In the past few days, the US stock market and the crypto market have been dazzled by MSTR. In the latest wave of Bit price movements, MSTR not only led the rally, but also maintained a premium growth over Bit for a period of time afterwards, with its price soaring from $120 a week or two ago to the current $247.
Regarding MSTR's surge, most people in the market still interpret it as "leveraging Bit". However, this does not seem to explain why MSTR's premium suddenly soared when the "debt financing to buy Bit" fundamentals remained unchanged. After all, Microstrategy has been buying Bit for so many years, but it has never seen such a surge in premium.
In fact, the recent surge in MSTR's premium, in addition to "debt financing to buy Bit", is also due to another secret weapon of Microstrategy, which not only has a huge impact on MSTR's fundamentals, but is also called by many analysts as Microstrategy's "infinite money printing machine", making MSTR "the more you sell, the more valuable the money".
Leverage Bit? An old story
Microstrategy, a company focused on business intelligence software, has adopted a radical strategy since 2020: raising funds through debt issuance to purchase Bit. This strategy was implemented starting in August 2020, when the company announced that it would convert $250 million of its treasury reserve assets into Bit. The motivation behind this strategy is mainly to address the challenges of declining cash returns and dollar depreciation, global macroeconomic factors.
To further expand the scale of Bit holdings, Microstrategy has raised funds in the capital markets through some long-term bonds in recent years. These bonds typically have longer maturities, mostly maturing in 2027-2028, and some are even zero-coupon bonds. This allows the company to maintain a lower financing cost in the coming years, and after obtaining the bond financing, it can quickly use it to purchase Bit and add it directly to the company's balance sheet.
According to data from Bitcoin Treasuries, as of now, Microstrategy already owns Bit that accounts for 1.2% of the total circulating supply, making it the public company with the largest Bit holdings in the world, far exceeding crypto mining companies like Marathon, Riot, and top crypto trading platforms like Coinbase that are more "crypto native" in their business.
Through debt financing, MSTR has been continuously increasing its Bit holdings, which not only increases the amount of Bit on its balance sheet, but also forms a significant driving force on the Bit market price. As the proportion of Bit in MSTR's asset portfolio continues to increase, the correlation between the company's market capitalization and the Bit price has further strengthened. According to MSTR Tracker, the correlation coefficient between MSTR's stock price and Bit price has recently surged to a record high of 0.365.
This correlation makes investors willing to buy MSTR's stock when they are bullish on Bit, further driving up the company's market capitalization. Of course, after 4 years of market and time testing, MSTR's "leveraged Bit effect" has long been an old story, and whenever MSTR's price rises, people always use the logic of "debt financing to buy Bit" to explain it.
However, in the recent Bit rally, MSTR's market price not only rose before Bit, but also maintained an increasingly high premium over Bit for a period of time. This has left many investors puzzled: the fundamentals haven't changed, so why did the premium suddenly surge?
Premium issuance: "The more you sell, the more valuable the money", MSTR's cheat code
First, let's take a look at how outrageous MSTR's recent premium has been. According to MSTR Tracker, MSTR's premium over Bit has experienced a sharp increase from around 0.95 to 2.43 and then fallen back to around 1.65 in the period from February to March this year. The second rapid growth started on the eve of the recent Bit price rally, growing from around 1.84 to a peak of 3.04, and currently maintaining around 2.8.
It can be seen that although Microstrategy has been accumulating Bit for the past 4 years, its NAV (Net Asset Value) premium has not shown a significant growth, but has remained in a 1:1 state for a relatively long period of time.
So what is the reason that has caused MSTR's premium to surge so quickly? Has the fundamental of Microstrategy's "debt financing to buy Bit" changed?
The answer is yes. This fundamental change is called "premium issuance". Since the middle and late part of last year, Microstrategy has adopted a new way of buying Bit, which is to purchase more Bit by issuing and selling its own MSTR shares. This "sell shares to buy Bit" strategy may sound very stupid at first, as it could not only hurt the stock price, but also threaten MSTR's market position as a "leveraged Bit".
However, when you analyze the logic chain carefully, you will find that this new "sell shares to buy Bit" model is simply MSTR's super flywheel and Microstrategy's infinite money printing machine.
First, we need to explain the concept of "net asset value premium" (NAV). Since MSTR holds a large amount of Bit through debt issuance, and the market's expectation for the future rise of Bit is relatively strong, the value of MSTR's stock often exceeds the value of the Bit it holds, and this premium is called "net asset value premium". This "net asset value premium" reflects the market's expectation of the company's future expansion of Bit holdings, and has become the support point for MSTR to continue to issue shares and purchase Bit.
