Author: Arain, ChainCatcher
Editor: Nianqing, ChainCatcher
This morning, Bitcoin finally broke through $100,000.
Since the announcement of the victory of the Republican presidential candidate Trump in the 2024 presidential election, the Bitcoin market has been devastated, finally breaking through the price range of $70,000-$80,000 per coin, and continuously hitting new historical highs.
It is unparalleled at the moment. "Bitcoin will become one of the national strategic reserve assets of the United States" seems to be a possibility. Regardless of when this possibility will be realized, the public capital market is moving in response, and has already announced the purchase of Bitcoin as a reserve asset.
Incomplete statistics show that there are about 60 listed companies worldwide holding Bitcoin. According to data from the Eurochain Research Institute, after the US election situation became clear, 17 listed companies in the US and Japan have announced that they hold or have approved Bitcoin as a strategic asset.
Unlike the previous concept of riding the heat, using real money to concentrate on hoarding Bitcoin, rather than other cryptocurrencies, means that the consensus on Bitcoin in the mainstream capital market is constantly strengthening. HODL15Capital data shows that globally, there are currently 22 listed companies with more than 1,000 Bitcoins - in US dollar terms, the total value of 1,000 Bitcoins exceeds $100 million.
Among them, the most acclaimed is MicroStrategy, the listed company with the largest Bitcoin holdings. The company's stock price has risen by 114.52% in the past year, and its market value has once reached over $100 billion.
According to the 8K file released by the company on December 2, the company is continuing to increase its Bitcoin holdings through a $42 billion financing plan, making its Bitcoin holdings continue to increase.
I. MicroStrategy's Unlimited Ammunition
On December 1, MicroStrategy founder Michael Saylor said on X that according to HODL15Capital statistics, there are currently 60 listed companies that can issue stocks to buy Bitcoin. The total Bitcoin holdings of these 60 companies are 522,565 BTC.
"Issuing stocks to buy Bitcoin" is not the main strategy for listed companies to hoard coins at the moment, and MicroStrategy (MSTR) is the leader in this wave of coin hoarding, and is still the listed company with the most Bitcoin holdings in the world.
At the end of 2019, MSTR had about $560 million in cash, cash equivalents and short-term investments on its books. So in August 2020, the developer of business intelligence software began to use its idle cash to buy Bitcoin. The first purchase was 21,454 Bitcoins for $250 million, and then another $50 million was used to continue increasing its Bitcoin holdings. This move was seen as more of a Bitcoin public relations meaning in 2020, rather than as eye-catching as it is today, the main reason being that the ammunition was its own cash, which would soon be exhausted - but what if the ammunition was provided by others?
Subsequently, the situation was opened up, and MSTR used the platform of a listed company to flexibly play among "stocks-bonds-coins", continuously increasing its Bitcoin holdings - even among the current followers, it is difficult to find a similar script.
Now MSTR defines itself as a Bitcoin financial company, and its stock price is highly correlated with the trend of Bitcoin. According to its latest 8K filing, MSTR currently holds 402,100 Bitcoins, with a total cost of $23.4 billion and an average purchase price of $58,263 per coin. In addition to a small portion of idle funds, the sources of MSTR's Bitcoin purchases are as follows:
- Obtained about $14.8 billion in financing through the ATM issuance of equity as a listed company on the US stock exchange;
- Obtained about $7.8 billion through private placement of non-convertible bonds, of which $500 million in private placement convertible bonds due in 2025 have been converted or redeemed;
- Issued $500 million in priority secured notes with an annual interest rate of 12.5% (already repaid);
- $205 million in credit guarantees (of which $161 million has been repaid so far), with Bitcoin pledged to be released on March 24, 2023.
It can be said that MSTR's main ammunition comes from ATM equity issuance and private placement convertible bonds, of which ATM currently provides the most ammunition for MSTR.
ATM (at-the-market offering) means "issuing at the market price". After submitting a Shelf prospectus, the listed company can gradually issue the same class of tradable shares to the secondary market through designated brokers at the current market price. The issuer can control the timing and scale of each sale, and can modify it at any time as needed without submitting additional applications.
