MicroStrategy’s (MSTR) net asset value premium to its Bitcoin ( BTC ) holdings has grown to its highest in three years, reaching approximately 270% as of Oct. 14, according to MSTR-Tracker .

MicroStrategy NAV premium to its Bitcoin holdings. Source: MSTR-Tracker.com

The NAV premium is measured after dividing MSTR’s market capitalization by the value of its Bitcoin holdings. A higher NAV, therefore, shows that holding a share of MSTR has provided investors with a yield 2.7 times higher than simply holding Bitcoin directly.

Key factors explaining why the MicroStrategy stock is trading at a premium to its Bitcoin holdings include leveraging and free cash flows from its software business.

MSTR leverage creates premium vs. Bitcoin holdings

MicroStrategy uses leverage, using financial instruments such as at-the-market equity offerings (ATM) and convertible senior notes , to amplify its Bitcoin holdings.

As of Oct. 14, it held around $3.91 billion in long-term debt, with a market cap of $35 billion. This shows that its assets are 1.1 times leveraged relative to its equity.

In simpler terms, for every $1 of equity, MSTR controls $1.1 of assets (mainly Bitcoin), thanks to its use of debt.

Related: Leveraged MicroStrategy ETFs break $400M as ‘hot sauce arms race’ heat up

Suppose Bitcoin’s value increases by 10%. Without leverage, MicroStrategy’s Bitcoin holdings would also increase by 10%, and so would its stock price. But because MSTR uses debt, it controls more Bitcoin than it could with its own money (equity).

Source: X

So, when Bitcoin goes up 10%, the company’s overall asset value increases more—about 11% instead of 10%, suggesting that MSTR’s NAV premium comes from leverage.

MicroStrategy’s software business

Although often overlooked, MicroStrategy’s software business generated around $111 million in revenue in the second quarter, with steady subscription revenue growth. That provides a cash flow base to service its debt and sustain its BTC acquisition strategy.

MicroStrategy’s Q2 earnings key metrics. Source: Bloomberg

While the software side is not the primary focus, it contributes to MSTR’s overall ability to operate its Bitcoin strategy without selling BTC to cover debt obligations, thereby maintaining its BTC holdings and NAV premium.

Bitcoin “macro strategy” liked by MSTR investors

Lastly, market confidence in CEO Michael Saylor’s aggressive BTC acquisition strategy is high. Since adopting Bitcoin as its primary treasury asset in August 2020, MSTR has consistently outperformed Bitcoin and most traditional stocks.

For instance, MSTR has increased by 1,700% since purchasing its first Bitcoin. Meanwhile, BTC’s returns in the same period have been around 500%, prompting analyst Maartunn to call it “Bitcoin on steroids.”

MSTR vs. BTC performance since MicroStrategy’s first acquisition in August 2020. Source: X

Top US stock indexes, such as the S&P 500 and the Nasdaq Composite, have delivered returns of approximately 80% and 70%, respectively.

Investors are willing to pay a premium for MSTR because they expect the company to continue increasing its BTC holdings over time, particularly if BTC enters another bullish phase.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.