Author: Zack Guzman
Translator: Baihua Blockchain
Michael Saylor, the founder of MicroStrategy, has become one of the most outspoken supporters of Bitcoin, boldly declaring: "There is no second best choice."
Since 2020, Saylor has cumulatively purchased over $3 billion worth of Bitcoin through his publicly traded company, with a paper profit of over $1.4 billion, making MicroStrategy the company with the largest Bitcoin holdings. This strategy has earned the praise of Bitcoin maximalists, 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 Bitcoin, external concerns are also mounting. Will this brew another massive bubble? If Bitcoin prices fall, how will MicroStrategy's bold move end?
1. Echoes of the Trading Ghost
MicroStrategy's Bitcoin 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 Bitcoin exposure through the Grayscale Bitcoin Trust (GBTC), as its trading price was higher than the value of the underlying Bitcoin holdings. They borrowed to acquire GBTC shares and reaped the premium upon the expiration of the lock-up period.
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 Bitcoin leveraged trading through its own stock and bonds - effectively transforming the company into a leveraged Bitcoin proxy.
Some periods of MicroStrategy's Bitcoin purchasing 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, which works as follows:
MicroStrategy offers extremely low or even zero-interest rate bonds (0%) to bondholders.
In return, the bondholders are offered the potential upside of stock appreciation, as they can convert the bonds into MicroStrategy's shares when the stock price rises. This potential upside has attracted numerous institutional investors, including Germany's largest insurance company, Allianz.
The funds raised are then used to purchase more Bitcoin, further driving up the stock price.
This feedback loop has resulted in an astounding performance of MicroStrategy's stock, which has risen nearly 500% in 2024 alone. This strategy has been so successful that bond investors, attracted by the potential appreciation of the stock, are willing to lend billions of dollars to the company at a 0% interest rate.
This is a rather compelling proposition: why settle for the low-interest returns of bonds when MicroStrategy can offer you the opportunity to double or even quintuple your investment?
As Saylor said in a recent investor call, bondholders are fleeing the "negative real yield" world and pursuing the potential gains offered by Bitcoin.
Currently, MicroStrategy's strategy is operating remarkably well, with the rise in Bitcoin prices creating a virtuous cycle. But what if the trend of Bitcoin reverses?
MicroStrategy holds nearly 387,000 Bitcoin, worth around $37 billion, but its market capitalization has already exceeded $100 billion. This sky-high valuation is largely dependent on the assumption of continued Bitcoin price appreciation. If Bitcoin were to decline, the company's stock price - essentially a leveraged bet on Bitcoin - could plummet significantly.
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 Bitcoin speculation.
All of this has driven massive Bitcoin purchases. According to Fundstrat's research, MicroStrategy's buying volume has actually far exceeded the total inflows of all Bitcoin ETFs earlier this month. If the market starts to doubt MicroStrategy's ability to achieve its $42 billion financing target, Bitcoin prices could decline, further jeopardizing MicroStrategy's financing capacity. 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 Bitcoin, this stance may be difficult to maintain if debt pressures increase and Bitcoin prices decline.
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 the leveraged strategy. While MicroStrategy's approach avoids some of the pitfalls of the GBTC trade - such as not relying on an inefficient fund structure - it still faces the core risk: if Bitcoin prices decline, the leverage could amplify the losses.
Saylor's unwavering belief in Bitcoin may inspire confidence, but history has shown that markets cannot rise indefinitely. Just as the over-confidence in a "self-sustaining system" led to a $40 billion loss during the 2023 Terra collapse, if Bitcoin prices decline, MicroStrategy's stock price could face a similar reckoning.
However, for those Bitcoin supporters who firmly believe that the U.S. government will soon follow suit and incorporate Bitcoin into its strategic reserves, MicroStrategy's bet has the potential to become the greatest investment of all time - either to be remembered as a "stroke of genius" or a "disastrous failure."