This model can raise funds flexibly, and in theory can effectively avoid the large discount issuance that occurs in traditional financing. Currently, MSTR's stock price benefits from the performance of Bitcoin, and ATM will also benefit from this, but if the Bitcoin price falls, the interests of MSTR's stock investors will be damaged, one is that the premium over the net asset value (Bitcoin) may shrink or even become a discount, and the continuous ATM may gradually erode the premium, causing the stock price to fall to the actual value of Bitcoin.
MSTR's second largest source of ammunition is private placement convertible bonds, which often raises market concerns. In fact, the convertible bonds issued by MSTR are all unsecured, senior debts, and convertible bonds mean that investors can convert the bonds into stocks under the conditions stipulated in the agreement. If most investors choose to "convert", combined with MSTR's consistent ATM operation, MSTR's debt ratio can be kept under control, only the equity may be diluted to a large extent. Of course, investors can also choose not to convert within the agreed time, and wait for the company to redeem the bonds with principal and interest.
Due to the addition of equity warrants and other rights, convertible bonds usually have a lower coupon rate than ordinary corporate bonds. In the past, most of the convertible bonds issued by MSTR had relatively low coupon rates and higher conversion prices:
1. Announced in December 2020: Issued a total of $650 million in 0.750% convertible bonds due in 2025. The initial conversion price was $397.99 per share, a premium of about 37.5% over the $289.45 per share of Class A common stock at the time of issuance;
2. Announced in February 2021: Issued a total of $1.05 billion in 0% convertible bonds due in 2027. The initial conversion price was about $1,432.46 per share, a premium of about 50% over the $955.00 per share of Class A common stock at the time of issuance;
3. Announced in March 2024, issued a total of $800 million in 0.625% convertible bonds due in 2030. The initial conversion price was about $1,497.68 per share, a premium of about 42.5% over the $1,051.01 per share of Class A common stock at the time of issuance;
4. Announced in March 2024, issued a total of $603.8 million in 0.875% convertible bonds due in 2031. The initial conversion price was about $2,337.21 per share, a premium of about 40% over the $1,662.1999 per share of Class A common stock at the time of issuance;
5. Announced in September 2024, issued a total of $1.01 billion in 0.625% convertible bonds due in 2028. The initial conversion price was about $183.19 per share, a premium of about 40% over the $130.8477 per share of Class A common stock at the time of issuance;
6. Announced in June 2024, issued a total of $800 million in 2.25% convertible bonds due in 2032. The initial conversion price was about $2,043.32 per share, a premium of about 35% over the $1,513.46 per share of Class A common stock at the time of issuance;
7. Announced in November 2024, issued a total of $3 billion in 0% convertible bonds due in 2029, with an initial conversion price of about $672.40 per share, a premium of 55% over the $433.7997 per share of Class A common stock at the time of issuance.
(*The above conversion prices are all subject to anti-dilution adjustments. MSTR executed a 1-for-10 stock split on August 1, 2024, which can be understood as the conversion price before that date divided by 10 is the adjusted conversion price.)
Among MSTR's previously issued convertible bonds, only the ones issued in February 2021 and this November were zero-coupon convertible bonds, and correspondingly, the conversion premium of the convertible bonds was also higher, and Bitcoin was also at a high price. Especially in February 2021, Bitcoin was actually in a high-to-low downward phase, and then there was a bear market of Bitcoin for about two years, during which MSTR did not issue convertible bonds, but instead used ATM to sell stocks.
The period from December 2021 to February 2024 was a time of low Bitcoin prices and a low period for MSTR's stock price. During this period, MSTR issued stocks in the amounts of $1 billion, $500 million (partially sold and suspended), $625 million (partially sold and suspended), $750 million (partially sold and suspended), $750 million, and $2 billion.
It can be seen that in its past operations, MSTR did not use the ATM tool to issue new shares at high stock prices to obtain more favorable prices. On the contrary, when stock prices/Bitcoin market conditions were weak, MSTR used more equity financing, while when stock prices/Bitcoin market conditions were strong, it used convertible bond financing. This approach was mainly to control the leverage level.
