Interpretation of MSTR's latest financial report: currently holding over 250,000 BTC, will raise $42 billion in the next three years for additional purchases

Author: Alvis, MarsBit

Historically, whenever a traditional industry reaches its peak, some groundbreaking companies often emerge, finding unique "production methods" in the market's crevices and attracting capital with their distinctive strategies. These companies rarely "produce" actual goods but concentrate resources on a core asset—like Shell Oil Company in the past, which maintained its valuation through oil reserves, or gold mining companies that dominated prices through gold extraction and reserves. This morning, the financial report from MicroStrategy showcased such a company again: it is not known for "production," yet it has broken traditional valuation rules with its massive investment in Bitcoin, becoming one of the largest and most unique Bitcoin holders in the world.

From Software Company to Bitcoin Whale: The Transformation Journey of MicroStrategy

MicroStrategy (MSTR) originally built its empire on business intelligence software, but founder Michael Saylor hit the gas in 2020, directly entering the "fast lane" of Bitcoin. From that year on, Saylor no longer allowed the company to remain in traditional "production" but recognized the potential of Bitcoin as a core asset, gradually converting the company's reserves into Bitcoin, even betting his own fortune, step by step transforming MicroStrategy into a "Bitcoin bank." In Saylor's eyes, Bitcoin is the gold of the digital world and the anchor point for the future of global finance. Some think he is crazy, while others call him a "zealous evangelist" of Bitcoin, but he firmly believes he is securing a "new gold standard" for the company.

Saylor does not intend to follow the old path; he positions MicroStrategy more like "air freight": compared to the "ground logistics" of traditional ETFs, MicroStrategy raises funds through bonds, loans, and equity issuance to directly purchase Bitcoin, making it flexible and efficient, while also chasing the upward momentum of the Bitcoin market. This has made MicroStrategy not just a stock code but a "fast target" in the Bitcoin market, with the company's market value directly linked to the rise and fall of Bitcoin. Saylor's actions have sparked considerable controversy, with well-known investor Peter Schiff even mocking on social media platform X, "The company doesn't produce any products, yet it achieves a high market value by hoarding Bitcoin." He pointed out that MicroStrategy's market value has surpassed most gold mining companies, second only to Newmont Corporation.

In response, Saylor's reply is quite simple: "Bitcoin is our future reserve asset." Driven by this firm belief, MicroStrategy has accumulated over 250,000 Bitcoins and plans to raise $42 billion over the next three years to continue increasing its holdings. MicroStrategy's "production" method is not traditional material manufacturing but rather building a new financial system around Bitcoin's "infrastructure."

Some say Saylor is gambling, but perhaps this is not just a gamble but a kind of faith. He has carved out an alternative path through a risky venture, making MicroStrategy an alternative target in the financial market. As he said, "We do not produce; we just 'hoard Bitcoin.'"

MSTR Latest Financial Report Interpretation: Capital Growth and Bitcoin Reserves Increase

1. Overview of Financial Report and Financing Plans

The financial report released by MicroStrategy presents a favorable outlook. The company plans to raise $42 billion over the next three years to continue increasing its Bitcoin holdings and has completed the repurchase of previously pledged Bitcoins. As of the report date, MicroStrategy holds a total of 252,220 Bitcoins.

Since the end of the second quarter of 2024, the company has purchased an additional 25,889 Bitcoins at a total cost of approximately $1.6 billion, with an average price of $60,839 per Bitcoin. Currently, the company's total market value is approximately $18 billion, with a cumulative purchase cost of Bitcoin amounting to $9.9 billion, averaging about $39,266 per Bitcoin. The company has also raised $1.1 billion through the sale of Class A common stock and an additional $1.01 billion through the issuance of convertible bonds maturing in 2028, while repaying $500 million of senior secured notes, releasing all Bitcoin assets from collateral. This release of collateral significantly enhances the company's financial flexibility and reduces its risk under extreme market conditions.

2. Cash Reserves and Future Financing Goals

MicroStrategy currently holds $836 million in cash, providing stable funding support for further Bitcoin purchases. The company has also announced phased financing goals: $10 billion in 2025, $14 billion in 2026, and $18 billion in 2027, totaling $42 billion. CEO Michael Saylor's plan aims to strengthen the company's core asset reserves through incremental Bitcoin acquisitions, which is undoubtedly viewed by the market as positive rather than negative news.

3. Market Value and Book Value

As of October 29, 2024, MicroStrategy's market value is approximately $18 billion, with a book value of $6.9 billion, which has deducted $3 billion in cumulative impairment losses. The impairment is not due to MicroStrategy selling Bitcoin but is based on book adjustments under current accounting standards. According to accounting regulations, if Bitcoin's market price falls in a given quarter, the company must lower the book value of these assets and recognize an impairment loss. However, even if the price rebounds later, the book value does not automatically recover; it can only reflect appreciation upon sale. If future accounting standards are modified (such as the FASB's fair value measurement being implemented), this issue may improve.

4. Flexibility Advantages of Bitcoin as a Core Asset

As a core asset, Bitcoin provides MicroStrategy with greater capital operation flexibility compared to spot ETFs. The company operates its Bitcoin reserves similarly to how oil companies manage their oil reserves. Just as oil companies handle unrefined and refined products (such as gasoline, diesel, and aviation fuel), MicroStrategy views its Bitcoin reserves as a capital preservation tool, allowing the company to enhance productivity and implement innovative financial strategies through this core asset.

