In the history of Wall Street, there has never been a shortage of legendary stories, but the strategic transformation journey of MicroStrategy's Bitcoin Treasury Company is destined to become a unique new legend.
Author: 0xCousin
Source: IOBC Capital
In the history of Wall Street, there has never been a shortage of legendary stories, but the strategic transformation journey of MicroStrategy's Bitcoin Treasury Company is destined to become a unique new legend.
A Bitcoin strategy that has attracted global attention
In 2020, the COVID-19 pandemic triggered a global liquidity crisis, and countries adopted loose monetary policies to stimulate the economy, leading to currency depreciation and increased inflation risks.
During the COVID-19 pandemic, Michael Saylor reassessed the value of Bitcoin. He believed that when the money supply grows at a rate of 15% per year, people need a hedge asset that is not tied to fiat cash flow. Therefore, he chose the Bitcoin strategy for MicroStrategy.
Compared to Bitcoin ETFs or other Spot Bitcoin ETPs launched by companies like BlackRock, MicroStrategy's Bitcoin strategy is more aggressive. It uses the company's idle funds, issues convertible bonds, and raises capital through equity issuance to buy Bitcoin, allowing the company to gain potential profits from the rise in Bitcoin while bearing the potential risks of Bitcoin's decline, whereas ETFs/ETPs focus more on price tracking.
MicroStrategy's funding sources and Bitcoin purchasing history
MicroStrategy primarily raises funds to purchase Bitcoin through four channels.
1. Use own funds to buy
In the initial three investments, MicroStrategy invested its idle funds for purchases. In August 2020, MicroStrategy spent $250 million to buy 21,400 Bitcoins; in September, it invested $175 million to purchase 16,796 Bitcoins; and in December, it invested $50 million to buy 2,574 Bitcoins.
2. Issuance of Convertible Senior Notes
To purchase more Bitcoin, MicroStrategy began financing its Bitcoin purchases by issuing convertible bonds.
Convertible preferred bonds are financial instruments that allow investors to convert the bonds into company stock under specific conditions. These bonds are characterized by low or even zero interest rates, while setting a conversion price above the current stock price. Investors are willing to purchase such bonds mainly because they provide downside protection (i.e., the ability to recover principal and interest at maturity) and potential gains when the stock price rises. The interest rates of the convertible bonds issued by MicroStrategy mostly range between 0%-0.75%, indicating that investors are confident in the rise of MSTR's stock price, hoping to convert the bonds into stocks for greater returns.
3. Issuance of Senior Secured Notes
In addition to convertible preferred bonds, MicroStrategy also issued a secured bond of $489 million due in 2028 with an interest rate of 6.125%.
Secured bonds are a type of collateralized bond with lower risk than convertible preferred bonds, but these bonds only offer fixed interest income. The batch of secured bonds issued by MicroStrategy has already opted for early repayment.
4. At-the-Market Equity Offerings
With MicroStrategy's Bitcoin strategy beginning to show results, the MSTR stock price has continued to rise, prompting MicroStrategy to adopt more at-the-market stock offerings for financing. This method of raising funds carries lower risk as it does not involve debt, does not have repayment pressure, nor is there a foreseeable repayment date.
MicroStrategy has signed public market sales agreements with agents such as Jefferies, Cowen and Company LLC, and BTIG LLC. According to these agreements, MicroStrategy can periodically issue and sell Class A common stock through these agencies. This is what the industry refers to as ATM.
At-the-market stock offerings are more flexible, and MicroStrategy can choose the timing to sell new shares according to the secondary market conditions. Since issuing stock dilutes the existing shareholders' equity, its correlation with Bitcoin prices and the increase in the amount of Bitcoin per share of MSTR lead to complex market reactions, resulting in relatively high volatility in MSTR's stock price.
