Microstrategy's Strategy
The Bitcoin glitch
Bitcoin is up 123% year-to-date at the time of writing. It’s been a great recent rally for the cryptocurrency as the markets watched it go on a straight march to what seems like a psychological price target of $100K.
At the same time, Microstrategy (MSTR), a bitcoin-related company, is up over 500% year-to-date. There are even leveraged ETFs that are 2x or 3x long MSTR. How is a Bitcoin company outperforming Bitcoin itself?
What is Microstrategy?
The company’s main business is selling business intelligence (B.I) software. Q3 revenue was $116m, up 10% YoY (As someone who has worked in the B.I space for the past few years, I’ve not heard of any company in APAC using their solutions). With a TTM revenue of $467m and a market cap of $85b, how does a B.I software company command a P/S premium of over 180?
That’s because the company is also the largest corporate holder of Bitcoin and the world’s first “Bitcoin Treasury Company”. In it’s own words:
As a Bitcoin Treasury Company, we plan to use the additional capital to buy more bitcoin as a treasury reserve asset in a manner that will allow us to achieve higher BTC Yield.
This is not immediately intuitive, so let’s break down MSTR’s model into 2 components. The company’s bitcoin-focused strategy is financed through a combination of both equity and debt offerings.
(1) Equity
MSTR trades at a market premium of around 2-3x of its actual Bitcoin holdings (NAV). The company uses this stock price premium to grow its Bitcoin per share efficiently by raising equity and diluting shareholders.
Say the company issues additional equity to raise $100m
It uses this $100m to buy $100m worth of Bitcoin
Since the market gives MSTR a 2-3x premium on its Bitcoin holdings, the company should now be worth an additional $200-300m.
As Bitcoin appreciates, MSTR appreciates even more with the additional $100m of Bitcoin it now has.
The strategy combines (1) NAV premium (2) Leverage (3) Bitcoin appreciation to grow the company’s Bitcoin holdings and consequentially its value, via equity offerings.
(2) Debt
The company raises convertible bonds at a low or zero interest rate. It most recently completed a $3b debt offering maturing in 2029 that do not bear any interest but are convertible to MSTR shares at a 55% premium over its closing price.
What’s in it for these institutional lenders? By having the option to convert to convertible shares, these lenders gain exposure to Bitcoin upside with almost no downside risk since MSTR has to repay the debt in full if they do not convert. The only real risk is if MSTR goes bankrupt and cannot repay its debt, but you would think that there are terms in the deal that protect the lenders from this, such as forcing early repayments if Bitcoin falls by X%.
MSTR’s End Game
For shareholders, MSTR’s strategy of using its NAV premium and access to cheap leverage aims to exceed the effects of dilution by increasing Bitcoin holdings at a faster rate. With its NAV premium, MSTR can raise more funds and purchase more Bitcoin than the dilution would otherwise cause. As long as Bitcoin ownership per share increases, any short-term dilution is more than compensated by the added value of increased Bitcoin holdings.
It feels like an infinite money glitch. Higher bitcoin prices drive a higher premium which allows more equity and debt issuance by MSTR that in turn results in more bitcoin on MSTR’s balance sheet and buying pressure which can drive higher bitcoin prices, and the cycle repeats.
MSTR’s strategy relies on two critical conditions:
The NAV premium given by the market remains intact. If this premium is broken, then MSTR should only be worth 1/3 of its value, and the offering strategies no longer work.
Bitcoin continues to appreciate in the long term. If Bitcoin falls, then not only would MSTR’s value fall, but the company may also have to sell some of its bitcoin to repay its debts that didn’t convert, which in turn results in less bitcoin on MSTR’s balance sheet and adds selling pressure… i.e the glitch reverses.
Michael Saylor, CEO of MSTR, believes the price of Bitcoin could eventually hit $13m per coin, delivering an ARR of 29% over 21 years. When you consider that the value of a dollar reduces 3-4% every year due to inflation, investing in an alternative asset class that is scarce and not subjected to “money printing” by the government is certainly appealing.
And if the conditions above hold, then for investors, buying MSTR provides much more leverage compared to simply buying and holding Bitcoin directly. Also, in the future when Bitcoin’s price stabilities and MSTR is one of (if not the) world’s biggest known owner of Bitcoin, you wonder what it can do with its reserves (e.g lending).
Bitcoin’s End Game
I don’t think Bitcoin is ever going to serve the purpose of being a “coin” for transactional purposes - that’s the role of stablecoins. Instead it’s going to be a scarce appreciating asset, i.e a digital version of gold. Consider what happens if the U.S decides to build out a Bitcoin strategic reserve under Trump’s administration. Every other country’s government will be under pressure to follow suit - You don’t want to be the last one to the party losing out by just holding cash and gold.
Also, consider that the global bond market is supposedly worth $140t, compared to $115t for global equities and $3t for global cryptocurrency. Can a few % of the bond market flow into Bitcoin (and cryptocurrency)? MSTR is serving as the channel for that. There is money to be made from facilitating wealth transfers.
Personally, I’ve built out a small position in MSTR and will be looking to increase my Bitcoin exposure one way or another. Remember that leverage works both way and an extended bitcoin bear market will most definitely crash MSTR’s stock price - have a look at its 5-year chart.
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This Week:
💾: Nvidia reported Q3 earnings that beat analyst estimates, with revenue of $35b and EPS of $0.81. Revenue grew 94% YoY, a consecutive slowdown from the previous three quarters, and Q4’s forecast implies an expected 70% YoY growth.
🤖: Amazon to invest another $4b in Anthropic, doubling its total investment in the A.I startup. We’re still early in the A.I cycle.
🇨🇳: Xi makes diplomatic push at global summits, positioning China as a defender of global trade order against Trump’s “America First” messaging. Economists polled by Reuter expect U.S to impost tariffs on China of nearly 40% starting from early next year.
🇺🇸: DOJ kicks off its attempt to break up Alphabet (Google) by seeking to make it divest Chrome and possibly Android to end its monopoly on Search. The court is holding hearings on the proposed breakup in Apr 2025, with a ruling expected by August. Google will almost certainly appeal, so expect the entire process to take years.