Recently, the price of Bitcoin has been experiencing violent fluctuations around the $100,000 mark, especially after surging to $104,000 last week, it then plunged to $90,500, which many believe is a signal of sentiment topping out and weakening of positions. Some well-performing institutional investors have started to choose to gradually withdraw, for example, Meitu has cleared all of its crypto assets, and the market is concerned that this profit-taking trend may accelerate.
At a time when market sentiment is generally bearish, MicroStrategy has bucked the trend and announced on Monday that it has purchased $2.1 billion worth of Bitcoin. This aggressive strategy, while injecting a shot in the arm into the market, has also sparked controversy over the sustainability of its investment strategy. The market is concerned that if the price of Bitcoin continues to plummet significantly, MicroStrategy may find itself in trouble, triggering a black swan event that could ripple through the entire crypto market.
MicroStrategy: A Bitcoin Holding Giant and a Market Aggressive Pusher
As the publicly traded company that holds the most Bitcoin globally, MicroStrategy's strategy has always been closely watched. Data shows that the circulation of Bitcoin is becoming increasingly concentrated in the hands of a few major institutions. Excluding Satoshi Nakamoto, the top five Bitcoin holding entities control 9.9% of the circulating supply. Among them, Coinbase holds 1.12 million BTC, worth over $112 billion; Binance holds 687,000 BTC, worth nearly $68.9 billion; BlackRock, Microstrategy and Bitfinex are ranked third to fifth respectively. Excluding Satoshi Nakamoto, the top ten holding entities currently control about 14.82% of the total Bitcoin circulation. The holdings of these institutions directly affect the market trend.
Compared to other institutions, MicroStrategy's investment strategy is particularly aggressive. If the Bitcoin rally in the $40K-$70K range was driven by ETFs, then the rally in the $70K-$100K range was inseparable from MicroStrategy's push. MicroStrategy is known as the "perpetual financing machine", and its strategy of increasing positions has played a key role in the rise of Bitcoin prices.
MicroStrategy's goal is to acquire as many BTC as possible using prudent leverage, boost its stock price, and outperform Bitcoin itself. As of December 8, 2024, MicroStrategy holds a total of 423,650 Bitcoins, with a total investment of about $25.6 billion and an average cost of $60,324 per Bitcoin. So far this year, its quarterly BTC return rate has reached 43.2%, and its year-to-date return rate is 68.7%. At the same time, MicroStrategy's stock price performance has far exceeded Bitcoin, with a year-to-date increase of 613%, making it the hottest "Bitcoin shadow stock".
MicroStrategy stock price
MicroStrategy's Bitcoin holdings
MicroStrategy's Infinite Capital Model
MicroStrategy (MSTR) is a US-listed software company that went "All in BTC" in 2020. Initially, it purchased Bitcoin using its own cash flow, and later mainly raised funds through the issuance of convertible senior notes to continue large-scale Bitcoin purchases. These notes typically have a fixed maturity date and a relatively low interest rate. As the price of Bitcoin rises, the value of MSTR's Bitcoin assets increases, thereby boosting its stock price, forming a positive feedback loop. Through continuous debt issuance and Bitcoin purchases, MSTR has established a self-reinforcing capital chain.
This financing model of MSTR has the characteristics of low risk and high returns. Convertible notes are essentially a contract with a free call option embedded. For creditors, this is a risk-free business: if Bitcoin falls and MSTR has money, creditors can get their money back; if Bitcoin falls and MSTR has no money, creditors can still have the final bottom line, that is, convert to stocks and realize their principal. If Bitcoin rises, MSTR will rise, and they can execute the conversion to get more stock returns. In the worst case, if MSTR goes bankrupt, they are still "higher-ranking" than ordinary shares, and the holders will benefit first in the event of bankruptcy or liquidation.
MSTR's strategy has been hugely successful. Since the company fully invested in Bitcoin, its stock price has skyrocketed, with an annualized return rate of 80%, and the stock has risen by more than 2600% since August 2020, with a current market value of nearly $93 billion, far outperforming Bitcoin itself and all other major US stocks.
The impressive performance has put MSTR on a relentless path of attracting global capital and investing in Bitcoin. On October 30, while announcing its third-quarter results, MSTR announced a "21/21 Plan", which aims to raise $42 billion through $21 billion in equity and $21 billion in notes over the next three years to purchase more Bitcoin. So far in November, MSTR has invested about $13.5 billion to increase its BTC holdings through this model, accounting for 32% of the total "21/21 Plan" funds, demonstrating the market's strong confidence in MSTR.
Will MicroStrategy Become a Crypto Black Swan?
In recent years, the crypto market has experienced many fluctuations and violent crashes, especially the bankruptcies of Luna and FTX, which have made investors particularly sensitive to the risks of similar companies.
MSTR currently has a market capitalization of $93 billion, about 2.2 times its Bitcoin holdings (Q3 core business revenue was only $116.1 million). When Bitcoin is rising, its stock price soars, and its financing ability is strong, forming a positive feedback loop. However, once Bitcoin enters a volatile or downward phase, it will continuously erode market confidence in the future development of BTC prices, affecting its stock price, and this will translate into doubts about MSTR's financing ability. Under the resonance of these two factors, the premium of MSTR is likely to converge rapidly. This valuation difference is also the reason why funds like Soros are shorting MSTR's stock.
It is well known that leverage is a double-edged sword. If BTC prices fall, MSTR's worst-case scenario may be that it has to sell its Bitcoin holdings to repay its debts, triggering a "vicious death spiral". Fortunately, MSTR's debts are unsecured and do not directly depend on its Bitcoin holdings. Although the company has previously issued notes secured by Bitcoin, as of the third quarter of 2024, these notes have all been repaid. In addition, its earliest debt maturity is not until February 2027, so there is no major repayment pressure in the short term.
In terms of annual interest repayment, MSTR's total debt is currently about $7.3 billion, with an average interest rate of only 0.476%, resulting in an annual interest expense of about $34.6 million, which is relatively manageable.
In other words, MSTR is borrowing off-exchange leverage, without a liquidation mechanism. Theoretically, even if MSTR's stock price is crushed to zero, it still does not need to be forced to sell these Bitcoins. However, for MSTR's CEO Michael Saylor, the long-term value of the company is far higher than the value of the BTC it holds. After multiple rounds of additional issuance, his equity stake is not high at the moment, and if the company faces bankruptcy and liquidation, he would not be able to get much BTC. This forces him to bear the responsibility of managing the company's market value. When MSTR's price-to-earnings ratio is undervalued due to panic, it would be a profitable move to sell BTC for cash and repurchase MSTR shares from the market.
Whether MSTR is a guardian of Bitcoin or a risk creator ultimately depends on Bitcoin's performance. Currently, it does not appear to face major direct risks, and its financing is progressing smoothly. However, Bitcoin's price cycle has historically been consistent with its 4-year halving cycle, and according to historical patterns, 2025 will be a highly anticipated year, but the possibility of a bear market afterwards is relatively high, at which point MSTR's risk level will increase.
In summary,
Against the backdrop of the current Bitcoin price facing a correction, MicroStrategy's strategy of increasing its holdings has injected confidence into the market, but also raised profound doubts about its sustainability. Although MicroStrategy's risks currently appear to be under control, the future trend of Bitcoin prices will determine whether it will be a guardian of Bitcoin or a creator of risks. For investors, timely assessment of potential risks, especially when Bitcoin enters an adjustment cycle, has become a crucial issue for risk management.
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