The strategy of "issuing bonds to buy coins" hasn't changed, so why has MSTR's premium suddenly surged?

BlockBeats
2024-10-31 19:20:48
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Recently, the premium of MSTR has soared, mainly due to MicroStrategy's "new weapon," which has not only impacted MSTR's fundamentals but also made MSTR "more valuable as it is sold."

Author: CMed, Jack, BlockBeats

In the past few days, both the US stock market and the crypto market have been dazzled by MSTR. In the latest wave of Bitcoin's market, MSTR not only led the surge but also maintained a premium growth over Bitcoin for a period of time afterward, with its price soaring from around $120 a week or two ago to the current $247.

Regarding MSTR's explosive growth, most interpretations in the market still revolve around "leveraged Bitcoin." However, this seems insufficient to explain why MSTR's premium suddenly surged despite the fundamentals of "issuing bonds to buy coins" remaining unchanged. After all, MicroStrategy has been buying Bitcoin for many years, and such a rise in premium has never been seen before.

In fact, the recent surge in MSTR's premium, in addition to "issuing bonds to buy coins," can also be attributed to another secret weapon of MicroStrategy, which has had a tremendous impact on MSTR's fundamentals and has even been referred to by many analysts as MicroStrategy's "infinite printing machine," making MSTR "more valuable the more it sells."

Leveraged Bitcoin? A Common Topic

MicroStrategy, as a company focused on business intelligence software, adopted an aggressive strategy starting in 2020: raising funds through bond issuance to purchase Bitcoin. This strategy began in August 2020 when the company announced the conversion of $250 million of its treasury reserve assets into Bitcoin. The primary motivation behind this strategy was to address challenges posed by declining cash return rates and the devaluation of the dollar due to global macroeconomic factors.

To further expand its Bitcoin holdings, MicroStrategy financed itself through long-term bonds in the capital markets in earlier years. These bonds typically have long maturities, most maturing in 2027-2028, with some even being zero-coupon bonds. This allowed the company to maintain low financing costs over the coming years and quickly use the bond financing obtained to purchase Bitcoin, directly adding it to the company's balance sheet.

According to data from Bitcoin Treasuries, as of now, MicroStrategy holds 1.2% of the total circulating supply of Bitcoin, making it the publicly listed company with the largest Bitcoin holdings, far exceeding Bitcoin mining companies like Marathon, Riot, and leading crypto trading platform Coinbase, which are more "crypto-native" in their business operations.

Through bond financing, MSTR has continuously increased its Bitcoin holdings, which not only increases the number of Bitcoins on its balance sheet but also creates a significant upward pressure on Bitcoin's market price. As the proportion of Bitcoin in MSTR's portfolio continues to rise, the positive correlation between the company's stock market value and Bitcoin's price has further strengthened. According to MSTR Tracker, the correlation coefficient between MSTR's stock price and Bitcoin's price recently surged to 0.365, setting a historical high.

This correlation makes investors willing to buy MSTR's stock while being optimistic about Bitcoin, further driving up the company's market value. Of course, after four years of market and time testing, MSTR's "leveraged Bitcoin effect" has long been a common topic; whenever MSTR's price rises, people always use the logic of "issuing bonds to buy coins" to explain it.

However, in the recent Bitcoin market, MSTR's market price not only rose ahead of Bitcoin but also maintained an increasingly high premium over Bitcoin for a period afterward. This has left many investors puzzled: why did the premium suddenly spike when the fundamentals remained unchanged?

Premium Issuance: "More Valuable the More It Sells," MSTR's Cheat Code

First, let's take a look at how exaggerated MSTR's recent premium has been. According to MSTR Tracker, MSTR's premium over Bitcoin surged once between February and March of this year, rising from about 0.95 to 2.43 before falling back to around 1.65. The second rapid increase began just before the recent rise in Bitcoin's price, climbing from 1.84 to a peak of 3.04, currently maintaining around 2.8.

It can be seen that although MicroStrategy has been accumulating Bitcoin over the past four years, its NAV (Net Asset Value) premium has not shown significant growth, remaining at a 1:1 ratio for a long time.

So what exactly caused MSTR's premium to soar? Did the fundamentals of MicroStrategy's "issuing bonds to buy coins" change?

The answer is: yes. This fundamental change is called "premium issuance." Since the middle to late last year, MicroStrategy adopted a new way of buying Bitcoin, namely through issuing and selling its own MSTR stock to purchase more Bitcoin. This "selling stock to buy coins" strategy may sound very foolish at first, as it could hurt the stock price and even threaten MSTR's market positioning as "leveraged Bitcoin."

However, upon closer analysis of its logical chain, one will find that this new model of "selling stock to buy coins" is simply MSTR's super flywheel and MicroStrategy's infinite printing machine.

First, it is necessary to explain the concept of "Net Asset Value premium" (NAV). Since MSTR holds a large amount of Bitcoin through bond issuance, and the market has strong expectations for Bitcoin's future price increase, the value of MSTR's stock often exceeds the value of the Bitcoin it holds. This premium is referred to as "Net Asset Value premium," reflecting the market's expectations for the company's future expansion of Bitcoin holdings and serving as a support point for MSTR's continuous stock issuance to purchase Bitcoin.

