instead recognizing the potential of Bitcoin as a core asset and gradually converting company reserves into Bitcoin, even betting his own fortune, step by step transforming MicroStrategy into a 'Bitcoin treasury bank'.
In Saylor's eyes, Bitcoin is the gold of the digital world, the anchor point of the future of global finance. Some think he is crazy, while others call him a 'zealous preacher' of Bitcoin, but he firmly believes that he is winning a 'new gold standard' for the company.
Saylor does not intend to follow the old path; he positions MicroStrategy more like an 'air freight courier': compared to traditional ETFs' 'ground logistics', MicroStrategy finances through bond issuance, borrowing, and equity increases to directly purchase Bitcoin, flexibly and efficiently, while chasing the upward trend of the Bitcoin market. This makes MicroStrategy not just a stock code, but a 'fast target' in the Bitcoin market, with the company's market value directly linked to Bitcoin's fluctuations. Saylor's actions have sparked significant controversy, with well-known investor Peter Schiff even ridiculing on social media, 'The company does not produce any products, yet it has achieved an exceptionally high market value by hoarding Bitcoin.' He pointed out that MicroStrategy's market value has surpassed most gold mining companies, second only to Newmont.
In response, Saylor's reply is very simple: 'Bitcoin is our future reserve asset.' Driven by this firm belief, MicroStrategy has accumulated over 250,000 Bitcoins and plans to finance $42 billion over the next three years to continue increasing its holdings. MicroStrategy's 'production' method is not traditional material manufacturing, but rather constructing a new financial system around Bitcoin's 'infrastructure'.
Some say Saylor is gambling, but perhaps it is not just a bet, but a kind of faith. He has carved out an alternative path through a venture, making MicroStrategy an alternative target in the financial market. As he said: 'We do not produce; we only hoard coins.'
MSTR Latest Financial Report Interpretation: Capital Enrichment and Reinforcement of Bitcoin Reserves
1. Overview of Financial Reports and Financing Plans
The financial report released by MicroStrategy shows overall positive expectations. The company plans to finance $42 billion over the next three years to continue increasing its Bitcoin holdings, and has completed the repurchase of previously pledged Bitcoins. As of the report date, MicroStrategy holds a total of 252,220 Bitcoins.
Since the end of Q2 2024, the company has purchased an additional 25,889 Bitcoins at a total cost of about $1.6 billion, with an average price of $60,839 per coin. The current total market value of holdings is approximately $18 billion, and the cumulative cost of purchased Bitcoins is $9.9 billion, with an average price of about $39,266 per coin. The company also raised $1.1 billion through the sale of Class A common stock and raised another $1.01 billion through issuing convertible bonds maturing in 2028, while repaying $500 million of senior secured notes, releasing all Bitcoin assets from collateral. This measure significantly enhances the company's financial flexibility and reduces risks under extreme market conditions.
2. Cash Reserves and Future Financing Goals
MicroStrategy currently holds $836 million in cash, providing stable funding support for future Bitcoin purchases. The company has also announced phased financing goals: $10 billion planned for 2025, $14 billion for 2026, and $18 billion for 2027, totaling $42 billion. CEO Michael Saylor's plan aims to strengthen the company's core asset reserves through gradually increasing Bitcoin, which is undoubtedly viewed as a positive by the market, rather than negative news.
3. Market Value and Book Value
As of October 29, 2024, MicroStrategy's market value is approximately $18 billion, with a book value of $6.9 billion, after accounting for $3 billion in accumulated impairment losses. The impairment was not due to MicroStrategy selling Bitcoin, but rather a book adjustment under current accounting standards. According to accounting regulations, if Bitcoin's market price falls in a given quarter, the company must lower the book value of these assets and record impairment losses. However, even if the price later rebounds, the book value will not automatically restore, only reflecting appreciation upon sale. If future accounting standards are revised (such as the FASB's fair value measurement passing), this issue may be improved.
4. The Flexible Advantage of BTC as a Core Asset
As a core asset, Bitcoin provides MicroStrategy with greater capital operational flexibility compared to spot ETFs. The company likens its Bitcoin reserve operations to that of an oil company's oil reserves. Just as oil companies handle unrefined and refined products (like gasoline, diesel, and jet fuel), MicroStrategy views its Bitcoin reserves as a capital preservation tool, enabling the company to enhance productivity and implement innovative financial strategies.
5. Principles of MicroStrategy's Bitcoin Holdings
MicroStrategy has set eight core principles for its Bitcoin holdings, reflecting its long-term investment strategy and market orientation:
Continuously purchasing and holding Bitcoin, focusing on long-term returns;
Prioritizing the long-term value of MicroStrategy's common stock;
Maintaining transparency and consistency for investors;
Using smart leverage to ensure the company outperforms the Bitcoin market;
Quickly and responsibly adapting to market dynamics, continuing to grow;
Issuing innovative Bitcoin-supported fixed income securities;
Maintaining a healthy and robust balance sheet;
Promoting Bitcoin as a global reserve asset.
6. The Difference Between MicroStrategy and Bitcoin Spot ETFs
Compared to Bitcoin spot ETFs, MicroStrategy's uniqueness lies in its financing methods. ETF investors need to actively purchase ETF shares, while MicroStrategy raises funds through various channels such as equity, unsecured or secured debt, convertible bonds, and structured notes, directly increasing its Bitcoin holdings. This 'selling shares to finance' model allows the company to actively raise funds to support its long-term strategy of holding Bitcoin.
