Author: Zack Guzman
Translator: Baihua Blockchain
MicroStrategy founder Michael Saylor has become one of the most outspoken supporters of Bit, boldly declaring: "There is no second best choice."
Since 2020, Saylor has cumulatively purchased over $30 billion worth of Bit through his publicly traded company, with paper profits exceeding $14 billion, making MicroStrategy the company with the largest Bit holdings. This strategy has won the praise of Bit extremists, but has also drawn skepticism from traditional investors.
However, as MicroStrategy continues to raise billions of dollars - planning to raise an additional $42 billion in financing over the next three years - to quadruple down on Bit, external concerns are also mounting. Will this brew another massive bubble? If Bit prices fall, how will MicroStrategy's bold move end?
1. Echoes of the Trading Ghost
MicroStrategy's Bit strategy has similarities to one of the most infamous trades in the crypto space, the "GBTC premium trade". At the peak of this arbitrage trade, investors gained exposure to Bit through the Grayscale Bit Trust (GBTC), as its trading price was higher than the value of the underlying Bit holdings. They borrowed to acquire shares of GBTC, and then cashed in the premium after the lock-up period ended.
This trade experienced a dramatic collapse in 2021, when the GBTC premium turned into a discount. Companies that were over-leveraged or associated with leveraged clients, such as Three Arrows Capital and BlockFi, subsequently collapsed. The subsequent wave of bankruptcies, including that of Genesis, highlighted the risks of financial strategies built on the fragile imbalances of the market.
Now, critics warn that MicroStrategy is walking a similar tightrope. But unlike exploiting the GBTC premium, MicroStrategy has carved out a new path for Bit leveraged trading through its own stock and bonds - effectively transforming the company into a leveraged Bit proxy.
Some periods of MicroStrategy's Bit purchase behavior
2. The Magic of Convertible Bonds
The core of MicroStrategy's strategy is to raise funds through the issuance of convertible bonds and stocks, operating as follows:
Borrowing at low interest rates (0%) MicroStrategy offers bondholders extremely low or even zero-interest bonds.
Providing stock appreciation potential In return, bondholders can convert their bonds into MicroStrategy stock when the stock price rises. This potential upside has attracted many institutional investors, including Germany's largest insurance company Allianz.
Buying more Bit The funds raised are immediately used to purchase more Bit, further driving up the stock price.
This feedback loop has led to MicroStrategy's stock performing remarkably, rising nearly 500% in 2024 alone. This strategy has been so successful that bond investors, attracted by the potential stock price appreciation, are willing to lend billions of dollars to the company at 0% interest.
This is a rather appealing proposition: why settle for the low-yield returns of bonds when MicroStrategy can offer you the potential to double or even quintuple your investment? As Saylor said in a recent investor call, bond holders are fleeing the "negative real yield" world in pursuit of the potential returns offered by Bit.
Currently, MicroStrategy's strategy is operating very well, with the rise in Bit prices creating a virtuous cycle. But what if the trend of Bit reverses?
MicroStrategy holds nearly 387,000 Bit, worth around $37 billion, but its market capitalization has already exceeded $100 billion. This extremely high valuation is largely dependent on the assumption of continued Bit price appreciation. If Bit falls, the company's stock price - essentially a leveraged bet on Bit - could plummet.
It's also worth noting that leveraged ETFs like MSTU and MSTX, which focus on MicroStrategy, are further exacerbating the speculative behavior in the market based on MicroStrategy's Bit speculation.
All of this has driven massive Bit purchases. According to Fundstrat's research, MicroStrategy's buying volume has actually far exceeded the total inflows into all Bit ETFs earlier this month. If the market starts to doubt MicroStrategy's ability to achieve its $42 billion financing target, Bit prices could fall, further jeopardizing MicroStrategy's financing capacity. And once this dynamic shifts, the situation could deteriorate rapidly, similar to FTX's failed financing attempts when it needed funds the most, and Terra's $40 billion collapse.
Although Saylor has repeatedly emphasized that the company will never sell its Bit, this stance may be difficult to maintain if debt pressures increase and Bit prices fall.
3. Lessons from History
The cautionary tale of the GBTC premium trade is still fresh in memory. When market conditions changed, this bubble burst, exposing the fragility of leveraged strategies. Although MicroStrategy's approach avoids some of the pitfalls of the GBTC trade - for example, it does not rely on an inefficient fund structure - it still faces the core risk: if Bit prices fall, the leverage could amplify the losses.
Saylor's unwavering faith in Bit may inspire confidence, but history shows that markets cannot rise indefinitely. Just as the 2023 Terra collapse demonstrated the over-confidence in a "self-sustaining system" leading to a $40 billion loss, if Bit prices fall, MicroStrategy's stock price could face a similar liquidation moment.
However, for those Bit supporters who firmly believe the U.S. government will soon follow suit and incorporate Bit into its strategic reserves, MicroStrategy's bet has the potential to become the greatest investment in history - either to be known as a "stroke of genius" or a "disastrous failure".
Link to the article: https://www.hellobtc.com/kp/du/11/5560.html
Source: https://finance.yahoo.com/news/microstrategy-creating-next-big-bitcoin-123000918.html
