Understanding MicroStrategy from Scratch: The Transformation Path from Business Intelligence (BI) to Bitcoin Empire

Here is the English translation of the text, with the requested terms retained and not translated: As Bit recently continued to hit new historical highs, MicroStrategy, which claims to be a Bit development company, has also seen its value soar. Not only did its trading volume once surpass Tesla (TSLA) and NVIDIA (NVDA), but its issued low-interest convertible bonds also attracted a large number of financial institutions to purchase them. This article will analyze MicroStrategy's corporate history, the philosophy of its founder Michael Saylor, and how he has used sophisticated financial operations to continuously buy Bit at low prices as the company's reserve asset.

What is MicroStrategy's core business?

MicroStrategy is a US company that provides business intelligence (BI), data analysis, mobile software development, and cloud computing. It was founded in 1989 and went public in 1998. Its main competitors include Salesforce, IBM's Cognos, and Oracle's BI platform. Business intelligence (BI) was initially proposed by the globally renowned IT research and consulting firm Gartner. It defines BI as an umbrella term that includes applications, infrastructure, tools, and practices that enable access to and analysis of information to improve and optimize performance. In short, MicroStrategy is a platform that provides business intelligence to corporate users, from model building to data analysis, and even business model recommendations, through easy-to-use visual analysis software that allows customers to instantly grasp the latest status of the company. After the rise of AI, MicroStrategy has also jumped on the bandwagon, emphasizing that it is "a platform that accelerates AI through BI", an modern AI application built on trust.

MicroStrategy founder Michael Saylor: Using Bit as the company's primary reserve asset

MicroStrategy's co-founder Michael Saylor is a staunch believer in Bit, repeatedly stating publicly that Bit is digital gold and the scarcest asset in the world. In September 2020, MicroStrategy announced its Treasury Reserve Policy, a policy of using Bit as the company's primary reserve asset. In addition to the cash flow generated by its core business, it also continuously buys Bit through debt and equity financing transactions. Michael Saylor believes that the strategy of buying Bit can enhance the company's visibility, and the increase in software revenue from the core business can allow MicroStrategy to buy more Bit, creating a virtuous cycle, which is also the strategic focus of the company. Although Saylor has stepped down as CEO during the bear market, he remains active in various mainstream media, vigorously promoting his Bit holding philosophy on programs. His Hodler philosophy (meaning to hold and not sell) is not only reflected in Bit, but also includes his personal holdings in the company. He chose to receive only a $1 salary and only obtain stock options from MicroStrategy, and this year he exercised the options he obtained in 2014 that were about to expire, earning nearly $400 million in profits. Saylor stated that he will invest the cash from the sale into his own financial planning, which of course includes buying more Bit.

(Michael Saylor's daily stock sale plan is nearing its end, with $370 million in MicroStrategy shares sold)

MicroStrategy rebrands as a "Bitcoin development company": Buying BTC, better to buy MSTR

In February this year, MicroStrategy stated that it would undergo a brand transformation, positioning itself as a "Bitcoin development company". It has also reiterated its advice to investors that buying MicroStrategy stock is better than buying Bitcoin, and has emphasized the following benefits of buying MSTR:

• Easy to buy and sell (only need a stock account)
• No additional fees (buying and selling on-chain requires gas fees, ETFs have management fees)
• Bitcoin continues to increase (using its cash flow to continuously purchase Bitcoin)
• Smart leverage (can use debt to purchase Bitcoin)
• Downside protection (supported by MicroStrategy's core business and intellectual property)
• Risk management (I think this refers to Bitcoin being like a derivative product attached to the MicroStrategy company)

MicroStrategy's Bitcoin flywheel effect

MicroStrategy entered the Bitcoin market as early as 2020, using its own cash, issuing debt, and issuing new shares to continuously purchase Bitcoin. In late October, MicroStrategy announced its "21/21 Plan", aiming to increase its capital by $42 billion over the next three years, including $21 billion in equity and $21 billion in fixed-income securities, further supporting its acquisition of Bitcoin as part of its reserve asset strategy.

MSTR's issuance of new shares

MicroStrategy has raised capital multiple times through the issuance of new shares. According to its disclosure, as of 2024/11/10, MicroStrategy has issued a total of 191,154,000 Class A shares and 19,640,000 Class B shares.

Issuing convertible bonds to accumulate Bitcoin

MicroStrategy is an expert in issuing convertible bonds. Convertible bonds are bonds with an additional clause that allows them to be converted into stocks at a predetermined price when the stock price is higher than a certain level. The pricing principle is the company's debt plus a call option to buy the stock.

MicroStrategy has issued convertible bonds multiple times, and currently has six outstanding convertible bond issues totaling $7.264 billion. Recently, it has also redeemed its previously higher-interest (6.125%) senior secured notes, reducing its interest expense and releasing the collateral (Bit) that secured those notes.

ABMedia has previously analyzed the timing of MicroStrategy's convertible bond issuances and found that they were issued when MicroStrategy's stock price was significantly higher than the Bit price. We can infer that:

By pricing the options at a high stock price, the conversion price can be set at a relatively high point. Under the market's enthusiastic sentiment, the option price also rises with the tide, allowing the company to obtain funds at almost zero cost.