The Cycle of Capital and High Premium Rates: MicroStrategy's Valuation Code
The higher the premium rate, the more suitable it is for large-scale financing
MicroStrategy's valuation model relies on market value premium rates, increasing its Bitcoin (BTC) holdings through equity dilution financing, enhancing per-share BTC holdings, and thus driving up the company's market value. Here is a detailed analysis of this model:
Simplified Analysis of Premium Rate and Enrichment Effect
Assuming the price of Bitcoin is $72,000, MicroStrategy holds 252,220 BTC, with a total holding value of about $18.16 billion. Currently, with the company's market value at $48 billion, MicroStrategy's market value is 2.64 times the total value of Bitcoin holdings, resulting in a current premium rate of 164%.
Assuming the company's current total shares are 10,000, each share corresponds to about 25.22 Bitcoins.
If MicroStrategy plans to raise $10 billion through a new issuance, the total share capital after the increase will become 12,083 shares (calculation: the financing amount of $10 billion divided by the current market value of $48 billion, resulting in 0.2083 times, meaning the share capital will increase by 20.83%, totaling 10,000 shares multiplied by 1.2083, approximately equal to 12,083 shares). In this case, the company could purchase about 138,889 Bitcoins at a price of $72,000 for $10 billion, increasing the total Bitcoin holdings to 391,109. Thus, each share's BTC holding would also increase to 32.37 coins (391,109 Bitcoins divided by 12,083 shares), achieving an enrichment of approximately 28%.
Similarly, if financing $42 billion according to plan
Further assuming MicroStrategy issues 87.5% more shares, i.e., financing $42 billion by issuing 8,750 shares, the total share capital would increase to 18,750 shares (calculation: 10,000 shares multiplied by 1.875 times). If Bitcoin is purchased at $72,000, the company can buy about 583,333 BTC, bringing the total holdings to 835,553 Bitcoins. At this point, each share's BTC holding would increase to 44.23 coins (835,553 Bitcoins divided by 18,750 shares), up from the previous 25.22 coins, an increase of about 75%.
If this enrichment effect is realized within three years, the average annual enrichment would be 25%.
Of course, the price of Bitcoin will fluctuate upon reinvestment, potentially higher or lower, but this will not change the enrichment conclusion. Under MicroStrategy's extremely high premium rate (currently around 180%-200% volatility), the company should maximize financing by utilizing the premium rate as much as possible. Therefore, although CEO Michael Saylor's $42 billion financing plan initially caused market panic, market sentiment quickly recovered, indicating the company's clear recognition of the current model, which is a rational decision that maximizes shareholder equity.
MicroStrategy's Advantages and the Logic Behind High Premium Rates
Many investors may wonder why the market is willing to purchase MicroStrategy's stock and convertible bonds at a high premium rather than directly buying Bitcoin ETFs. This involves several unique advantages of MicroStrategy:
Continuously enriching earnings
By continuously enriching Bitcoin reserves through financing, MicroStrategy has achieved an annualized enrichment of 6%-10%, with a 17% annualized enrichment realized so far in 2024. Under the current high premium rate financing model, annualized enrichment is expected to exceed 15%. Based on a valuation of 10 to 15 times, MicroStrategy's premium rate corresponds to a valuation of 150%-225%.
Volatility and Market Bridge
Michael Saylor believes that MicroStrategy acts as a bridge between traditional capital markets and the Bitcoin market. Currently, Bitcoin's market value is about $1.4 trillion, with a relatively low penetration rate. If the penetration rate increases, even if only 1% of the global $300 trillion bond market allocates funds to Bitcoin, it could bring approximately $3 trillion in potential incremental funds to MicroStrategy. Additionally, the convertible bonds issued by the company not only provide some downside protection but also offer potential options for Bitcoin price increases.
Conclusion: The Self-Reinforcing Effect of High Premium Rates in Bull Markets
In a bullish market environment, MicroStrategy's valuation model and high premium rate financing model form a self-reinforcing positive cycle. The higher the premium rate, the larger the company's financing amount, the more it enriches each share's BTC reserves, further pushing up the company's market value. This market effect rolls like a snowball, especially under the expectation that Bitcoin prices may rise to the $90,000-$100,000 range, MicroStrategy might continue to accelerate under the protection of high premium rates.
Michael Saylor's bets and the market's response seem to indicate a subtle game between traditional finance and digital assets. In this dual struggle of capital and technology, will MicroStrategy achieve a financial revolution or simply be a flash in the pan? What we are witnessing may be a precursor to future financial changes.
(The above content is excerpted and reproduced with the authorization of the partner MarsBit, original link)
Disclaimer: The article only represents the author's personal views and opinions, not the views or positions of Blockkey. All content and opinions are for reference only and do not constitute investment advice. Investors should make their own decisions and trades, and the author and Blockkey will not bear any responsibility for any direct or indirect losses resulting from investors' trades.
"Not producing, just hoarding coins! MicroStrategy Financial Report Interpretation: Capital Enrichment and Reinforcement of Bitcoin Reserves" was originally published on (Blockkey).
