Recently, the price of Bit has been experiencing violent fluctuations around the $100,000 mark, especially after surging to $104,000 last week, it plunged to $90,500, which many believe is a signal of emotional topping and loosening of positions. Some well-performing institutional investors have started to choose to gradually withdraw, for example, Meitu has cleared all its crypto assets, and the market is worried that this profit-taking trend may accelerate.
Just as the market sentiment is generally bearish, MicroStrategy has bucked the trend and announced on Monday that it has purchased $2.1 billion worth of Bit. This aggressive strategy, while injecting a shot in the arm into the market, has also sparked controversy over the sustainability of its investment strategy. The market is concerned that if the price of Bit continues to plummet, MicroStrategy may get into trouble, which could trigger a black swan event that would ripple through the entire crypto market.
MicroStrategy: Bit Holding Giant and Market Aggressive Pusher
As the listed company that holds the most Bit globally, MicroStrategy's strategy has always been closely watched. Data shows that the circulation of Bit is becoming increasingly concentrated in the hands of a few major institutions. Excluding Satoshi Nakamoto, the top five Bit holding entities control 9.9% of the circulation. Among them, Coinbase holds 1.12 million BTC, worth over $112 billion; Binance holds 687,000 BTC, worth nearly $68.9 billion; BlackRock, Microstrategy and Bitfinex are ranked third to fifth respectively. Excluding Satoshi Nakamoto, the top ten holding entities currently control about 14.82% of the total Bit circulation. The holding positions of these institutions directly affect the market trend.
Compared to other institutions, MicroStrategy's investment strategy is particularly aggressive. If the Bit price increase in the $40K-$70K range was driven by ETFs, then the increase in the $70K-$100K range was inseparable from MicroStrategy's push. MicroStrategy is known as the "perpetual financing machine", and its strategy of increasing positions has played a key role in the rise of Bit prices.
MicroStrategy's goal is to acquire as many BTC as possible using prudent leverage to increase its stock price and outperform Bit itself. As of December 8, 2024, MicroStrategy holds a total of 423,650 Bit, with a total investment of about $25.6 billion and an average cost of $60,324. So far this year, its quarterly Bit return rate has reached 43.2%, and the year-to-date return rate is 68.7%. At the same time, MicroStrategy's stock price performance has far exceeded Bit, with a year-to-date increase of 613%, becoming the hottest "Bit shadow stock".
MicroStrategy stock price
MicroStrategy Bit holdings
MicroStrategy's Infinite Capital Model
MicroStrategy (MSTR) is a US-listed software company that went "All in BTC" in 2020. Initially, it purchased Bit through its own cash flow, and later mainly raised funds through the issuance of convertible senior notes, continuously making large-scale purchases of Bit. These notes usually have a fixed maturity date and a relatively low interest rate. As the price of Bit rises, the value of MSTR's Bit assets increases, thereby pushing up its stock price, forming a positive feedback loop. Through continuous debt issuance and Bit purchases, MSTR has established a self-reinforcing capital chain.
This financing model of MSTR has the characteristics of low risk and high return. Convertible notes are essentially a contract with a free call option embedded. For creditors, this is a risk-free business: if Bit falls and MSTR has money, creditors can get their money back; if Bit falls and MSTR has no money, creditors can still have the final bottom line, that is, convert to stocks and realize the principal. If Bit rises, MSTR will rise, and they can exercise the conversion to get more stock returns. At worst, if MSTR goes bankrupt, they are still "higher-ranking" than ordinary stocks, and the holders can benefit first in the event of bankruptcy or liquidation.
MSTR's strategy has achieved tremendous success. Since the company fully invested in Bit, its stock price has soared, with an annualized return rate of 80%, and the stock has risen more than 2600% since August 2020, with a current market value of nearly $93 billion, far outperforming Bit itself and all other major US stocks.
The impressive performance has put MSTR on a relentless path of attracting global capital and investing in Bit. On October 30, while announcing its third-quarter results, MSTR announced a "21/21 Plan", which is to raise $42 billion through $21 billion in equity and $21 billion in notes over the next three years to purchase more Bit. So far in November, MSTR has invested about $13.5 billion to increase its BTC holdings through this model, accounting for 32% of the total "21/21 Plan" funds, demonstrating the market's strong confidence in MSTR.
Will MicroStrategy Become a Crypto Black Swan?
In recent years, the crypto market has experienced many fluctuations and violent crashes, especially the bankruptcies of Luna and FTX, which have made investors particularly sensitive to the risks of similar companies.
MSTR currently has a market value of $93 billion, about 2.2 times its Bit holdings (Q3 core business revenue is only $116.1 million). When Bit rises, the stock price soars, and the financing ability is strong, forming a positive feedback loop. But once Bit price enters a volatile or downward phase, it will continuously erode market confidence in the subsequent BTC price development, which will in turn affect the stock price, and this will be translated into doubts about MSTR's financing ability. Under the resonance of these two, the premium of MSTR will converge rapidly. This valuation difference is also the reason why funds like Muddy Waters are shorting MSTR's stock.
It is well known that leverage is a double-edged sword. If the BTC price drops, the worst-case scenario for MSTR may be that it has to sell its Bit holdings to repay its debts, triggering a "vicious death spiral". Fortunately, MSTR's debts are unsecured and do not directly depend on its Bit holdings. Although the company has previously issued notes secured by Bit, as of the third quarter of 2024, these notes have all been repaid. In addition, its earliest debt maturity is not until February 2027, so there is no major repayment pressure in the short term.
In terms of annual interest repayment, MSTR's total debt is currently about $7.3 billion, with an average interest rate of only 0.476%, resulting in an annual interest expense of about $34.6 million, which is relatively manageable.
In other words, MSTR is borrowing off-exchange leverage, without a forced liquidation mechanism. Theoretically, even if MSTR's stock price is crushed to zero, it still does not need to be forced to sell these Bit. However, for MSTR's CEO Michael Saylor, the long-term value of the company is far higher than the value of the Bit it holds. After multiple rounds of additional issuance, his equity stake is not high at present, so if the company faces bankruptcy and liquidation, he would not be able to get much Bit, which forces him to bear the responsibility of managing the company's market value. When MSTR's price-to-earnings ratio is undervalued due to panic, it is a profitable move to sell Bit for cash and then repurchase MSTR from the market.
Whether MSTR is the guardian of Bit or the creator of risks ultimately depends on the performance of Bit. At present, it does not seem to face major direct risks, and its financing is also progressing smoothly. However, Bit's price cycle has always been consistent with its 4-year halving cycle, and according to historical patterns, 2025 will still be a very anticipated year, but the possibility of a bear market afterwards is relatively high, at which time MSTR's risk level will increase.
Summary
Against the backdrop of the current Bit price facing a correction, MicroStrategy's strategy of increasing its holdings has injected confidence into the market, but it has also raised profound doubts about its sustainability. Although MicroStrategy's risks currently appear to be under control, the future trend of the Bit price will determine whether it will be a guardian of Bit or a creator of risks. For investors, timely assessment of potential risks, especially when Bit enters an adjustment cycle, has become a crucial issue for risk management.
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