Background: Up nearly 500% this year, far outperforming Bitcoin
As is well known, Michael Saylor, the boss of MicroStrategy, is a fervent Bitcoin believer, constantly accumulating coins regardless of bull or bear market. With Trump's victory, Bitcoin has surged to approach the $100,000 mark, and MicroStrategy, which holds 386,000 Bitcoins, has also seen its stock price soar, up about 500% since the beginning of this year, outperforming Bitcoin by 121%.
How does MicroStrategy's strategy work? Can MicroStrategy still rise? Is it the leveraged version of Bitcoin or the new Luna? Let's take a look with WOO X Research!
What strategy does MicroStrategy use to buy Bitcoin?
Currently, most people's impression of MicroStrategy is that it buys Bitcoin, but MicroStrategy is actually a technology company founded in 1989, whose main business is to provide data analysis solutions to help companies analyze data and make decisions.
In August 2020, CEO Michael Saylor saw the value of Bitcoin and believed it to be a scarce digital asset with long-term appreciation potential that could hedge against inflation and preserve value, so he converted the company's $250 million in reserves into Bitcoin, which was the beginning of MicroStrategy's frantic Bitcoin accumulation.
As of November 2024, MicroStrategy holds about 386,700 Bitcoins, accounting for 1.8% of the global Bitcoin supply.
How did they do it?
1. MicroStrategy issues debt to buy Bitcoin:
- The company raises funds by issuing bonds (such as convertible bonds) and then uses these funds to buy Bitcoin.
- This is the starting point of the strategy, using leverage to increase Bitcoin holdings.
2. Bitcoin price rises, MicroStrategy's market value rises:
- As the price of Bitcoin rises, the value of MicroStrategy's assets (the large amount of Bitcoin it holds) also rises, driving the growth of the company's market capitalization.
3. Increased market capitalization, higher weighting in indexes:
- The growth in market capitalization increases MicroStrategy's stock weighting in financial indexes (such as the S&P 500, NASDAQ, etc.).
- More index funds need to allocate MicroStrategy stocks, further driving up the stock price.
4. MicroStrategy issues stock to buy Bitcoin:
- After the market capitalization has risen, MicroStrategy takes advantage of the market's demand for its stock, issues new shares at a premium, sells them, and uses the proceeds to buy Bitcoin.
5. Bitcoin price rise further drives up market value:
- The newly purchased Bitcoin, as its price rises, further increases the company's asset value and market capitalization.
- The increased market capitalization again enhances the attractiveness of the stock in the market.
6. MicroStrategy issues stock again, repeating the cycle:
- MicroStrategy uses the rise in stock market value to repeatedly issue new rounds of stock and purchase Bitcoin, forming a "flywheel effect".
The key for MicroStrategy is to initiate a positive flywheel cycle, making Bitcoin and MicroStrategy's market value an upward perpetual motion machine. Exploring the details can reveal the ingenuity of this model.
Currently, MicroStrategy has five convertible bonds in the market, with a principal value of $4.25 billion, maturing between 2027 and 2032, which are medium to long-term debts, and most of them are zero-coupon bonds, meaning that the principal does not need to be repaid until maturity, which also reduces MicroStrategy's default risk.
In terms of stock issuance, since the launch of the Bitcoin strategy, MicroStrategy has announced five stock issuances, raising a total of $4.4 billion.
Source: Bloomberg
Will MicroStrategy be liquidated if the coin price drops?
On November 21, the well-known short-selling institution Hindenburg said: "Although Hindenburg is still bullish on Bitcoin, we have hedged our position by shorting MSTR. We have great respect for Saylor, but even he must know that MSTR is overheated."
Is Hindenburg's concern justified?
The design of the asset flywheel inevitably makes people think of Luna/UST, which also relied on two assets to step on each other's feet to drive prices up rapidly. It also makes people worry that if one of the assets falls in price, it may trigger a chain reaction of liquidations.
However, MicroStrategy's model is very different from Luna:
Low debt ratio: Currently, MicroStrategy's market capitalization is about $75 billion, with $4.25 billion in bonds, and the overall liabilities account for a low proportion of the company's financial structure, and the maturity dates are between 2027 and 2032.
- No intention to sell Bitcoin: Well-known KOL @TheFlowHorse recently posted that if Michael Saylor sells Bitcoin, that would be the best trade in history. Michael Saylor replied that he will not sell Bitcoin.
- This commitment also ensures that MicroStrategy's "premium stock issuance" strategy can continue.
- Premiums return to 2021 levels: As shown in the chart below, even during the 2022 bear market, MicroStrategy maintained a premium state and did not fall below.
The rapidly rising green line indicates that the market's confidence in MicroStrategy's Bitcoin strategy has been rebuilt, returning to the level of the 2021 bull market.
Source: CryptoQuant
If Bitcoin crashes, the probability of MicroStrategy being forced to sell and triggering a chain reaction of stock and coin crashes is very low, as the leverage ratio is not as exaggerated as imagined.
Conclusion: MicroStrategy's success case has sparked a wave of Web 2 companies hoarding BTC
The success of MicroStrategy's Bitcoin reserve strategy has also led other companies to emulate it, including:
- RUMBLE: A video sharing platform, announced the purchase of up to $20 million worth of Bitcoin as a reserve
- Interactive Strength: A fitness equipment company, announced the purchase of $5 million worth of Bitcoin as a reserve
- Hoth Therapeutics: A biopharmaceutical company, announced the purchase of $1 million worth of Bitcoin as a reserve
There are countless other examples, with more and more companies (small-cap stocks) wanting to follow MicroStrategy's successful Bitcoin reserve model, but most are short-term gimmicks, as the success of the strategy is partly built on capital-intensive, and for small companies, using this strategy is more likely to invite investor skepticism and regulatory scrutiny.
Nevertheless, Bitcoin will be the biggest winner.
