Historically, whenever a traditional industry reaches its peak, there are often some highly innovative companies that find a unique "production method" in the cracks of the market, attracting capital with their unique strategies. These companies rarely "produce" actual things, but concentrate their resources on a core asset - like how Shell Oil Company maintained its valuation through oil reserves, and gold mining companies dominated prices through gold mining and reserves. And this morning, the release of MicroStrategy's financial report once again showed us such a company: it is not known for "production", but through its massive investment in Bitcoin, it has broken the traditional valuation rules and become one of the world's largest and most unique Bitcoin holders.
From Software Company to Bitcoin Whale: MicroStrategy's Transformation Journey
MicroStrategy (MSTR), a company that originally built its empire on business intelligence software, however, its founder Michael Saylor stepped on the gas in 2020 and directly entered the "fast lane" of Bit. Since then, Saylor no longer let the company stay in traditional "production", but saw the potential of Bit as a core asset, and began to gradually replace the company's cash reserves with Bit, even betting his own fortune, step by step turning MicroStrategy into a "coin hoarding bank" for Bit. In Saylor's eyes, Bit is the gold of the digital world, the anchor of the global financial future. Some think he's crazy, and some call him a "fanatical missionary" of Bit, but he firmly believes that he is winning the "new gold standard" for the company.
Saylor doesn't plan to take the old path, his positioning of MicroStrategy is more like an "air express": Compared to the "ground logistics" of traditional ETFs, MicroStrategy raises funds through bond issuance, borrowing, and equity issuance to directly purchase Bit, which is flexible, efficient, and can also chase the rise of the Bit market. This makes MicroStrategy not only a stock code, but also a "fast track target" in the Bit market, with the company's market value directly linked to the rise and fall of Bit. Saylor's operations have caused quite a stir, with well-known investor Peter Schiff even joking on social media platform X that "the company doesn't produce any products, but has achieved a super high market value by hoarding Bit". He pointed out that MicroStrategy's market value has surpassed most gold mining companies, second only to Newmont Corporation.
In response, Saylor's response is very simple: "Bit is our future reserve asset." Driven by this firm belief, MicroStrategy has already accumulated over 250,000 Bit, and plans to raise $42 billion in the next three years to continue increasing its holdings. MicroStrategy's "production" method is not traditional material manufacturing, but building a new financial system around the "infrastructure" of Bit.
Some say Saylor is gambling, but perhaps this is not only a bet, but a belief. He took a risky path to carve out an alternative route, making MicroStrategy an alternative target in the financial market. As he said: "We don't produce, we just 'hoard coins'."
Interpretation of MSTR's Latest Financial Report: Capital Thickening and Further Increase in Bit Reserves
1. Overall Financial Report and Financing Plan
The financial report released by MicroStrategy this time shows an overall positive outlook. The company plans to raise $42 billion in the next three years to continue increasing its Bit holdings, and has also completed the repurchase of previously pledged Bit. As of the financial report date, MicroStrategy holds a total of 252,220 Bit.
Since the end of the second quarter of 2024, the company has newly purchased 25,889 Bit, with a total cost of about $1.6 billion and an average price of $60,839 per Bit. The company's current total market value is about $18 billion, and the cumulative cost of purchasing Bit is $9.9 billion, with an average price of about $39,266 per Bit. The company also raised $1.1 billion through the sale of Class A common stock, and another $1.01 billion through the issuance of convertible bonds due in 2028, while repaying $500 million of senior secured notes, releasing all Bit assets from collateral. This move to release the collateral has significantly enhanced the company's financial flexibility and reduced its risk under extreme market conditions.
2. Cash Reserves and Future Financing Targets
MicroStrategy currently holds $836 million in cash, providing stable financial support for further Bit purchases in the future. The company has also released its phased financing targets: $10 billion in 2025, $14 billion in 2026, and $18 billion in 2027, totaling $42 billion. CEO Michael Saylor's plan aims to strengthen the company's core asset reserves by gradually increasing Bit holdings, which is undoubtedly seen by the market as a positive, rather than negative, news.
3. Market Value and Book Value
As of October 29, 2024, MicroStrategy's market value is about $18 billion, and its book value is $6.9 billion, which has deducted $3 billion in accumulated impairment losses. The reason for the impairment is not that MicroStrategy has sold Bit, but the accounting adjustment based on the current accounting standards. According to the accounting regulations, if the market price of Bit falls in a certain quarter, the company must lower the book value of these assets and record an impairment loss. However, even if the price subsequently rises, the book value will not automatically recover, and the appreciation can only be reflected when the assets are sold. If the future accounting standards (such as FASB's fair value measurement) are implemented, this problem is expected to be improved.
4. Flexibility Advantage of Bit as a Core Asset
As a core asset, Bit provides MicroStrategy with higher capital operation flexibility compared to spot ETFs. The company compares the operation of its Bit reserves to how oil companies handle unrefined and refined products (such as gasoline, diesel, and aviation fuel). Just as oil companies treat these as capital preservation tools, MicroStrategy also sees Bit as a capital preservation tool, through which the company can enhance productivity and implement innovative financial strategies.
