A Quick Guide to MSTR MicroStrategy's Bitcoin Strategy

Original Article Title: "Understanding MicroStrategy's Bitcoin Strategy in One Article"

Original Article Author: 0xCousin, IOBC Capital

In the history of Wall Street, legendary stories have never been lacking, but MicroStrategy's Bitcoin Treasury Company's strategic transformation journey is destined to become a unique new legend.

A Globally Spotlighted Bitcoin Strategy

In 2020, the COVID-19 pandemic triggered a global liquidity crisis, with countries adopting loose monetary policies to stimulate the economy, leading to currency devaluation and heightened inflation risks.

During the COVID-19 pandemic, Michael Saylor reevaluated the value of Bitcoin. He believed that with the currency's supply growing at a rate of 15% per year, people needed a hedging asset not tied to fiat cash flow. Therefore, he chose a Bitcoin strategy for MicroStrategy.

Compared to BTC ETFs launched by companies like BlackRock or other Spot Bitcoin ETPs, MicroStrategy's Bitcoin strategy is more aggressive. It purchases Bitcoin through corporate idle funds, issuing convertible bonds, share offerings, and other financing methods to gain potential gains from Bitcoin's rise while bearing potential risks from Bitcoin's fall, whereas ETFs/ETPs focus more on price tracking.

MicroStrategy's Funding Sources and Bitcoin Acquisition Journey

MicroStrategy mainly raised funds to purchase Bitcoin through four avenues.

1. Purchases Using Corporate Cash

For the initial three investments, MicroStrategy used its idle corporate cash for purchases. In August 2020, MicroStrategy invested $250 million to buy 21,400 Bitcoins; in September, it invested $175 million to buy 16,796 Bitcoins; in December, it invested $50 million to buy 2,574 Bitcoins.

2. Issuance of Convertible Senior Notes

To purchase more Bitcoin, MicroStrategy began using convertible bond issuance to finance its purchases.

Convertible Senior Notes are a financial instrument that allows investors to convert the bond into company stock under specific conditions. These bonds have a low or even zero-interest rate and a conversion price set higher than the current stock price. Investors are willing to purchase such bonds mainly because they provide downside protection (i.e., the bond's maturity guarantees the principal and interest) and potential gains when the stock price rises. MicroStrategy's issued convertible bonds mostly have interest rates between 0% and 0.75%, indicating that investors are confident in MSTR's stock price increase, hoping for the bonds to convert into stocks to earn more returns.

3. Senior Secured Notes

In addition to convertible senior notes, MicroStrategy has also issued $489 million of Senior Secured Notes due in 2028 with a 6.125% interest rate.

Senior Secured Notes are a type of collateralized bond with lower risk compared to convertible senior notes, but they only provide a fixed interest return. The batch of Senior Secured Notes issued by MicroStrategy has already been selected for early redemption.

4. At-the-Market Equity Offerings

As MicroStrategy's Bitcoin strategy began to show results, MSTR's stock price continued to rise. MicroStrategy opted for more At-the-Market Equity Offerings to fund its initiatives. This funding method carries lower risk as it is not debt, there is no repayment pressure, and there is no specific repayment date in sight.

MicroStrategy has entered into At-the-Market offering agreements with structures such as Jefferies, Cowen and Company LLC, and BTIG LLC. Under these agreements, MicroStrategy can periodically issue and sell its Class A common stock through these agents. This is what is commonly known in the industry as an ATM.

At-the-Market Equity Offerings provide greater flexibility, allowing MicroStrategy to choose the timing of selling new shares based on secondary market conditions. While issuing stock dilutes existing shareholder equity, the market's response to this measure has been complex due to factors such as its correlation with Bitcoin prices, the increase in MSTR's per-share Bitcoin holdings, leading to higher overall volatility in MSTR's stock price.

MicroStrategy's journey of purchasing Bitcoin through the four methods above is as follows:

Production: IOBC Capital

In the corresponding BTC price chart, MicroStrategy's specific purchase history is shown in the following image:

Source: bitcointreasuries.net

As of December 30, 2024, MicroStrategy has invested approximately $27.7 billion, acquiring 444,262 bitcoins at an average price of $62,257 per bitcoin.