(How does MicroStrategy's issuance of convertible bonds, with low interest rates and high conversion prices, work?)

MicroStrategy's recent convertible bond issuances not only do not provide coupons (with a face interest rate of zero), but the conversion price is also 55% higher than the current stock price, demonstrating the enthusiasm of the transaction. Several Taiwanese financial institutions, including Cathay, Fubon, CTBC, and Yuanta Securities, have all invested in its convertible bonds.

(Taiwanese financial institutions are also crazy about MicroStrategy's convertible bonds, with Cathay, Fubon, and Yuanta all participating)

MicroStrategy's KPI indicator "Bitcoin Yield"

MicroStrategy has created a key performance indicator (KPI) called "Bitcoin Yield" for its Bitcoin strategy.

Bitcoin Yield is the ratio of the Bit held by MicroStrategy to its diluted outstanding shares. The issued diluted shares include all actual shares of the company's common stock, as well as any additional shares that may be generated through the conversion of all convertible notes, the exercise of all stock options, and the settlement of all restricted and performance stock units. This indicator shows the company's Bit holdings compared to its potential total share count.

The "Bitcoin Yield" eliminates the fluctuations in Bit price and MicroStrategy's stock price, and simply looks at it from the perspective of a Hodler, which also echoes Saylor's statement that "continuously buying Bit is a way of exiting".

From the BTC Yield chart below, we can see that MicroStrategy has been aggressively accelerating in the fourth quarter of this year, using both debt and equity to further increase its Bit purchases. As of 11/25, the Bitcoin Yield has reached 59.3%, indicating that the Bit holdings of shareholders who held MicroStrategy at the end of last year have increased by nearly 60%!

Note 1: The BTC Yield for 2024 and beyond is calculated based on the end of 2023, representing the year-to-date (YTD) change compared to the end of last year.

Note 2: MicroStrategy conducted a 10-to-1 stock split on 2024/8/7, and the author has presented the figures based on the pre-split share count for consistency.

MSTR, the world's largest publicly traded Bit holding company, with many companies vying to emulate it

As of November 24, 2024, MicroStrategy has acquired 386,700 Bit at a cost of approximately $21.9 billion, with an average cost of $56,761 per Bit. At the current Bit price of $96,700, the value is approximately $37.4 billion.

According to Bitcoin Treasuries, MicroStrategy is the top publicly traded company in terms of Bit holdings, with the second-largest holder, mining company Marathon Digital, currently owning 34,794 Bit, less than one-tenth of MicroStrategy's. Marathon Digital's own mining already generates Bit, and the company announced in August that it will adopt a full HODL strategy, not only holding all the Bit it mines, but also emulating MicroStrategy's issuance of convertible bonds to buy more Bit.

With the rise of Bit, MicroStrategy has become widely known, and it has successfully made the Bit financial strategy more widely accepted. Many companies are vying to emulate it, but analysts believe this model is more suitable for small-cap companies.

(Many companies are vying to use Bit as a reserve asset, is it focusing on their core business or reviving a dead body?)

MicroStrategy's Severe Premium on Bitcoin

As its Bitcoin strategy has become increasingly well-known, MicroStrategy has recently become the largest stock traded in the US, even surpassing Tesla (TSLA) and Nvidia (NVDA).

However, the well-known investment research firm Citron Research has recently issued a short-selling report on it, arguing that investing in Bitcoin has become easier now, such as through Bitcoin ETFs, COIN (Coinbase exchange), and HOOD (Robinhood exchange), and MicroStrategy's trading volume has completely divorced from the fundamentals of Bitcoin. Although Citron remains bullish on Bitcoin, it has already hedged by short-selling MSTR.

Note: This refers to a long position in Bitcoin while short-selling MSTR as a hedging (or arbitrage) strategy.

Citron told its readers four years ago that MicroStrategy was the ultimate way to invest in Bitcoin, and set a target of $700. Today, MSTR has soared to nearly $4,000 (after stock splits), thanks to the visionary Bitcoin strategy of founder Michael Saylor. But even Saylor should know that MSTR is overheated!

Currently, the value of Bitcoin held by MicroStrategy is severely overpriced by 178% compared to its fully diluted market capitalization.

Can the Flywheel Effect of Bitcoin Hodlers Continue?

When asked if he would consider taking profits, Michael Saylor said he would "always buy at the high point", and continuing to buy Bitcoin is MicroStrategy's exit strategy.

However, if Bitcoin faces a significant correction, can MicroStrategy's Bitcoin flywheel effect continue to spin rapidly? Water can both carry and capsize a boat, and the current leverage and widespread FOMO have helped fuel the rapid rise of MicroStrategy and risk assets, but they will also exacerbate their volatility, even leading to a situation of "killing the winners". Whether this irrational prosperity will ultimately form a bubble is also worth readers' careful observation and consideration.

According to MicroStrategy's Q3 financial report, its software business is still in a loss. It seems the company is determined to transform itself into a "Bitcoin development company"!