Author: 0xjs, Jinse Finance
Bitcoin breaks $80,000! Bitcoin breaks $90,000! Bitcoin breaks $95,000! Bitcoin breaks $99,000!
Clearly, Bitcoin is bound to break the $100,000 mark very soon.
Common sense tells us that the direct cause of the sharp rise in prices is that someone is buying in with real money, after all, "Money Talks".
In this round of the crypto bull market, crypto tokens are severely divided, with the two brightest sectors being Bitcoin and Solana. The rise of Solana is mainly driven by the influx of crypto players into MEME, while the rise of Bitcoin is mainly driven by funds from the US Bitcoin ETF and some listed companies, especially MicroStrategy. This article will focus mainly on MicroStrategy.
Jinse Finance reporter spent an evening on the US SEC website browsing the documents submitted by MicroStrategy since 2021, and deeply analyzed MicroStrategy's behavior of buying Bitcoin and the source of funds. The conclusion is that MicroStrategy is an enhanced version of "Grayscale + Luna".
First, let's look at the overall situation of MicroStrategy, then analyze the source of funds for MicroStrategy's purchase of Bitcoin, and finally compare with Grayscale and Luna. As follows.
MicroStrategy Fearless of Bulls and Bears: Spent Over $16 Billion to Firmly Buy Bitcoin
Since implementing the Bitcoin reserve strategy in September 2020, MicroStrategy has steadfastly executed the Bitcoin reserve strategy through cycles, undaunted by bulls and bears, such as buying Bitcoin at over $59,000 in April and November 2021 during that bull market.
MicroStrategy Continues to Buy BTC
Jinse Finance reporter's statistics show that as of November 22, 2024, MicroStrategy has cumulatively spent $16.58 billion to buy Bitcoin, and currently holds 331,000 Bitcoins, with a Bitcoin market value of nearly $33 billion.
Since the successful launch of the Bitcoin ETF in January 2024, the Bitcoin ETF has managed over 1.24 million Bitcoins, with a total asset value of over $120 billion and a net inflow of about $30.3 billion. Bitcoin ETFs are an investment target for many investors, not from a single investor.
As far as I can see, MicroStrategy may be the single entity that has spent the most on buying Bitcoin.
So the question is, where does MicroStrategy's huge amount of funds for buying Bitcoin come from?
Jinse Finance reporter has reviewed the reports submitted by MicroStrategy to the US SEC, and its funds mainly come from two sources: Convertible Senior Notes and At-the-Market Equity Offerings.
Among them, Convertible Senior Notes are aimed at qualified institutional investors, and At-the-Market Equity Offerings are directly aimed at the secondary market.
Convertible Senior Notes: $7.26 Billion Qualified Institutional Investors
Here are the notes issued by MicroStrategy since 2020, except for the $500 million senior secured notes issued in June 2021, the rest are all Convertible Senior Notes.
Among them, the $3 billion Convertible Notes issued by MicroStrategy on November 21, 2024 can be used to buy Bitcoin at any time. Perhaps it will be in the last few days, when MicroStrategy uses this $3 billion to buy Bitcoin, that Bitcoin will break $100,000.
Understanding what Convertible Senior Notes are, you will find that it is really a good financial instrument.
Convertible senior notes are a special debt security that includes an option to convert the notes into a predetermined number of the issuer's shares. If the stock goes up, you can convert it into stock, and if the stock price is low, you can pay off the debt according to the debt. Moreover, convertible senior notes have priority over all other debt securities issued by the same organization and can receive priority compensation. Therefore, it is a bond with high returns above and a bottom line below.
The key is that convertible senior notes generally have mandatory redemption clauses. After the prohibition redemption period specified in the terms has passed or the early redemption conditions are triggered, the issuer can initiate a mandatory redemption. Before the specified redemption date, the investor needs to convert the convertible bonds into the company's stock, otherwise the issuer has the right to forcibly redeem the convertible bonds at the face value plus accrued interest. And in most cases, the investors will actively convert to stocks.