The process through which MicroStrategy purchases Bitcoin through these four methods is as follows:
Reflected in the price chart of BTC, MicroStrategy's specific purchase history is shown in the figure below:
As of December 30, 2024, MicroStrategy has invested approximately $27.7 billion to purchase 444,262 Bitcoins, with an average purchase price of $62,257 per Bitcoin.
Key questions regarding MicroStrategy's 'intelligent leverage' strategy for purchasing Bitcoin
Regarding MicroStrategy's 'intelligent leverage' strategy for purchasing Bitcoin, there has been considerable controversy in the market. I would like to share my thoughts on several key issues that are hotly debated in the market:
1. Is MSTR's leverage risk high?
To conclude, it is not very high.
According to information disclosed by MSTR during the Q3 2024 earnings call, MSTR's total assets were approximately $8.344 billion, with the carrying value of Bitcoin on the balance sheet being only $6.85 billion (then holding only 252,220 Bitcoins, calculated at a price of $27,160). Total debt was approximately $4.57 billion, resulting in a corresponding debt-to-equity ratio of 1.21.
We do not discuss this accounting standard, only considering the data at the time of actual sale, which reflects the latest market price. If calculated based on the latest market price of Bitcoin as of September 30, 2024 ($63,560), the actual market value of the Bitcoin held by MSTR would be $16.03 billion, resulting in a corresponding MSTR debt-to-equity ratio of only 0.35.
Let us take a look at the data situation as of December 30, 2024.
As of December 30, 2024, MicroStrategy's total outstanding debt is $7.27385 billion, detailed as follows:
As of December 30, 2024, MicroStrategy holds 444,262 Bitcoins, worth $42.25 billion. If MicroStrategy's other assets remain unchanged (i.e., $1.49 billion), then MSTR's total assets would be $43.74 billion, and liabilities would be $7.27385 billion, resulting in a debt-to-equity ratio of only 0.208.
Let's look at the debt-to-equity ratios of leading publicly listed companies in the U.S. - Alphabet 0.05, Twitter 0.7, Meta 0.1, The Goldman Sachs Group 2.5, JPMorgan Chase & Co. 1.5.
MicroStrategy is a company that has transformed from the software industry to the financial industry, and its debt-to-equity ratio is still healthy.
2. Under what circumstances could these convertible bonds become an unbearable burden in the future?
To conclude, if MicroStrategy does not continue to issue convertible bonds in the future, Bitcoin would have to fall below $16,364 for the value of the 444,262 Bitcoins held by MicroStrategy to be less than the total amount of its convertible bonds of $7.273 billion. If MicroStrategy only uses ATM financing and idle funds to purchase Bitcoin in the future, with the increase in MicroStrategy's Bitcoin holdings, this 'debt crisis' price line can become even lower.
If MicroStrategy continues to issue convertible bonds to purchase Bitcoin at high prices and Bitcoin enters a bear market, the decline in Bitcoin prices could lead to the value of MicroStrategy's Bitcoin holdings dropping below the total amount of its convertible bonds, which would also cause MSTR's stock price to slump, thereby affecting its refinancing and debt repayment capabilities, potentially making the convertible bonds an unbearable burden.
MicroStrategy's convertible bonds give bondholders the right to convert their bonds into MSTR stock, divided into two phases: Phase one - Initial phase - If the trading price of the bonds drops >2%, creditors can exercise their rights to convert the bonds into MSTR shares and sell to recover their investment; if the trading price of the bonds remains stable or even rises, creditors can sell the bonds in the secondary market at any time to recover their investment. Phase two - Later phase - When the bonds are nearing maturity, the 2% rule no longer applies, and bondholders can either cash out or directly convert the bonds into MSTR shares.
Since the convertible bonds issued by MicroStrategy are low-interest or even zero-interest bonds, it is evident that creditors are primarily seeking conversion premiums. If, at the repayment date, MSTR's stock price has increased compared to the price at the time of financing, creditors are more likely to consider converting their bonds into stock. If MSTR's stock price has declined compared to the price at the time of financing, creditors will consider demanding principal and interest.