Key Issues Regarding MicroStrategy's "Intelligent Leverage" Bitcoin Purchase

There has been much controversy in the market regarding MicroStrategy's "Intelligent Leverage" strategy for purchasing Bitcoin. In response to several key issues that are widely discussed in the market, I will share my thoughts:

1. How High is MSTR's Leverage Risk?

Let me start with the conclusion: it is not very high.

Based on the information disclosed by MSTR during the Q3 2024 earnings call, at that time, MSTR's total assets were approximately $8.344 billion. Because the Bitcoin carrying value in this financial report was only $6.85 billion (at that time, only 252,220 coins calculated at a price of $27,160), and the total debt was around $4.57 billion, the corresponding debt-to-equity ratio was 1.21.

We will not discuss this accounting standard, only consider the data at the time of actual sale, which reflects the latest market price. If we calculate based on the latest market price of Bitcoin on September 30, 2024 ($63,560), the actual market value of Bitcoin held by MSTR would be $16.03 billion, resulting in a MSTR debt-to-equity ratio of only 0.35.

Now, let's look at the data as of December 30, 2024.

As of December 30, 2024, MicroStrategy's total outstanding debt was $7.27385 billion, as follows:

Produced by: IOBC Capital

As of December 30, 2024, MicroStrategy held 444,262 Bitcoins, valued at $42.25 billion. Assuming that the rest of MicroStrategy's assets remain the same (i.e., $1.49 billion), then MSTR's total assets would be $43.74 billion, with liabilities of $7.27385 billion, resulting in a debt-to-equity ratio of only 0.208.

Let's take a look at the debt-to-equity ratios of some top U.S. listed companies—Alphabet 0.05, Twitter 0.7, Meta 0.1, The Goldman Sachs Group 2.5, JPMorgan Chase & Co. 1.5.

MicroStrategy is a company that has transitioned from the software industry to the financial industry, and its debt-to-equity ratio is still healthy.

2. Under what circumstances will these convertible bonds become an unbearable burden in the future?

Let's start with the conclusion: If MicroStrategy does not continue to issue convertible bonds in the future, then only if the price of Bitcoin falls below $16,364 in the long term, the value of MicroStrategy's 444,262 BTC holdings will be lower than the total amount of its convertible bonds of $7.27 billion. If MicroStrategy only uses ATM financing and idle funds to buy coins in the future without issuing more convertible bonds, as the amount of Bitcoin held by MicroStrategy increases, this "underwater" price line can become even lower.

If MicroStrategy continues to issue convertible bonds frantically to buy Bitcoin at a high price and Bitcoin enters a bear market, causing the value of MicroStrategy's Bitcoin holdings to fall below the total amount of its convertible bonds, it will also cause MSTR's stock price to slump, thereby affecting its refinancing ability and debt repayment capacity, eventually turning the convertible bonds into an unbearable burden.

Holders of MicroStrategy's convertible bonds have the right to convert their bonds into MSTR's stock, which is divided into 2 stages: 1. Initial stage - If the bond's trading price drops by>2%, the bondholder can exercise the conversion option, convert the bond into MSTR shares, and sell to recoup the principal; if the bond's trading price remains normal or even rises, the bondholder can sell the bond in the secondary market at any time to recoup the principal. 2. Later stage - When the bond is about to mature, the 2% rule no longer applies, and the bondholder can either take the cash and leave or directly convert the bond into MSTR shares.

Since MicroStrategy's issued convertible bonds are all low-interest or even zero-interest bonds, it is clear that bondholders are actually looking for a conversion premium. If, on the repayment date, the MSTR stock price has increased compared to the price at the time of financing, then the bondholders are more likely to consider converting the bonds into shares. If the MSTR stock price has decreased compared to the price at the time of financing, then the bondholders will consider receiving the principal and interest.