On the other hand, when the price of Bit rises, the market value of Microstrategy will also grow accordingly, which will force various index funds to increase their purchases of MSTR based on weight considerations, further driving up its price and market value.
At this time, due to the existence of the "net asset value premium", MSTR can start its own "premium issuance" operation. By continuously issuing shares, it can obtain more funds to purchase Bit, drive up the price of Bit, and the rise of Bit will further enhance the company's market value and financing capabilities, so that this cycle can continue, creating a "Reflexive Flywheel Effect".
The most ingenious point in Microstrategy's "Reflexive Flywheel Effect" is that the issuance not only will not have a negative impact on the MSTR price, but will actually make MSTR more valuable.
When Microstrategy issues shares to purchase Bit, the newly issued shares are usually traded at a price higher than their net asset value. Relying on this premium, Microstrategy will be able to buy more Bit when it sells each MSTR share than the Bit actually represented by the individual stock.
For example, based on the correlation coefficient between MSTR and Bit, 36% of the value of each MSTR share represents the Bit backed by the company. Without the premium, when Microstrategy sells MSTR, it can only exchange for 36% of the Bit. However, currently, the premium of MSTR over Bit is around 2.74, which means that every time Microstrategy sells one MSTR share, it will be able to exchange for about 98% of the Bit.
This means that the company can use funds higher than the net asset value of Bit to increase its Bit holdings, thereby expanding the amount of Bit on its balance sheet. The core of this strategy is that MSTR, through high-premium financing, has increased the speed and scale of its Bit holdings, which is far faster than the previous "debt-buying Bit" speed.
After the flywheel appears, the increasingly high-valued MSTR has also been included in the investment scope of the US stock index, which has brought in more incremental funds and generated more net asset value premiums. One of the reasons for the decoupling of MSTR and BTC in the third quarter is also that the market is pre-pricing the fact that MSTR will be included in the Nasdaq 100 index, bringing a large amount of passive capital inflows.
US stock index investors will be "forced" to invest in MSTR, and then return to the Reflexive Flywheel, resulting in an even greater net asset value premium, allowing MSTR to raise more funds to increase its Bit holdings, drive up the price of Bit, and improve market optimism about MSTR, which may increase the company's weight in the index, triggering further buying demand from index funds, forming a self-reinforcing positive feedback loop, overall forming an index buying pressure flywheel.
From a larger time dimension, the amount of Bit equivalent held by each MSTR shareholder is constantly increasing, which not only enhances the market's recognition of MSTR's position as a "Bit alternative investment tool", but also improves the pricing expectation for MSTR.
"There Will Be More MSTR in the US Stock Market"
In the past few weeks, Microstrategy CEO Michael Saylor has become increasingly high-profile, shouting on major Podcasts and news programs that "there will be more MSTR in the US stock market" and that the MSTR mechanism is simply a "infinite money printing glitch".
Saylor believes that MSTR's "Reflexive Flywheel" model has strong capital operation potential, and this model can not only continuously accumulate Bit, but also maintain its own growth through financing and stock price increases, demonstrating how a listed company can use asset premiums and capital market financing capabilities to achieve long-term expansion.
This model is not just a traditional "buy and hold" strategy, but a way to actively use the advantages of the capital market to expand the balance sheet. This mechanism may become an object for other companies to emulate, especially in resource-intensive or capital-intensive industries. In fact, there are already many companies that have imitated MSTR to carry out partial asset operations.
At present, this "left foot on the right foot" model seems to be quite feasible. According to current data statistics, MSTR will use $1 to purchase Bit for every $2.713 of additional shares issued. Many people believe that he is able to "outperform" Bit to a large extent by taking a highly leveraged long position on Bit, but in fact MSTR's health is very high, and it is estimated that only when the price of Bit falls below $700 per coin will MSTR face the risk of being liquidated.
At present, this mechanism seems to be running smoothly, with MSTR continuously increasing its Bit holdings. However, as this mechanism is used more and more widely, it will undoubtedly subject the US stock index to greater influence from crypto assets and their related derivatives. This mechanism is like a rope that binds the crypto currency market and the US stock market together, which will bring about deep-seated changes in the market. For the crypto currency market, it undoubtedly introduces a large amount of US stock capital spillover liquidity (mainly absorbed by BTC), while for the US stock market, it seems to exacerbate the risk of volatility.
According to Saylor's (the founder of MSTR) vision, by 2050, the price of Bit will reach $50,000 per coin, and he hopes that by then, MSTR will become a company with a scale of trillions, better applying crypto currencies to deeper integration into people's lives. This model, which sounds like a "perfected version of the Ponzi scheme", whether it can be executed until then, may need to be tested by the subsequent market.