If creditors do not choose to convert to MSTR stock and ultimately need to repay the creditors, MicroStrategy has multiple options:
Continue to issue new shares to obtain funds for repayment;
Continue to issue new debts to repay old debts; (this has already been done in September 2024)
Sell part of the Bitcoin to repay debts.
Therefore, at present, the likelihood of MicroStrategy falling into a 'debt crisis' is quite low.
3. Why are investors starting to care about MSTR's Bitcoin per share?
To conclude, the amount of Bitcoin per share will determine MSTR's net asset value per share.
Whether issuing convertible bonds or ATM, both achieve financing through share dilution. The purpose of financing is to increase Bitcoin reserves. For MSTR shareholders, share dilution is a negative, traditionally speaking, it is not a good thing. The management of MicroStrategy tells MSTR shareholders the story of - BTC Yield KPI.
Essentially, it suggests that as long as MSTR's market value is higher than the total value of the held BTC, there is a market value premium rate, so diluting MSTR's shares to buy BTC will enhance the Bitcoin per share of MSTR. The increase in MSTR's Bitcoin per share means that MSTR's net asset value per share is growing, making it a worthwhile endeavor for shareholders to dilute shares to finance Bitcoin purchases.
Currently, MicroStrategy holds 444,262 BTC, with a total holding value of approximately $42.256 billion. With the current market value of MSTR at $80.37 billion, MSTR's market value is 1.902 times the value of its Bitcoin holdings, indicating a current premium rate of 90.2%. Currently, MSTR's total share capital is 244 million shares, with each share corresponding to approximately 0.0018 BTC.
This is the core of what is known as 'intelligent leverage', turning the difference between the company's market value and the market value of its Bitcoin holdings into a capital operation advantage.
4. Why has MicroStrategy been more aggressive in buying Bitcoin in the past two months?
To conclude, it may be because MSTR's stock price is very high.
In the past two months, MicroStrategy has significantly increased the scale of financing for Bitcoin purchases. In November and December 2024, MicroStrategy invested a total of $17.69 billion (accounting for 63.8% of total investment) through ATM and issuing convertible bonds to purchase 192,042 Bitcoins (accounting for 43.2% of total purchases). Among these, only $3 billion was from convertible bonds, while the remaining $14.69 billion was financed through ATM.
Overall, the entire process of MicroStrategy's strategic allocation of Bitcoin has characteristics of regular investment in terms of time dimension; however, in terms of quantity and amount, it seems to be more aggressive in bull markets than in bear markets.
I cannot understand this characteristic and can only boldly speculate that it may be because MSTR's stock price rises more in bull markets. In August 2024, after a stock split, MSTR's stock price tripled, while its price rose more than four times throughout the year, whereas Bitcoin only rose 2.2 times this year.
MicroStrategy's CEO presented a beautiful '42B plan' during the Q3 2024 earnings call.
British author Douglas Adams mentioned in 'The Hitchhiker's Guide to the Galaxy' that the supercomputer 'Deep Thought' provided the answer to 'life, the universe, and everything' as 42.
MicroStrategy believes this is a magical number, thus proposing a $42 billion financing plan. 21 is also a magical number, as the maximum total supply of Bitcoin is 21 million. Therefore, MicroStrategy plans to issue $21 billion in ATM + $21 billion in fixed income over the next three years to continue increasing its Bitcoin holdings.
Assuming MicroStrategy ultimately raises $42 billion through equity issuance, and assuming a share price of $330 for the new issuance, the total share capital would become 371.3 million shares. If MicroStrategy buys Bitcoin at an average price of $100,000, the company could increase its Bitcoin holdings by 420,000, raising MicroStrategy's total holdings to 864,262 Bitcoins. At that time, the amount of Bitcoin per share would increase to 0.00233, an increase of approximately 29.4%. At this point, MSTR's total market value would be $122.53 billion, with a total value of 864 billion for Bitcoin holdings. In this case, the market value premium rate would still exist.
