Another BTC ETF: Behind MicroStrategy's Continuous Large Purchases of Bitcoin

Original: 《Why does the publicly traded company MicroStrategy continue to buy Bitcoin in large quantities?》

Author: AKIRA.H, CoinPost

Compiled by: Aya, Odaily Planet Daily

The Public Company with the Most Bitcoin Holdings

As a pioneer in the business intelligence (BI) industry, MicroStrategy has provided innovative products to thousands of companies. In recent years, a seemingly incredible investment strategy has driven its stock price further up.

The company's co-founder Michael Saylor purchased $250 million worth of Bitcoin in August 2020 as part of a capital allocation strategy. This bold strategy was based on expectations of Bitcoin's potential high returns and its appeal as a hedge against inflation. As a result, MicroStrategy's stock price has increased nearly threefold compared to the beginning of 2020.

Trust in the company's Bitcoin investments has been steadily increasing, and as of July 2023, its holdings exceeded 150,000 BTC, making it the largest holder among publicly traded companies. Now, MicroStrategy's stock (MSTR) has become a proxy investment tool for Bitcoin, attracting the attention of large institutional investors such as BlackRock, Vanguard Group, Morgan Stanley, and Fidelity.

This article will explore MicroStrategy's Bitcoin investment strategy, financial status, and Michael Saylor's vision, compiled by Aya from Odaily Planet Daily.

Table of Contents

• Overview of MicroStrategy

• Changes in MicroStrategy's BTC Holdings

• Funding for BTC Purchases and Financial Status

• Michael Saylor's Vision

• Major Shareholders of MicroStrategy

Overview of MicroStrategy

MicroStrategy, headquartered in Virginia, USA, was founded in 1989 by MIT graduates Michael Thaler and Sanju Bansal.

After providing a platform for enterprises to efficiently analyze and visualize business data, the company achieved stable growth and went public on NASDAQ in 1998 (Ticker: MSTR).

As a pioneer in the business intelligence (BI) field, MicroStrategy offers enterprise-level analytics solutions and mobile software. With these innovative products, thousands of organizations worldwide can gain data-driven decision-making insights.

In the BI sector, MicroStrategy's main competitors include SAP AG Business Objects, IBM Cognos, and Oracle Corporation's BI platform.

A noteworthy trend is that in June 2023, MicroStrategy partnered with Microsoft to expand its products on Microsoft Azure and enhance AI capabilities. Through this collaboration, customers can achieve a comprehensive solution for managing and analyzing data in the cloud, enabling faster and more accurate decision-making.

MicroStrategy's revenue primarily comes from licensing and subscription fees for cloud services, with sales in the first quarter of 2023 (January-March) amounting to approximately 16.8 billion yen ($121.9 million), a year-on-year increase of 2.2%. Sales and operating profits have remained stable over the past few years.

However, the situation is different when it comes to stock prices. Since the beginning of 2020, MicroStrategy's stock price has risen about threefold, primarily due to the company's purchase of Bitcoin in August 2022 as part of its capital allocation strategy.

Since then, the company has continuously increased its Bitcoin holdings, and as of July 2023, its holdings have surpassed 150,000 Bitcoins, making it the largest holder among publicly traded companies. MicroStrategy's stock price (MSTR) is closely correlated with Bitcoin price fluctuations.

When Bitcoin prices fell by 60% in 2022, MSTR's stock price also dropped by about 35%. However, entering 2023, the situation changed, with the stock price rising from around 19,000 yen (approximately $145) at the beginning of the year to about 56,000 yen (approximately $400) as of July 11.

MSTR Stock Price (Yellow), BTC Price (Candlestick), NASDAQ 100 Index (Blue) Source: Trading View

When MicroStrategy first purchased Bitcoin, the price was around $11,700, and MSTR's stock price was about $144. However, as of July 2023, the price of Bitcoin has nearly tripled to around $30,300, while MSTR's stock price has also increased by 2.7 times.

Over the past five years, MicroStrategy (MSTR) has significantly outperformed the S&P 500 index and has also outperformed Meta and Amazon.

Changes in MicroStrategy's Bitcoin Holdings

Source: Ecoinometrics

Since August 2020, MicroStrategy has been an active Bitcoin buyer, purchasing Bitcoin more than 25 times over the past three years.

This pace of purchasing continued into 2023, with an additional purchase of 1,045 Bitcoins on April 5 of the same year. Subsequently, on June 28, they made a large-scale purchase of 12,333 Bitcoins worth approximately 50 billion yen ($347 million).

Through these transactions, MicroStrategy's total Bitcoin holdings amount to 152,333 BTC (approximately $4.6 billion), with a total investment of about 650 billion yen ($451.7 million). To date, the average price at which the company purchased Bitcoin is $29,668.

Considering the current market price of Bitcoin is around $30,000, MicroStrategy's unrealized gains and losses on its Bitcoin investments have slightly turned positive. This is a significant improvement compared to the impairment loss of approximately 27.1 billion yen ($197.6 million) recorded in the fourth quarter of 2022.

MicroStrategy BTC Purchase History

Funding for BTC Purchases and Financial Status

MicroStrategy purchases and holds Bitcoin directly and indirectly through its wholly-owned subsidiary MacroStrategy. The funding for Bitcoin purchases comes from operating funds, loans, issuing corporate bonds, and new funds raised in the stock market, known as "public offerings."

Source: Buy Bitcoin Worldwide

In the first quarter of 2023, MicroStrategy focused on improving its financial structure, including fully repaying Bitcoin-backed loans. MicroStrategy's long-term liabilities decreased from 23.78 billion yen to 21.75 billion yen.