Taking the 2025 Convertible Notes already redeemed by MicroStrategy as an example, the maturity date of the 2025 Convertible Notes is December 15, 2025. But on June 13, 2024, MicroStrategy issued a notice requiring the holders of the 2025 Convertible Notes to convert the notes into 2.5126 shares of MicroStrategy Class A common stock per $1,000 principal amount (reflecting a conversion price of $397.99 per share) by 5:00 pm New York time on July 11, 2024. Otherwise, MicroStrategy will forcibly redeem all outstanding notes on July 15, with a redemption price equal to the principal + accrued unpaid interest.
And MicroStrategy's stock price was around $1,300 at the time (MicroStrategy completed a 1:10 stock split on August 8, so the pre-split price was $1,300), so the creditors will obviously choose to convert the debt into stock. The creditors will then complete the arbitrage after getting the stock.
Why are institutional investors eager to buy MicroStrategy's convertible bonds? Because the risk is extremely small, basically a guaranteed profit, and the priority convertible bonds have priority claim rights. Currently, MicroStrategy's total convertible bond debt is $7.26 billion, and the market value of the Bitcoin held by MicroStrategy is close to $33 billion. Even if Bitcoin drops 75%, the holders of MicroStrategy's convertible bonds will not lose money.
It can be said that the most important motivation behind the convertible bonds is for the issuer to let the investors actively choose to convert the debt into equity, so that the issuer does not have to pay cash to repay the debt.
At-the-Market Equity Offerings: Nearly $10 Billion Secondary Market
Here are the data on MicroStrategy's market stock issuance over the past 4 years. In the past 4 years, MicroStrategy has directly raised $9.8235 billion in the secondary market through the issuance of new shares, and all of these funds have been used by MicroStrategy to buy Bitcoin.
At-the-Market Equity Offering (ATM Equity Offering) refers to the subsequent stock issuance by a listed company to raise funds after the IPO. In ATM issuance, the listed company sells the newly issued shares to the secondary trading market gradually over a period of time through designated brokers. The brokers sell the company's shares in the open market to obtain cash proceeds, which are then delivered to the issuing company.
Still taking MicroStrategy's ATM Equity Offering as an example to explain. On August 1, 2024, MicroStrategy entered into a sales agreement ("August 2023 Sales Agreement") with brokers TD Securities (USA), The Benchmark Company, BTIG, Canaccord Genuity, Maxim Group and SG Americas Securities. Under this agreement, MicroStrategy can from time to time issue and sell its Class A common stock through the sales agents, with a maximum of $2 billion in stock to be issued. According to the 8-K filed by MicroStrategy with the SEC on November 11, 2024, MicroStrategy has issued a total of 7.854647 million shares, raising $2.03 billion, all of which was used to buy 27,200 Bitcoins.
On October 30, 2024, MicroStrategy announced the 21/21 plan, stating that it will raise $42 billion in capital in the future, including $21 billion in equity and $21 billion in fixed income securities, for investment in Bitcoin. MicroStrategy also disclosed on the same day that MicroStrategy and TD Securities (USA), Barclays Capital, The Benchmark Company, BTIG, LLC, Canaccord Genuity, Cantor Fitzgerald & Co., Maxim Group, Mizuho Securities USA, and SG Americas Securities have reached a sales agreement to issue $21 billion in MicroStrategy stock at market price. The 8-K filed by MicroStrategy with the SEC on November 18, 2024 shows that between November 11 and 17, MicroStrategy sold 13.594 million shares, raising about $4.6 billion, all of which was used to buy 51,780 Bitcoins.
According to MicroStrategy's plan, the brokers still have about $16.4 billion in newly issued MicroStrategy shares available for sale.
Why MicroStrategy is an enhanced version of "Grayscale+Luna"
Now that you are familiar with MicroStrategy's "convertible bonds" and "market price stock issuance" tricks, let's recall that they are very similar to Grayscale and Luna in the previous bull market, but enhanced versions.
Grayscale Vs. Convertible Bonds:
Reviewing the operating mechanism of Grayscale trust stocks before they were converted into ETFs, Grayscale trust stocks were only issued to qualified investors, and investors could purchase GBTC stocks (the underlying assets of the Grayscale trust are corresponding BTC assets) with off-exchange cash or exchange physical BTC for GBTC stocks, and complete arbitrage after a 6-month lock-up period. At the same time, GBTC stocks and the underlying BTC assets are isolated, and investors cannot redeem them.
