BTC breaks $80,000! BTC breaks $90,000! BTC breaks $95,000! BTC breaks $99,000! Clearly, BTC is set to break the $100,000 mark very soon.
Common sense tells us that the direct reason for the sharp price increase is that someone is buying in with real money, after all, "Money Talks".
In this round of the crypto bull market, crypto tokens have seen severe differentiation, with BTC and Solana being the two most outstanding sectors. Solana's rise is mainly driven by the influx of crypto players into MEME, while BTC's rise is mainly due to the buying power of BTC ETFs in the US and some listed companies, especially MicroStrategy. This article will focus mainly on MicroStrategy.
Jinse Finance reporter spent an evening browsing through MicroStrategy's filings submitted to the US SEC since 2021, and deeply analyzed MicroStrategy's behavior of buying BTC and the source of funds. The conclusion is that MicroStrategy is an enhanced version of "Grayscale + Luna".
Let's first look at the overall situation of MicroStrategy, then analyze the source of funds for MicroStrategy's BTC purchases, and finally compare with Grayscale and Luna. Here we go.
MicroStrategy Unfazed by Bull and Bear Markets: Firmly Invests Over $16 Billion in BTC
Since implementing the BTC reserve strategy in September 2020, MicroStrategy has steadfastly executed the BTC reserve strategy through cycles, unfazed by bull and bear markets, such as buying BTC at over $59,000 in April and November 2021 during that bull run.
MicroStrategy Continues to Accumulate BTC
Jinse Finance reporter's statistics show that as of November 22, 2024, MicroStrategy has cumulatively spent $16.58 billion to buy BTC, and currently holds 331,000 BTC, with a market value of nearly $33 billion.
Since the successful launch of BTC ETFs in January 2024, BTC ETFs have managed over 1.24 million BTC, with total assets exceeding $120 billion and a net inflow of about $30.3 billion. BTC ETFs are an investment target for many investors, not from a single investor alone.
As far as I can see, MicroStrategy may be the single entity that has spent the most on buying BTC.
So the question is, where does MicroStrategy get all this money to buy BTC?
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, while 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 Senior Notes issued by MicroStrategy on November 21, 2024 can be used to buy BTC at any time. Perhaps it will be when BTC breaks $100,000 that MicroStrategy will use this $3 billion to buy BTC.
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. And the senior convertible notes have priority over all other debt securities issued by the same organization, and can get priority compensation. Therefore, it is a bond with high returns above and a bottom guarantee below.
The key point is that convertible preferred debt generally comes with a mandatory redemption clause. After the prohibited redemption period specified in the clause or when the early redemption clause is triggered, the issuer can initiate a mandatory redemption. Before the specified redemption date, investors need to convert the convertible bonds into the company's stock, otherwise the issuer has the right to redeem the convertible bonds at the bond's face value plus accrued interest. In most cases, investors will actively convert to stocks.
Taking the example of MicroStrategy's redeemed 2025 Convertible Notes, the maturity date of the 2025 Convertible Notes is December 15, 2025. However, MicroStrategy issued an announcement on June 13, 2024, requesting the holders of the 2025 Convertible Notes to convert the notes by 5:00 pm New York time on July 11, 2024, at the applicable conversion rate of 2.5126 shares of MicroStrategy Class A common stock per $1,000 principal amount (reflecting a conversion price of $397.99 per share). Otherwise, MicroStrategy will mandatorily redeem all outstanding notes on July 15 at a redemption price equal to the principal + accrued and unpaid interest.
MicroStrategy's stock price was around $1,300 on that day (MicroStrategy completed a 1:10 stock split on August 8, so the pre-split price was $1,300), so it is obvious that the creditors will choose to convert the debt into stocks. After obtaining the stocks, the creditors complete the arbitrage.
Why are institutional investors enthusiastically buying MicroStrategy's convertible bonds? Because the risk is extremely small, basically a guaranteed profit, and the convertible preferred debt has priority claim rights. Currently, MicroStrategy's total convertible debt is $7.26 billion, and the market value of the Bitcoin held by MicroStrategy is close to $33 billion. Even if Bitcoin falls 75%, MicroStrategy's convertible bondholders will not lose money.
It can be said that the most important motivation behind convertible bonds is that the issuer wants investors to 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 since 2020. In the past 4 years, MicroStrategy has directly raised a total of $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 (ATM) Equity Offering refers to the subsequent stock issuance by a listed company to raise funds after its IPO. In an ATM issuance, the listed company gradually sells newly issued shares in the secondary trading market through designated brokers at the current market price over a period of time. The brokers obtain cash proceeds by selling the company's shares in the public market, and then deliver the proceeds to the issuing company.
