Author: Climber, Jinse Finance
About 20 years from now, people will look back and say, "Where were you during the digital gold rush?" - Michael Saylor.
Recently, MicroStrategy has once again become the focus of market attention due to its $42 billion BTC investment plan, and its market value has also surpassed Coinbase due to the rise in BTC.
Since Q3 2020, MicroStrategy has been continuously purchasing BTC, and in the past year, the company has raised tens of billions of dollars through the issuance of convertible preferred notes, stock splits, leveraged ETFs, and other means to increase its BTC reserves. Currently, the company holds as many as 252,220 BTC, with a BTC return of 17.8% year-to-date, and has an unrealized profit of $8.4 billion on its BTC investment.
I. Choice over Effort: A Listed Company that Struck Gold
MicroStrategy was founded in 1989, headquartered in Washington, D.C., USA, and was founded by Michael J. Saylor, Sanju Bansal, and Thomas Spahr. Currently, the company is one of the largest independent BI (Business Intelligence) companies in the world (NASDAQ: MSTR).
Since its inception, MicroStrategy has maintained 20 years of continuous growth, with annual revenue exceeding $500 million, mainly from BI software and services. Its main competitors are SAP's Business Objects, IBM's Cognos, and Oracle's BI platform.
However, due to the company's own operational reasons and the decline of the industry cycle, MicroStrategy's performance in the first 20 years of the new century has been average, and the stock price has remained stagnant after falling from its peak.
However, the gears of fate began to turn in 2020, and MicroStrategy made the most correct choice of its corporate history - adopting a BTC investment strategy.
According to MicroStrategy's Q3 2024 financial results, as of the end of Q3, the company holds 252,220 BTC, with a BTC return of 17.8% year-to-date. The total purchase cost of BTC is about $9.9 billion, with an average price of about $39,266.
According to Coingecko data, the company is currently the largest public company holder of BTC, exceeding Grayscale's GBTC.
This business transformation has also brought new vitality to MicroStrategy, making it a shining star in the financial market once again.
Over the past 5 years, MicroStrategy's stock price has risen from around $15 to $244.5, an increase of 1490.76%. Not only has the company's stock price surpassed the gains of BTC, the S&P 500 index, and major tech stocks, but its market value of $49.54 billion has also surpassed Coinbase's $44.87 billion.
Furthermore, with BTC price breaking through $70,000 again, MicroStrategy's BTC holdings have an unrealized profit of $7.774 billion.
On October 29, Bloomberg ETF analyst said that T-Rex's MicroStrategy double-leveraged ETF MSTU has risen 225% in just 6 weeks since its launch, with a trading volume of $500 million (ranking top 1% among ETFs), and an AUM of $1 billion, exceeding the 1.75x leveraged MSTR ETF's initial listing by 1.75 times.
On October 30, according to Bloomberg, since the crypto market crash two years ago, the performance of MicroStrategy Inc. has outperformed almost all major U.S. stocks, including the AI industry benchmark Nvidia Corp.
Driving its huge gains is the unconventional decision made four years ago by co-founder and chairman Michael Saylor - to buy BTC to hedge against inflation, a strategy that has transformed this little-known enterprise software company into the world's most famous crypto hedge fund proxy.
Michael Saylor and his team have also created the concept of "BTC yield", which MSTR views as a key performance indicator (KPI) to describe the company's performance in acquiring BTC in an appreciating manner. The BTC yield for Q3 was 17.8%. The company has recently raised its "BTC yield" target range from the previous 4%-8% to 6%-10%.
Michael Saylor himself also said he holds BTC worth over $1 billion.
II. All-in on BTC: The Biggest Win-Win
On October 31, MicroStrategy proposed the "21/21 Plan", with a total investment of up to $42 billion. That is, the company will raise $21 billion through equity financing and $21 billion through bond issuance over the next three years, using the additional capital to purchase more BTC as a financial reserve asset, in order to achieve higher BTC yields.
MicroStrategy has been purchasing BTC every quarter since Q3 2020, and the company now holds a total of 252,220 BTC.
To raise funds for the purchase of BTC, MicroStrategy has utilized various means, such as convertible notes, stock splits, leveraged ETFs, etc.