If bondholders do not choose to convert into MSTR shares and actually need repayment, MicroStrategy also has several options:

· Continue to issue new shares to raise funds for repayment;

· Continue to issue new bonds to repay the old ones; (This was done in September 2024)

· Sell some of the Bitcoin to use for repayment.

Therefore, at present, the likelihood of MicroStrategy falling into an "underwater" situation is not high.

3. Why are investors starting to care about MSTR's per-share coin holdings?

Let's start with the conclusion: Per-share coin holdings will determine MSTR's per-share net asset value.

Whether through issuing convertible bonds or ATM offerings, financing is achieved through share dilution. The purpose of this financing is to increase the Bitcoin reserve. For MSTR shareholders, share dilution is a negative signal, traditionally speaking, not a favorable development. The story MicroStrategy's management tells its shareholders is the BTC Yield KPI.

In essence, as long as MSTR's market capitalization is higher than the total value of the held BTC, creating a market value premium, diluting MSTR's shares to buy BTC can increase MSTR's per-share coin holdings. An increase in MSTR's per-share coin holdings means an increase in MSTR's per-share net assets. Therefore, for shareholders, diluting shares to finance the purchase of Bitcoin is still a worthwhile endeavor.

Currently, MicroStrategy holds 444,262 BTC, with a total holding value of approximately $42.256 billion. With MSTR's current market capitalization at $80.37 billion, MSTR's market cap is 1.902 times the Bitcoin holding value, resulting in a current premium of 90.2%. Currently, MSTR has a total share count of 24 million, with each share corresponding to approximately 0.0018 BTC.

This is the essence of "intelligent leverage," converting the difference between its corporate market value and Bitcoin holding market value into a capital operation advantage.

4. Why has MicroStrategy been more aggressive in buying Bitcoin in the past two months?

Let's start with the conclusion: It may be because MSTR's stock price is very high.

In the past two months, MicroStrategy has significantly increased the scale of its coin acquisition through financing. In November and December 2024, MicroStrategy invested a total of $17.69 billion (representing 63.8% of the total investment amount) in purchasing 192,042 bitcoins (representing 43.2% of the total purchase amount) through ATMs and convertible bond offerings. Only $3 billion was from convertible bonds, while the remaining $14.69 billion was financed through ATMs.

Overall, MicroStrategy's strategic allocation of Bitcoin appears to have characteristics of dollar-cost averaging over time. However, in terms of quantity and amount, it seems to be more aggressive in buying during a bull market than in a bear market.

I couldn't understand this feature and could only make a bold guess. It might be because during the bull market, MSTR's stock price saw a higher increase. In August 2024, after a stock split, MSTR's stock price tripled, with a more than fourfold increase throughout the year, while Bitcoin only saw a 2.2-fold increase this year.

MicroStrategy's CEO discussed a beautiful "42B Plan" during the Q3 2024 earnings call.

British author Douglas Adams said in "The Hitchhiker's Guide to the Galaxy" that the supercomputer Deep Thought provided the answer "42" as the ultimate answer to "Life, the Universe, and Everything."

MicroStrategy considers this a magical number and has thus proposed the 42B financing plan. 21 is also a magical number as Bitcoin's maximum total supply is 21M. Therefore, MicroStrategy plans to issue 21B ATM + 21B Fixed Income in the next three years to continue accumulating Bitcoin.

If MicroStrategy eventually raises $42 billion through share issuance, assuming an issuance at a $330 share price, the total share capital post-issuance would become 371.3 million shares. Assuming MicroStrategy buys Bitcoin at an average price of 100,000 USD, the company could acquire 420,000 bitcoins, bringing MicroStrategy's total holdings to 864,262 bitcoins. At that point, the bitcoin holdings per share would increase to 0.00233, a growth of about 29.4%. At this time, MSTR's total market capitalization would be $1,225.3 billion, with the total value of BTC holdings at $864 billion. In this scenario, a market value premium would still exist.

5. What Will Drive Bitcoin's Price Up After MicroStrategy?

Starting with a conclusion, besides publicly traded companies buying Bitcoin driven by MicroStrategy, the only other significant potential driver is more national-level strategic reserves, but expectations shouldn't be too high in this bull market cycle.

