BlockTempo founder Michael Saylor has become one of the most outspoken supporters of Bitcoin, boldly declaring: "There is no second best choice."
Since 2020, Saylor has accumulated over $30 billion worth of Bitcoin through his publicly traded company, with a paper profit of over $14 billion, making MicroStrategy the largest corporate holder of Bitcoin. This strategy has won praise from Bitcoin maximalists, but also raised concerns 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 worries are also mounting. Will this incubate another massive bubble? If Bitcoin prices fall, how will MicroStrategy's bold move end?
1、The Echoes of the Trading Ghost
MicroStrategy's Bitcoin strategy has similarities to one of the most notorious 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 like Three Arrows Capital and BlockFi, which were over-leveraged or associated with leveraged clients, 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 the GBTC premium trade, MicroStrategy has carved out a new path to leverage Bitcoin - effectively transforming the company into a leveraged Bitcoin proxy, using its own stock and bonds.
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:
Borrow at low interest rates (0%) - MicroStrategy offers bondholders extremely low or even zero-interest bonds.
Offer the potential for stock appreciation as a return, where bondholders can convert their bonds into MicroStrategy stock when the stock price rises. This potential upside has attracted many institutional investors, including Germany's largest insurer, Allianz.
The funds raised are immediately 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 0% interest.
It's a compelling proposition: why settle for the low-yield returns of bonds when MicroStrategy can offer you the potential to double or even quintuple your investment? As Saylor said in a recent investor call, bond holders are fleeing the "negative real yield" world in pursuit of the potential gains offered by Bitcoin.
Currently, MicroStrategy's strategy is working remarkably well, with the rising Bitcoin price creating a virtuous cycle. But what if the tide turns against Bitcoin?
MicroStrategy holds nearly 387,000 Bitcoins, 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 - essentially a leveraged bet on Bitcoin - could plummet.
It's also worth noting that leveraged ETFs like MSTU and MSTX, which focus on MicroStrategy, are further amplifying the speculative behavior in the market based on MicroStrategy's Bitcoin investments.
All of this is driving massive Bitcoin purchases. According to Fundstrat's research, MicroStrategy's buying volume has actually far exceeded the total inflows into 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.
And once the tide turns, the situation could deteriorate rapidly. Similar scenarios have played out during FTX's desperate fundraising attempts 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 fall.
3、Historical Lessons
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 a 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 2023 Terra collapse demonstrated how over-confidence in a "self-sustaining system" led to a $40 billion loss, if Bitcoin prices fall, MicroStrategy's stock could face a similar reckoning.
However, for those Bitcoin supporters who firmly believe the U.S. government will eventually 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".