In September, MicroStrategy bought 18,300 BTC for about $1.11 billion in cash, at an average price of around $60,408. The company then bought another 7,420 BTC for $458.2 million, at an average price of around $61,750. At the current BTC price of around $72,000, the company's BTC holdings are worth over $18 billion.
The company raised $2.1 billion through the sale of equity and debt in the third quarter, while in the three months ended June 30, the company raised $800 million.
1. Convertible Preferred Notes
MicroStrategy has issued convertible preferred notes multiple times, using the net proceeds from the sale of the notes to purchase BTC. These notes are MicroStrategy's unsecured senior debt and will bear interest.
These notes will also be convertible, at MicroStrategy's election, into cash, MicroStrategy's Class A common stock, or a combination of cash and MicroStrategy's Class A common stock.
On September 17, MicroStrategy announced plans to privately offer $700 million in aggregate principal amount of 2028 convertible senior notes to qualified institutional buyers under the Securities Act of 1933. The company later announced that it would increase the convertible note offering to $875 million.
In total, in September, MicroStrategy completed $1.01 billion in convertible note issuance at a 0.625% coupon rate and 40% conversion premium.
In June this year, MicroStrategy also announced the issuance of $500 million in unsecured senior convertible notes to purchase more BTC, and a day later increased the offering to $700 million. Subsequently, MicroStrategy completed an $800 million convertible note issuance at a 2.25% coupon rate and 35% conversion premium.
In March, MicroStrategy also issued $525 million and $800 million in convertible preferred notes, respectively.
In addition, MicroStrategy has proposed a plan to grant purchase options to the initial purchasers of the notes, allowing them to purchase up to an additional $75 million in aggregate principal amount of the notes within 13 days of the initial issuance date.
Michael Saylor has stated that the company used the proceeds from the convertible notes and cash to purchase an additional 9,245 BTC, worth about $623 million, at an average price of around $67,382 per BTC.
2. Equity Sales and Splits
Stock splits are common among listed companies with significant stock price appreciation, and splitting does not change the company's valuation, but in many retail trading platforms that offer fractional shares, it may make it psychologically easier for smaller retail investors to buy the stock by lowering the share price.
For example, the chip giant Nvidia (Nvidia) recently underwent a 10:1 stock split after its stock price reached four digits, and driven by the rise in the AI sector, its stock price has doubled in one year.
In August, MicroStrategy announced that it was seeking to sell its Class A common stock to raise up to $2 billion to purchase more BTC. However, in the regulatory filing with the US SEC, MicroStrategy did not disclose a timeline for the stock sales or reveal how much of the proceeds would be used to buy BTC.
In July, MicroStrategy announced a 1-for-10 stock split, which will make the company's shares more accessible to investors and employees.
3. Leveraged ETFs
On August 15, the SEC approved the first leveraged long MicroStrategy ETF. Asset management firm Defiance ETFs also launched the first leveraged MSTR ETF that month.
Competitors REX Shares and Tuttle Capital Management subsequently launched products with even higher leverage in September, kicking off what Bloomberg ETF analyst Eric Balchunas called a "spicy arms race".
On September 28, the leveraged MicroStrategy (MSTR) exchange-traded fund (ETF) surpassed $400 million in net assets for the week, as retail investors continued to pour into this highly volatile Bitcoin ETF.
As an ETF, BlackRock's Bitcoin trust has a fee rate of 0.25%, while MicroStrategy does not charge shareholders such fees. MicroStrategy benefits from the revenue generated by its analytics business, providing financial stability beyond its Bitcoin holdings. MSTR has the ability to raise funds through debt and equity issuance, while IBIT relies on direct investor inflows.
MicroStrategy's successful model has also bolstered other institutions' confidence in Bitcoin, such as Bitcoin miner Marathon Digital, which recently sold $300 million in convertible notes to purchase 4,144 Bitcoins; and the National Pension Service of Korea (NPS) investing in Bitcoin through MicroStrategy.
III. Huge Concerns: Leverage and Bubbles
MicroStrategy founder Michael Saylor has publicly stated that four years after adopting the Bitcoin strategy, MicroStrategy has outperformed every company in the S&P 500 index. In fact, the BTC price has been rising continuously since 2020, repeatedly hitting new highs. This has also brought MicroStrategy huge unrealized profits of $8.4 billion on its Bitcoin holdings.