5. What other driving forces are there for Bitcoin's rise after MicroStrategy?
To conclude, besides the publicly listed companies that are driven by MicroStrategy to buy Bitcoin, we currently only think of more national strategic reserves, but do not hold too high expectations for this round of bull market.
This round of Bitcoin's price increase is mainly due to the following major buyers:
1. Long Term Holders with strong consensus on Bitcoin
The long-term increase in Bitcoin does not require justification; it is as natural as monkeys climbing trees and mice digging holes in the BTCer community, as it is digital gold.
After Bitcoin fell below $16,000, the most mainstream Antminer S17 series mining machines were near the shutdown price. Other mining machines like Shenua M30S, Hippo H2, and Antminer T19 had also fallen into the shutdown price range. In this price range, even if nothing else happens, a rebound will occur. The transition from bull to bear markets is like a basketball dropped from a height, which will bounce multiple times with decreasing intensity after hitting the ground.
As seen in the above figure, by the end of 2022, Long Term Holders were continuously increasing their positions.
After over a decade of development, the Bitcoin consensus has become strong enough, with on-chain investors and Long Term Holders sharing a consensus around the shutdown price of mainstream mining machines.
2. ETFs bring incremental funds to traditional financial markets
Since the introduction of BTC ETFs, a total of 528,600 BTC has flowed in, bringing nearly $3.6 billion in incremental purchases for Bitcoin during this bull market, and $2.6 billion for ETH.
Moreover, the approval of BTC ETFs (and ETH ETFs) will have a ripple effect, leading more traditional financial institutions to pay attention to and invest in the crypto space.
3. MicroStrategy continues to buy, and many publicly listed companies follow suit, leading to a double boost.
According to Bitcointreasuries data, as of December 30, 2024, there are 149 entities holding a total of over 2.95 million Bitcoins. Furthermore, this data has been growing rapidly in recent times.
Among these entities holding Bitcoin, 73 are publicly listed companies, 18 are private enterprises, 11 are countries, 42 are ETFs or funds, and 5 are DeFi protocols.
MicroStrategy is the first publicly listed company to adopt the 'Bitcoin Treasury Company' strategy, but it is not the only one. Companies like Marathon Digital Holdings, Riot Platforms, and Boyaa Interactive International Limited have also implemented this strategy. However, MicroStrategy still has the largest impact.
4. National Strategic Reserves
Currently, there are some governments holding Bitcoin. Details are shown in the figure below:
Although these countries hold Bitcoin, most of the Bitcoin was seized by law enforcement during their operations. They have not sold it off yet, and therefore do not qualify as stable holders.
Among these countries, only El Salvador is likely to be a true BTC holder. Since 2021, El Salvador has been buying Bitcoin, purchasing 1 Bitcoin daily, and currently holds 6,002 BTC, valued at over $560 million.
Additionally, Bhutan holds 11,688 BTC through Bitcoin mining. However, Bhutan does not qualify as a BTC holder, as it has recently reduced its holdings.
Former President Donald Trump stated during his campaign that if elected president, he would establish a Bitcoin strategic reserve.
If there is any further motivation for Bitcoin to rise after MicroStrategy, it is primarily the promotion of a Bitcoin strategic reserve by the U.S. government under Trump's administration, which would subsequently encourage more countries to adopt Bitcoin as a strategic reserve.
Summary
MicroStrategy's Bitcoin strategy is not only a significant business experiment in corporate transformation but also a major innovation in financial history. Through ingenious capital operations, intelligent leverage, and deep insights into Bitcoin's value, it has not only achieved remarkable growth in its market value but also pushed Bitcoin further into the traditional financial view, breaking the barriers between crypto assets and mainstream capital markets.
MicroStrategy's bold attempt may just be the prologue to the Bitcoin legend, or it may be a small step in the process of Bitcoin's true rise, but it could be a significant leap into a new financial era.