5. MicroStrategy's Bit Holding Principles
MicroStrategy has formulated eight core principles for holding Bit, reflecting its long-term investment strategy and market orientation:
· Continuously purchase and hold Bit, focusing on long-term returns;
· Prioritize the long-term value of MicroStrategy's common stock;
· Maintain transparency and consistency with investors;
· Use smart leverage to ensure the company's performance exceeds the Bit market;
· Adapt quickly and responsibly to market dynamics, and continue to grow;
· Issue innovative Bit-backed fixed-income securities;
· Maintain a healthy and stable balance sheet;
· Promote Bit as a global reserve asset.
6. Differences between MicroStrategy and Bit Spot ETFs
The unique aspect of MicroStrategy compared to Bitcoin spot ETFs is its financing method. ETF investors need to actively purchase ETF shares, while MicroStrategy raises funds through various channels such as equity, unsecured or secured debt, convertible bonds, and structured notes, which are then used to directly increase its Bitcoin holdings. This "sell equity for financing" model allows the company to proactively raise funds to achieve its long-term strategic Bitcoin holding.
The Cycle of Capital and High Premium Rates: The Valuation Code of MicroStrategy
The Higher the Premium Rate, the More Suitable for Large-Scale Financing
MicroStrategy's valuation model relies on the market value premium rate, using equity dilution financing to increase its Bitcoin (BTC) holdings, thereby increasing the BTC holdings per share and driving up the company's market value. Here is a detailed analysis of this model:
Simplified Analysis of Premium Rate and Dilution Effect
Assuming a Bitcoin price of $72,000, MicroStrategy holds 252,220 BTC, with a total holding value of approximately $18.16 billion. Given the current company market value of $48 billion, MicroStrategy's market value is 2.64 times the total value of its Bitcoin holdings, translating to a current premium rate of 164%.
Assuming the company's current total share capital is 10,000 shares, the BTC holdings per share are approximately 25.22 BTC.
If MicroStrategy plans to raise $10 billion through additional financing, the total share capital after the issuance will become 12,083 shares (calculated as: the financing amount of $10 billion divided by the current market value of $48 billion, resulting in a 0.2083 multiple, i.e., the share capital will be increased by 20.83%, and the total share capital will change from 10,000 shares to approximately 12,083 shares). In this case, the company can use $10 billion to purchase approximately 138,889 BTC at a price of $72,000, increasing the total BTC holdings to 391,109 BTC. As a result, the BTC holdings per share will also increase to 32.37 BTC (using 391,109 BTC divided by 12,083 shares), an increase of approximately 28%.
Similarly, if the Planned Financing is $42 Billion
Further assuming that MicroStrategy issues an additional 87.5% of its share capital, i.e., raising $42 billion through the issuance of 8,750 new shares, the total share capital after the issuance will increase to 18,750 shares (calculated as: 10,000 shares multiplied by 1.875 times). If the company purchases BTC at a price of $72,000, it can acquire approximately 583,333 BTC, bringing the total holdings to 835,553 BTC. In this case, the BTC holdings per share will increase to 44.23 BTC (835,553 BTC divided by 18,750 shares), an increase of approximately 75% compared to the previous 25.22 BTC per share.
If this dilution effect is achieved within three years, the average annual dilution would be 25%.
Of course, the Bitcoin price may fluctuate during the final reinvestment, either higher or lower, but this will not change the dilution conclusion. Given MicroStrategy's extremely high premium rate (currently fluctuating around 180%-200%), the company should utilize the premium rate to maximize financing as much as possible. Therefore, CEO Michael Saylor's $42 billion financing plan, although initially causing market panic, was soon restored, demonstrating the company's clear understanding of the current model, which is a rational decision that maximizes shareholder value.
MicroStrategy's Advantages and the Logic Behind Its High Premium Rate
Many investors may wonder why the market is willing to purchase MicroStrategy's ATM or convertible bonds at a high premium, rather than directly buying a Bitcoin ETF. This involves several unique advantages of MicroStrategy:
Continuous Earnings Dilution
Through continuous financing to increase its BTC reserves, MicroStrategy has achieved an annualized earnings dilution of 6%-10%, and has realized a 17% annualized dilution since 2024. Under the current high-premium financing model, the annualized dilution is expected to exceed 15%. Calculated at a valuation of 10 to 15 times, MicroStrategy's premium rate corresponds to a valuation of 150%-225%.
Volatility and Market Bridge
Michael Saylor believes that MicroStrategy serves as a bridge between the traditional capital market and the Bitcoin market. The current Bitcoin market capitalization is approximately $1.4 trillion, with relatively low penetration. If the penetration rate increases, even if only 1% of the $300 trillion global bond market is allocated to Bitcoin, it would bring MicroStrategy approximately $3 trillion in potential incremental funds. Furthermore, the company's issued convertible bonds not only provide a certain downside protection, but also offer potential upside options on Bitcoin prices.
Conclusion: The Self-Reinforcing Effect of High Premium Rates in a Bull Market
In a bull market environment, MicroStrategy's valuation model and high-premium financing model have formed a self-reinforcing positive feedback loop. The higher the premium rate, the larger the company's financing amount, which in turn dilutes the BTC holdings per share and further drives up the company's market value. This market effect is like a snowball rolling, especially in the case where Bitcoin prices are expected to rise to the $90,000-$100,000 range, MicroStrategy may be able to accelerate its progress under the protection of high premium rates.
Michael Saylor's bet and the market's response seem to foreshadow a subtle interplay between traditional finance and digital assets. In this dual contest of capital and technology, will MicroStrategy achieve a financial revolution, or will it be just a fleeting moment? What we are witnessing may be a harbinger of future financial transformation.
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