During this cycle, some of the major Bitcoin buyers are:

1. Long-Term Holders with Strong Consensus on Bitcoin

Bitcoin's long-term uptrend doesn't need a reason; in the eyes of BTCers, it's as natural as monkeys climbing trees or mice digging holes because it is digital gold.

After Bitcoin fell below $16,000, at that time, the most mainstream Antminer S17 series miners were shut down near the shutdown price, and miners like the Whatsminer M30S, Whatsminer M30S, and Antminer T19 had already reached the shutdown coin price range. In this price range, even if nothing happens, a bounce will occur. The bull-bear transition is like a basketball falling freely from a height, bouncing sequentially weaker after hitting the ground.

Source: glassnode

As can be seen from the above chart, by the end of 2022, Long Term Holders continue to accumulate.

After more than a decade of development, the Bitcoin consensus has become strong enough, with on-chain hodlers and Long Term Holders reaching a consensus near the mainstream miner shutdown price.

2. ETF Bringing Incremental Capital from Traditional Financial Markets

Since the introduction of BTC ETFs, a total of 528.6k BTC have been net inflowed. In this bull market cycle, ETFs have brought nearly 36 billion in incremental buying pressure to Bitcoin, and 2.6 billion to ETH.

Source: coinglass.com

Furthermore, the approval of BTC ETFs (and ETH ETFs) will also have a driving effect, with more traditional financial institutions starting to pay attention to and enter the Crypto space.

3. MicroStrategy Continues to Buy, Multiple Public Companies Follow Suit, Davis Double Click

According to Bitcointreasuries data, as of December 30, 2024, 149 entities collectively hold over 2.95 million BTC. This data is still growing rapidly in recent times.

Source: bitcointreasuries.net

Among these entities holding Bitcoin, there are 73 public companies, 18 private companies, 11 countries, 42 ETFs or Funds, and 5 DeFi protocols.

MicroStrategy was the first public company to adopt a "Bitcoin Treasury Company" strategy, but not the only one. Other public companies such as Marathon Digital Holdings, Riot Blockchain, Boyaa Interactive International Limited, among others, have also implemented this strategy. However, MicroStrategy still has the largest impact.

4. National Strategic Reserves

Currently, some governments hold Bitcoin. Specific details are as follows:

Source: bitcointreasuries.net

Although these countries hold Bitcoin, most of the Bitcoin was seized by law enforcement agencies during law enforcement processes. It is temporarily not being sold and does not belong to a stable Holder.

Among these countries, perhaps only El Salvador is a true BTC Holder. Since 2021, El Salvador has been buying Bitcoin, purchasing 1 BTC per day. As of now, they hold 6,002 BTC, valued at over $560 million.

Furthermore, Bhutan holds 11,688 BTC through Bitcoin mining. However, Bhutan is not considered a BTC Holder and has recently reduced its holdings in the past two months.

During his election campaign, former U.S. President Trump once stated that if he were elected president, he would establish a strategic Bitcoin reserve.

If MicroStrategy paved the way, one could argue that there is no greater force to drive Bitcoin's rise than Trump taking office and pushing for a U.S. government Bitcoin strategic reserve, subsequently leading to more countries strategically reserving Bitcoin.

Conclusion

MicroStrategy's Bitcoin strategy is not just a corporate transformational business experiment but also a significant innovation in financial history. Through clever capital operations, intelligent leverage, and a profound insight into Bitcoin's value, it has not only achieved brilliant market value growth for itself but has also more profoundly brought Bitcoin into the traditional financial landscape, breaking down the barriers between crypto assets and mainstream capital markets.

MicroStrategy's bold attempt may only be the prelude to Bitcoin's legend or perhaps an insignificant step in Bitcoin's true rise, but it could be a significant step toward a new financial era.

References:

https://www.microstrategy.com/press/microstrategy-announces-third-quarter-2024-financial-results-and-announces-42-billion-capital-plan_10-30-2024

https://www.hope.com/for-corporations

https://bitcointreasuries.net/

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