Currently, MicroStrategy's main long-term liabilities are as follows:

Source: MicroStrategy

・ Convertible bonds maturing in 2025, interest rate: 0.75%: $650 million (October 2020)
・ Convertible bonds maturing in 2027, interest rate: 0%: $1.05 billion (February 2021)

Convertible corporate bonds are bonds that have the right to be converted into stock under certain conditions (conversion options). By issuing convertible corporate bonds, MicroStrategy can raise capital without diluting equity and use the proceeds for Bitcoin purchases.

The interest rates on the convertible bonds held by MicroStrategy are low, ranging from 0% to 0.75%, and as long as they are not delisted from NASDAQ or the New York Stock Exchange, they do not face the risk of being required to repay in full early, thus being excluded from risk.

・ Secured junk bonds (high-yield bonds) maturing in 2028, annual interest rate 6.125%: $500 million (June 2021)

As part of the collateral for this loan, MicroStrategy held 14,890 Bitcoins at the end of September 2022, with a liquidation line at a Bitcoin price of approximately 500,000 yen ($3,561). This liquidation line still has some margin, and MicroStrategy does not face direct risks from the Bitcoin market.

However, the loan interest accumulates twice a year, which may put pressure on MicroStrategy's performance. As of September 2022, MicroStrategy had paid approximately 3 billion yen ($22 million) in Bitcoin-related interest. This is not a small amount compared to the company's "cash and cash equivalents" balance (which was $94.3 million as of March 31, 2023).

Additionally, the fully repaid secured loan in the first quarter of 2023 was a secured loan reached with Silvergate Bank in March 2022, maturing in 2025. At that time, MicroStrategy borrowed $820 million, using 19,466 Bitcoins as collateral. MicroStrategy prepaid approximately $161 million, fully repaying this secured long-term debt.

Furthermore, in the first quarter of 2023, MicroStrategy sold its own stock in the open market, generating approximately $339 million in net income. About $179.39 million of this was used to purchase Bitcoin.

On the other hand, MicroStrategy's total assets reached $3.0264 billion in the first quarter of 2023, an increase from $2.41027 billion in the previous quarter. This growth was mainly due to a significant increase in digital assets (from $1.84002 billion to $2.0392 billion) and a substantial increase in deferred tax assets (from $188.15 million to $651.51 million).

Michael Saylor's Vision

MicroStrategy's co-founder Michael Saylor is considered a leader in Bitcoin investment strategy. In August 2020, Saylor judged that Bitcoin was a superior investment against inflation compared to other investments and had the potential for higher returns. Therefore, he purchased approximately $250 million worth of Bitcoin as part of a capital allocation strategy.

Saylor stated at the time: "Investing in Bitcoin is part of a new capital allocation strategy aimed at maximizing long-term shareholder value; Bitcoin is an attractive investment asset and a reliable store of value with long-term appreciation potential."

Even after the Bitcoin market entered a bear market in 2022, MicroStrategy remained committed to expanding its Bitcoin holdings, and their commitment has not wavered. Despite facing criticism, Saylor clearly stated: "We will continue to increase our Bitcoin holdings and do not intend to sell."

Additionally, on August 8, 2022, Saylor resigned as CEO of MicroStrategy to become executive chairman. He stated that this decision would allow MicroStrategy to focus more on its Bitcoin-related work.

Now, Saylor has expressed his bullish outlook, stating: "As regulatory clarity emerges, it will become easier for institutional investors to participate. If we rebuild our business around Bitcoin, its advantages will be further enhanced."

The U.S. Securities and Exchange Commission (SEC) considers most cryptocurrencies (tokens) to be unregistered securities, but it relatively clearly views Bitcoin as a commodity. According to CoinMarketCap data, Bitcoin's market share has risen from 43% at the end of February 2023 to about 49.9% now.

BTC Market Capitalization Market Share Source: CoinMarketCap

In recent years, MicroStrategy has been actively committed to Bitcoin adoption, including developing new products related to Bitcoin layer two scaling solutions, known as the "Lightning Network." Here are its major movements:

2021/5/25 Why the community fears the "Bitcoin Mining Council" established by North American mining companies (Related article)

2022/4/27 MicroStrategy will offer a fixed contribution pension for Bitcoin investments to employees (Related article)

2022/12/30 MicroStrategy will provide enterprise solutions for the Bitcoin Lightning Network (Related article)

2023/4/1 MicroStrategy allows sending Bitcoin via company email (Related article)

Major Shareholders of MicroStrategy

MicroStrategy's Bitcoin investment strategy serves as a bridge between mainstream investment institutions and Bitcoin.

As a leading business intelligence (BI) company, MicroStrategy's major shareholders include well-known institutional investors such as BlackRock, the largest asset management firm globally, and Vanguard Group, the second-largest asset management company.

Reportedly, in January 2020, financial giant Morgan Stanley acquired 11.9% of MicroStrategy's shares. Additionally, according to reports from the first quarter of 2023, Fidelity, with an asset management scale exceeding $4.5 trillion, significantly increased its holdings in MicroStrategy, making both companies among the top ten shareholders of MicroStrategy.

According to the quarterly report 13F submitted to the SEC, BlackRock holds about 6% of MicroStrategy, equivalent to over $2.2 billion. Furthermore, Fidelity increased its holdings of MicroStrategy shares by 650,000 shares in the first quarter of 2023, with a holding ratio of 6.79%.

Source: cnnmoney

This trend is not limited to the United States but is seen globally. Canada's sixth-largest bank, the National Bank of Canada, purchased over $500,000 worth of MicroStrategy stock in the first quarter of 2023, increasing its holdings by 8.8%.

For investment institutions, purchasing MicroStrategy stock (MSTR stock) is a very convenient way to gain exposure to Bitcoin. Therefore, some believe that MSTR stock effectively acts as a Bitcoin ETF.