Taking MicroStrategy's ATM Equity Offering as an example. 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, with a maximum of $2 billion in stock to be issued.
According to MicroStrategy's 8-K filing with the US SEC on November 11, 2024, MicroStrategy has issued a total of 7.854647 million new shares and raised $2.03 billion, all of which was used to purchase 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.
On the same day, MicroStrategy disclosed 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.
MicroStrategy's 8-K filing with the SEC on November 18, 2024 shows that between November 11 and 17, MicroStrategy sold 13.594 million shares and raised about $4.6 billion, all of which was used to purchase 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 is MicroStrategy called the Enhanced Version of "Grayscale+Luna"
Now that we are familiar with MicroStrategy's "convertible bonds" and "at-the-market stock issuance" magic tricks, let's think back - don't they look a lot like Grayscale and Luna from the last bull market, but even more powerful?
Grayscale vs. Convertible Bonds:
Reviewing the operating mechanism of Grayscale Trust before it was converted into an ETF, Grayscale Trust shares were only issued to accredited investors. Investors could use off-exchange cash to purchase GBTC shares (the underlying asset of the Grayscale Trust is corresponding Bitcoin) or exchange physical Bitcoin for GBTC shares. After a 6-month lock-up period, the shares could be publicly traded to complete the arbitrage. At the same time, the GBTC shares and the underlying Bitcoin assets were segregated, and investors could not redeem them.
MicroStrategy's convertible bonds (Convertible Senior Notes) are also targeted at accredited investors. Investors buy the convertible bonds with off-exchange cash, and then convert them into MicroStrategy shares when they are mandatorily redeemed to complete the arbitrage. The convertible bonds (Convertible Senior Notes) are also segregated from MicroStrategy's Bitcoin.
During the Bitcoin bull markets in 2020 and 2021, the premium of GBTC attracted a large amount of arbitrage capital, and GBTC had once accumulated over 650,000 bitcoins, which was called the "openly declared bull market" by many industry insiders at the time.
In this bull market, MicroStrategy has already attracted over $7.2 billion in qualified institutional investor capital through convertible bonds, and MicroStrategy's 21/21 Plan is preparing to issue even more bonds.
The difference is that MicroStrategy's convertible bonds have very long maturity dates, the nearest one being 2027, which is enough to last through the next cycle. If necessary, MicroStrategy can completely redeem the convertible bonds, allowing investors to convert the convertible bonds into virtually zero-cost new MicroStrategy shares, without MicroStrategy having to actually pay the money. Even if they wait until maturity to redeem, 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 robust.
Luna vs. At-the-Market Stock Issuance:
In the Luna case, burning $1 of LUNA can mint $1 of algorithmic stablecoin UST. As long as the LUNA price goes up, more UST can be minted, and with more UST, more Bitcoin can be purchased as reserves to stabilize 1UST=1USDT. Luna was directly accessible to ordinary investors without permission.
The issuance of MicroStrategy's market-priced stocks is similar to this, and it is also directly aimed at the secondary market ordinary investors. The higher the stock price of MicroStrategy, the more US dollars it can obtain through the issuance of market-priced stocks, and the more US dollars can be used to purchase more Bitcoin. It's a "left foot on the right foot" upward journey. After the Bitcoin ETF was approved in January 2024, MicroStrategy's net asset premium (market price per share / corresponding Bitcoin value -1) has climbed to 2.7. Currently, MicroStrategy holds a total of 331,200 Bitcoins, worth about $32.84 billion, and MicroStrategy's total market value has once exceeded $100 billion.
Luna and UST can be minted bidirectionally. If UST depegs, arbitrageurs can buy UST at a discount and mint LUNA at 1UST=1USDT, forming a "death spiral" and causing LUNA to collapse. In fact, if the Luna Foundation Guard (LFG) had bought more Bitcoin earlier in the bull run (it only bought $1.5 billion worth of Bitcoin), and if UST could be temporarily minted one-way to LUNA, Luna might not have collapsed.
MicroStrategy goes even further, with its market-priced stock issuance being one-way and not falling into a death spiral, and it's almost zero-cost. MicroStrategy is clearly safer than Luna. Even during the bear market of 2022, 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-priced stock issuance, the more Bitcoin MicroStrategy buys at a high premium to its NAV, the thicker its safety cushion. Taken to the extreme, MicroStrategy's market value would be entirely equal to its Bitcoin value, and MicroStrategy itself would have no risk, as the risk has been transferred to the stock investors.
In summary, can we say that MicroStrategy is an enhanced version of "Grayscale+Luna"?
Epilogue: Triple Maximalism
At the Bitcoin conference held in Nashville in late 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 put forward a triple maximalism strategy. For companies, it is to buy Bitcoin 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 Bitcoins.