On the other hand, when Bitcoin's price rises, MicroStrategy's market value also increases accordingly, forcing various index funds to increase their purchases of MSTR based on weight considerations, further driving up its price and market value.

At this point, due to the existence of the "Net Asset Value premium," MSTR can begin its "premium issuance" operation. By continuously issuing new shares, it can obtain more funds to purchase Bitcoin, driving up Bitcoin's price, and the rise in Bitcoin further enhances the company's market value and financing capacity, allowing this cycle to continue. This strategy creates a "Reflexive Flywheel Effect."

In MicroStrategy's "Reflexive Flywheel Effect," the most ingenious point is that the issuance of new shares not only does not negatively impact MSTR's price but actually makes MSTR more valuable.

When MicroStrategy issues new shares to purchase Bitcoin, the newly issued shares are typically traded at a price higher than their Net Asset Value. With this premium, MicroStrategy can buy more Bitcoin than what each share of MSTR truly represents when selling each share.

For example, based on the correlation coefficient between MSTR and Bitcoin, 36% of the value of each share of MSTR symbolizes the Bitcoin backed by the company. Without any premium, when MicroStrategy sells MSTR, it can only exchange for 36% of Bitcoin from the market. However, currently, MSTR's premium over Bitcoin is around 2.74, meaning that every time MicroStrategy sells a share of MSTR, it can exchange for about 98% of Bitcoin.

This means that the company can use funds above the net asset value of Bitcoin to increase its Bitcoin holdings, thereby expanding its Bitcoin position on the balance sheet. The core of this strategy is that MSTR enhances the speed and scale of its Bitcoin holdings through high premiums, and this speed far exceeds the previous "issuing bonds to buy coins" speed.

Once the flywheel is in motion, the increasingly high market value of MSTR is also included in the investment scope of US stock indices, attracting more incremental funds and generating more Net Asset Value premium. Part of the reason for MSTR's decoupling from BTC in the third quarter is also due to the market pricing in that MSTR would be included in the Nasdaq 100 index, bringing in a large amount of passive fund inflow.

US stock index investors will be "forced" to invest in MSTR, returning to the reflexive flywheel, leading to a greater Net Asset Value premium, enabling MSTR to raise more funds to increase its Bitcoin holdings, pushing up Bitcoin's price, and enhancing the market's optimistic expectations for MSTR. The company's weight in the index may increase, triggering further buying demand from index funds, forming a self-reinforcing positive feedback loop, overall creating a pressure flywheel for index buying.

From a larger time dimension, the amount of BTC equivalent held by each share of MSTR is continuously increasing, which not only enhances the market's recognition of MSTR as a "Bitcoin alternative investment tool" but also raises the pricing expectations for MSTR.

"There Will Be More MSTR in the US Stock Market"

In recent weeks, MicroStrategy CEO Michael Saylor has become increasingly high-profile, proclaiming on various podcasts and news programs that "there will be more MSTR in the US stock market" and that "the mechanism of MSTR is simply 'infinite financial silver printing failure.'"

Saylor believes that MSTR's "Reflexive Flywheel" model has strong capital operation potential. This model not only continuously accumulates Bitcoin but also maintains its growth through financing and rising stock prices, demonstrating how publicly listed companies can leverage asset premiums and capital market financing capabilities for long-term expansion. This model is not merely a traditional "buy and hold" strategy but a proactive way to utilize capital market advantages to expand the balance sheet. This mechanism could become a model for other companies to emulate, especially in resource-intensive or capital-intensive industries. In fact, many companies have emerged that mimic MSTR's partial asset operations.

Currently, this seemingly "left foot stepping on the right foot" model appears to be quite feasible. According to current data, for every $2.713 of stock issued by MSTR, only $1 is used to purchase Bitcoin. Many believe that Saylor is leveraging high leverage to go long on Bitcoin to a large extent to "outperform" Bitcoin, but in reality, MSTR's health is quite high; it is estimated that MSTR only faces liquidation risk if Bitcoin's price falls below $700.

At present, this mechanism seems to be operating smoothly, with MSTR continuously increasing its BTC holdings. However, as this mechanism becomes more widely used, it will undoubtedly cause US stock indices to be influenced more by crypto assets and their related derivatives. This mechanism acts like a rope, tying the cryptocurrency market and the US stock market together, leading to profound changes in the market. For the cryptocurrency market, it undoubtedly introduces a large amount of liquidity from the US stock market (mainly absorbed by BTC), while for the US stock market, it seems to exacerbate volatility risks.

According to Saylor's (the founder of MSTR) vision, by the year 2050, the price of Bitcoin will reach $500,000 per coin. He hopes that by then, MSTR will become a trillion-dollar company, better applying itself in driving cryptocurrency deeper into people's lives. Whether this seemingly "perfected Ponzi scheme" model can operate until then may require subsequent markets to test.

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