MicroStrategy's convertible senior notes are also aimed at qualified investors, where investors buy the convertible bonds with off-exchange cash, and then convert them into MicroStrategy stocks to complete the arbitrage when they are forcibly redeemed. The convertible senior notes are also isolated from MicroStrategy's BTC.
During the BTC bull markets in 2020 and 2021, the premium of GBTC attracted a large amount of arbitrage capital, and GBTC once accumulated over 650,000 BTC, which was called the "open-book bull market" by many industry practitioners at the time.
In this bull market, MicroStrategy has already attracted over $7 billion from qualified institutional investors through convertible bonds, and MicroStrategy's 21/21 plan is also preparing to issue more bonds.
The difference is that MicroStrategy's convertible bonds have a very long maturity, with the latest maturity being in 2027, which is enough to last until the next cycle. If necessary, MicroStrategy can completely force the redemption of the convertible bonds, allowing investors to convert the convertible bonds into almost zero-cost newly issued MicroStrategy stocks, without MicroStrategy having to actually pay back the money. Even if they are redeemed at maturity, MicroStrategy can issue new convertible bonds to replace the old ones, just as MicroStrategy used the 2028 Convertible Notes issued on September 20, 2024 to redeem the 2028 Secured Notes in cash. Clearly, MicroStrategy's convertible bonds are more stable.
Luna Vs. Market Price Stock Issuance:
In the Luna case, burning $1 of LUNA can mint $1 of algorithmic stablecoin UST. As long as the LUNA price rises, more UST can be minted, and with more UST, more BTC can be purchased as reserves to stabilize 1UST=1USDT. Luna was directly accessible to ordinary investors without permission.
MicroStrategy's market price stock issuance is very similar, also directly targeting the secondary market ordinary investors. The higher MicroStrategy's stock price, the more US dollars it can raise through market price stock issuance, and the more US dollars it can use to buy more BTC. "Left foot on right foot" all the way up. After the BTC ETF was approved in January 2024, MicroStrategy's net asset premium (stock price / corresponding BTC value -1) has been climbing to 2.7. Currently, MicroStrategy holds 331,200 BTC, worth about $32.84 billion, while MicroStrategy's total market cap has exceeded $100 billion at one point.
Luna and UST can be minted bidirectionally, and if UST depegs, arbitrageurs can buy UST at a discount to mint LUNA, forming a "death spiral" and causing LUNA to collapse. In fact, if the Luna Foundation Guard (LFG) had bought more BTC earlier in the uptrend cycle (it only bought $1.5 billion worth of BTC), and if UST could be temporarily minted unidirectionally to LUNA, Luna might not have collapsed.
MicroStrategy goes even further, with its market price stock issuance being unidirectional and not falling into a death spiral, and it's almost zero-cost. MicroStrategy is clearly safer than Luna. Even during the 2022 bear market, MicroStrategy's net asset premium was at least 60% at its lowest.
Source: mstr-tracker
As long as there are people willing to buy MicroStrategy's market price stock issuance, the more BTC MicroStrategy buys during its high premium NAV period, the thicker its safety cushion. Taken to the extreme, MicroStrategy's market cap would be exactly equal to its BTC value, and MicroStrategy itself would have no risk, as the risk has been transferred to the stock investors.
In summary, can we not say that MicroStrategy is an enhanced version of "Grayscale+Luna"?
Epilogue: Triple Maximalism
At the Bitcoin conference held in Nashville at the end of July 2024, MicroStrategy CEO Michael Saylor delivered a keynote speech on the "Bitcoin Revolution".
After 4 years of practice, he proposed a methodology for individuals, companies, institutions and countries to respond to the Bitcoin revolution, and he proposed a triple maximalism strategy. For companies, it is to buy BTC through three channels - cash flow, issuing stocks when the stock price is overvalued, and issuing debt when interest rates are low.
That's what he said, and that's what he did.
MicroStrategy has already accumulated 331,200 BTC.