In July, Michael Saylor stated at the Bitcoin 2024 conference that by 2045, Bitcoin will rise to $13 million, reaching $49 million in a bull market, and even $3 million in a bear market. He also said that Bitcoin adoption will enter a high-growth phase from 2024-2028.
It is precisely because of confidence in Bitcoin's long-term future that MicroStrategy has chosen to continuously increase its Bitcoin holdings. However, there are also different voices in the market regarding MicroStrategy's "All In BTC" behavior.
The CEO of Two Prime Digital Assets believes that MicroStrategy's plan to raise $42 billion to acquire more Bitcoin is a "win-win". More and more investors are considering how to invest in Bitcoin as the US dollar further depreciates, which is one of the reasons for the recent strength in Bitcoin prices, and this may stimulate more institutional interest in Bitcoin and related investments.
The CEO of CryptoQuant stated that Michael Saylor has proven that Bitcoin is the best strategic asset for a public company. Bitcoin has risen 237% in two years, while MicroStrategy's stock price has risen 669%. During the bear market, both experienced similar declines, but MSTR's rebound was three times that of Bitcoin.
However, some institutions have also expressed concerns, especially about whether MicroStrategy will choose to sell Bitcoin if the company's performance declines.
On October 28, a Steno Research report pointed out that MicroStrategy's Bitcoin holdings are trading at a premium of nearly 300%, but this is unsustainable.
Analysts said that the effect of MicroStrategy's recent stock split is waning, and the launch of US spot Bitcoin ETF options will reduce investor demand for the company's stock.
Furthermore, the report mentioned that during the 2021 crypto bull market, the company's premium was mostly below 200%. As the regulatory environment becomes more friendly towards Bitcoin and cryptocurrencies, investors may be more inclined to hold Bitcoin directly rather than MicroStrategy stock.
JPMorgan Chase has also warned that MicroStrategy's previous $2 billion Bitcoin purchase could exacerbate an economic downturn. This is because the company has purchased Bitcoin through debt, adding leverage and bubbles to the current crypto frenzy, and increasing the potential for more severe deleveraging risks in a future recession.
In fact, MicroStrategy's market capitalization is vastly overpriced compared to the net asset value of its underlying Bitcoin assets, with the asset premium soaring to 175.08%. The current stock market value is 3.007 times the net asset value of its Bitcoin assets.
MicroStrategy's core business valuation is between $1.5 billion and $2.5 billion, and even at the upper limit of $2.5 billion, the market's premium for MSTR's Bitcoin assets is still as high as 175.08%. This indicates that current investors buying MSTR stock still expect Bitcoin to rise by nearly 1.75 times, reaching $195,000.
MicroStrategy's large Bitcoin holdings and high debt levels have led some market participants to question whether the company may be forced to sell Bitcoin into the market, triggering a downward price spiral. MicroStrategy founder and executive chairman Michael Saylor has previously stated that he has no intention of selling the company's Bitcoin.
In this regard, BitMEX Research analysts stated that the company is highly unlikely to be forced to sell its Bitcoin holdings. If Bitcoin prices remain strong, bondholders may choose to convert to equity, reducing the likelihood of being forced to sell Bitcoin. Although in theory, interest payments may put pressure on MicroStrategy, the cash flow from its software business should be sufficient to cover these costs without the need to sell Bitcoin, even if prices decline.
However, in April this year, Michael Saylor made a profit of $370 million by selling the company's stock. Additionally, MicroStrategy reported a loss of $53.1 million in the first quarter. The net loss for the second quarter was $102.6 million, and the third quarter revenue was $116.1 million, down 10.3% from the third quarter of 2023 and about 5.22% lower than analysts' expectations.
Conclusion
There is no doubt that MicroStrategy is successful at this stage, as the continuous rise in Bitcoin has brought the company a steady stream of investment returns, and it has further increased its Bitcoin holdings through debt and leverage in a positive feedback loop. 99% of the total Bitcoin supply is expected to be mined by January 2, 2035, and if Bitcoin rises as expected, MicroStrategy could become the most effortless high-market-cap company in US stock market history.
However, we cannot ignore the concerns of analysts. MicroStrategy still faces multiple risk factors, and when the company's liquidity is tight, it may not be impossible to choose to sell Bitcoin. We can only hope that the next black swan event will not come too fast, too fierce, and too sudden.