From this, we can infer the two scenarios that may occur when Bitcoin prices rise/fall, and MSTR continues to raise funds to increase its Bitcoin holdings:
If Bitcoin prices rise, MSTR's stock price will rise, and MSTR will use both stock and debt financing methods. In this case, the convertible bond conversion price will be higher, and the ATM pricing will be at a high level, allowing MSTR to raise more money to purchase Bitcoin, while the leverage level remains unchanged.
If Bitcoin prices fall, MSTR's stock price will fall, and it will suspend convertible bond financing and use ATM to ensure the leverage level, but the ATM pricing will be affected by the market price. In extreme cases, MSTR can issue stocks to alleviate debt pressure, or sell coins to repay debt, or bondholders can choose to convert to shares, etc. In this scenario, the first to be affected will be MSTR's stockholders, followed by the creditors.
Coinciding with the rise in Bitcoin's market this year, MSTR announced the "21/21 Plan" in its Q3 report, which is to raise $42 billion through $21 billion in equity and $21 billion in bonds to purchase Bitcoin over the next three years. So far, this plan has been implemented with $3 billion in convertible bonds and $9.7 billion in equity.
II. The game of financing to buy Bitcoin continues
The market's contradictions with MSTR are mainly focused on two points:
1. Will MSTR get caught in a death spiral in the capital market?
2. Is MSTR's current price too high?
MSTR now defines itself as a Bitcoin financial company, and its stock price is anchored to the Bitcoin price. As mentioned earlier, MSTR intends to control the leverage level through equity financing, and as long as the leverage level is kept within a reasonable range and there are participants in the game, the game can continue to be played.
MSTR's current debt is mainly credit debt, and there is no risk of a margin call. It can be inferred that most of the holders of the private placement bonds are mainly locked in MSTR's stocks, rather than the low-interest bonds with a 5-7 year term (they would lose out even with compound interest).
For example, for the private placement convertible bonds due in 2025, MSTR adjusted the conversion price to $39.8 per share in July this year. This conversion cost (if the creditor's capital cost is not considered) is one-tenth of MSTR's latest stock price, so the choice between retaining the bonds or converting to shares is self-evident. Ultimately, most of the bondholders of this $650 million convertible bond chose to convert to shares, and MSTR only redeemed $3 million, with the pressure ultimately shifting to MSTR's stock.
In any case, these creditors have "made a profit" on paper. As long as market participants can continue to profit from it, the game can certainly continue.
If the creditors one day do not want to convert to stocks and want to be redeemed, MSTR can also redeem them with cash, and in extreme cases, it can even sell Bitcoin. In fact, MSTR has sold Bitcoin before, but it was a "tricky operation":
From November 1, 2022 to December 21, 2022, MicroStrategy's wholly-owned subsidiary MacroStrategy LLC ("MacroStrategy") acquired approximately 2,395 bitcoins for approximately $42.8 million in cash, at an average price of approximately $17,871 per bitcoin.
On December 22, 2022, MacroStrategy sold approximately 704 bitcoins for approximately $11.8 million in cash, at an average price of approximately $16,776 per bitcoin, net of fees and expenses.
On December 24, 2022, MacroStrategy acquired approximately 810 bitcoins for approximately $13.6 million in cash, at an average price of approximately $16,845 per bitcoin, including fees and expenses.
Although this operation resulted in an increase of 2,500 bitcoins, the round-trip operation actually caused some losses. However, this operation proves that MSTR's held bitcoins are not forever unsellable.
Of course, for the creditors, it is best to make money through MSTR's stock, rather than being redeemed, so the stock price is a key factor, which is the valuation issue.
Compared to the scale of Bitcoin it holds, MSTR's original software business is almost negligible. If MSTR is to be valued, the software business and Bitcoin trading business should be valued separately. However, today the software business has little impact and can be almost ignored, just like many shell companies.
However, the valuation of the Bitcoin trading part is not like the valuation of a fund company, because for MSTR, this is neither a client asset management business nor a securities business. MSTR's shareholders may benefit from MSTR's continuous increase in Bitcoin holdings.
Now, MSTR holds 402,000 bitcoins, which, based on the latest Bitcoin price, are worth about $40.2 billion, while MSTR's current total market value is about $82.3 billion, about twice the value of the bitcoins it holds. If one day, the Bitcoin price doubles from the current price or MSTR's Bitcoin holdings double, while MSTR's market value remains unchanged, the total market value/Bitcoin holdings value ratio will become 1.
But there is currently no coordinate axis to refer to, and the current P/E and P/B all need to be compared with the industry, and Bitcoin is also an asset with violent price fluctuations, so the problem is ultimately thrown back to the market for the market to vote on.
Interestingly, MSTR's underwriting team has been growing and becoming more well-known in the past two years. Initially, Jefferies LLC was the only underwriter for its private placement bonds and ATM. Until September 2022, Jefferies LLC was no longer the underwriter, and Cowen and Company, LLC (a subsidiary of Dominion Securities) and BTIG, LLC became the new underwriters. With the expansion of the scale, or perhaps due to the inclusion in the MSCI index, new underwriters joined in August this year, including TD Securities (USA) LLC, Barclays Capital Inc., The Benchmark Company, LLC, Canaccord Genuity LLC, Cantor Fitzgerald & Co., Maxim Group LLC, Mizuho Securities USA LLC, and SG Americas Securities, LLC (a subsidiary of Société Générale).
It is worth noting that according to MSTR's Q3 report, Capital International Investors, Vanguard Group Inc, Morgan Stanley, and Blackrock, Inc. are also increasing their shareholdings and have become its top four institutional shareholders.
In contrast to these institutions rushing in, a well-known short-selling institution - Hindenburg Research - stated on X in November this year that MSTR's current stock price is overheated. "Four years ago, Hindenburg was the first to tell readers that MicroStrategy (MSTR) was the ultimate way to invest in Bitcoin, setting a target of $700. Fast forward to today: MSTR has soared to over $5,000 (adjusted). Hats off to Michael Saylor's visionary Bitcoin strategy... Now, with Bitcoin investment becoming easier than ever, MSTR's trading volume has completely detached from Bitcoin's fundamentals. While Hindenburg remains bullish on Bitcoin, we have hedged our position by shorting MSTR."
III. The public company Bitcoin hoarding trend: Who will be the next MSTR
MSTR's capital operation is the most successful case in this wave of public companies hoarding Bitcoin.
Within the regulatory framework, MSTR first used its own idle funds to purchase Bitcoin, opening up a compliant path for capital to enter the market before the advent of ETFs, and also provided a compliant sample for public companies.
According to the accounting standards compilation ("ASC") 350 on Intangible Assets - Goodwill and Other, MSTR accounted for Bitcoin as an indefinite-lived intangible asset, recorded at cost, and reduced by any impairment losses incurred since acquisition. Additionally, in accordance with ASC 820 Fair Value Measurement, MSTR periodically determines the fair value of Bitcoin based on quoted prices in active markets for the primary exchange, and any impairment losses are recognized as "Digital Asset Impairment Loss" in the company's consolidated income statement, while gains are recorded upon sale and presented net of any impairment losses in the company's income statement.
Following MSTR, other listed companies such as Meitu and Tesla have also started to use their own funds to purchase BTC. After these companies had been following MSTR for some time, the Financial Accounting Standards Board (FASB) finally issued the first cryptocurrency accounting rules in December 2023.
According to statistics from HODL15Capital, currently 60 listed companies have purchased BTC, of which 22 have disclosed holding more than 1,000 BTC, and MSTR's holdings significantly exceed those of other listed companies.
However, apart from MSTR, other listed companies are mainly using their own funds to purchase BTC, or holding BTC due to their business involvement in the crypto-currency and mining sectors. For some large companies on the list, their core business is the dominant factor, and investing a portion of their cash in BTC is more like an allocation of idle funds. But for some small and medium-sized listed companies with weakening core businesses, MSTR has undoubtedly provided a successful capital operation model.
Prior to the launch of its BTC strategy, MSTR was a small and medium-sized company that had suffered from the Internet bubble and had a market value hovering around $1-2 billion for years, with its business scale stagnant. After launching the BTC strategy, MSTR has undergone a transformation, not only having "ample ammunition", but also being included in the MSCI Global Standard Index, and becoming a company with a market value of hundreds of billions of dollars seems to be just around the corner.