5. MicroStrategy's Principles for Holding Bitcoin

MicroStrategy has established eight core principles for holding Bitcoin, reflecting its long-term investment strategy and market orientation:

• Continuously purchase and hold Bitcoin, focusing on long-term gains;
• Prioritize the long-term value of MicroStrategy common stock;
• Maintain transparency and consistency with investors;
• Utilize smart leverage to ensure the company's performance exceeds the Bitcoin market;
• Adapt quickly and responsibly to market dynamics, ensuring continuous growth;
• Issue innovative Bitcoin-backed fixed-income securities;
• Maintain a healthy and robust balance sheet;
• Promote Bitcoin as a global reserve asset.

6. Differences Between MicroStrategy and Bitcoin Spot ETFs

Compared to Bitcoin spot ETFs, MicroStrategy's uniqueness lies in its financing methods. ETF investors must actively purchase ETF shares, while MicroStrategy raises funds through equity, unsecured or secured debt, convertible bonds, and structured notes to directly increase its Bitcoin holdings. This "equity financing" model allows the company to actively raise funds to achieve its long-term strategic holding of Bitcoin.

The Cycle of Capital and High Premium Rates: The Valuation Code of MicroStrategy

The Higher the Premium Rate, the More Suitable for Large-Scale Financing

MicroStrategy's valuation model relies on market value premium rates, using equity dilution financing to increase Bitcoin (BTC) holdings and enhance the per-share BTC holding, thereby boosting the company's market value. Here is a detailed analysis of this model:

Simplified Analysis of Premium Rate and Enhancement Effect

Assuming the price of Bitcoin is $72,000, MicroStrategy holds 252,220 BTC, with a total holding value of approximately $18.16 billion. With the current company market value at $48 billion, MicroStrategy's market value is 2.64 times the total value of its Bitcoin holdings, resulting in a current premium rate of 164%.

Assuming the company's total equity is currently 10,000 shares, each share corresponds to approximately 25.22 BTC.

If MicroStrategy plans to raise $10 billion through a new share issuance, the total equity after the issuance will become 12,083 shares (calculated by dividing the financing amount of $10 billion by the current market value of $48 billion, resulting in 0.2083 times, meaning the equity will increase by 20.83%, making the total equity approximately 12,083 shares). In this case, the company can use $10 billion to purchase approximately 138,889 Bitcoins at $72,000 each, increasing the total Bitcoin holdings to 391,109. Thus, the per-share BTC holding will also increase to 32.37 BTC (391,109 Bitcoins divided by 12,083 shares), representing an enhancement of about 28%.

Similarly, if planning to raise $42 billion

Further assuming MicroStrategy increases its equity by 87.5%, meaning it raises $42 billion by issuing 8,750 new shares, the total equity after the issuance would increase to 18,750 shares (calculated by multiplying 10,000 shares by 1.875 times). If the company purchases Bitcoin at $72,000, it could acquire approximately 583,333 BTC, bringing the total holdings to 835,553 Bitcoins. At this point, the per-share BTC holding would increase to 44.23 BTC (835,553 Bitcoins divided by 18,750 shares), an increase of about 75% compared to the previous 25.22 BTC.

If this enhancement effect is realized within three years, the average annual enhancement would be 25%.

Of course, the Bitcoin price will fluctuate during the final reinvestment, potentially higher or lower, but this will not change the enhancement conclusion. Given MicroStrategy's extremely high premium rate (currently fluctuating around 180%-200%), the company should maximize financing by leveraging the premium rate. Therefore, CEO Michael Saylor's $42 billion financing plan, although initially causing market panic, quickly saw market sentiment recover, indicating the company's clear understanding of the current model, which is a rational decision that maximizes shareholder equity.

MicroStrategy's Advantages and the Logic Behind High Premium Rates

Many investors may wonder why the market is willing to purchase MicroStrategy's ATM or convertible bonds at a high premium rather than directly buying Bitcoin ETFs. This involves several unique advantages of MicroStrategy:

Continuous Enhancement of Returns

By continuously financing to enhance BTC reserves, MicroStrategy has achieved an annualized return enhancement of 6%-10%, with a 17% annualized enhancement realized so far in 2024. Under the current high premium rate financing model, the annualized enhancement is expected to exceed 15%. Based on a valuation of 10 to 15 times, MicroStrategy's premium rate corresponds to a valuation of 150%-225%.

Volatility and Market Bridge

Michael Saylor believes that MicroStrategy acts as a bridge between traditional capital markets and the Bitcoin market. Currently, Bitcoin's market value is approximately $1.4 trillion, with relatively low penetration. If penetration increases, even if only 1% of the $300 trillion global bond market allocates funds to Bitcoin, it could bring about $3 trillion in potential incremental funds to MicroStrategy. Additionally, the convertible bonds issued by the company not only provide some downside protection but also offer potential options for Bitcoin price appreciation.

Conclusion: The Self-Reinforcing Effect of High Premium Rates in Bull Markets

In a bull market environment, MicroStrategy's valuation model and high premium rate financing model create a self-reinforcing positive cycle. The higher the premium rate, the larger the company's financing amount, thereby enhancing each share's BTC reserves and further boosting the company's market value. This market effect rolls forward like a snowball, especially with Bitcoin prices expected to rise to the $90,000-$100,000 range, MicroStrategy may continue to accelerate under the protection of high premium rates.

Michael Saylor's bets and the market's response seem to indicate a subtle game between traditional finance and digital assets. In this dual contest of capital and technology, will MicroStrategy achieve a financial revolution, or will it merely be a fleeting moment? What we are witnessing may be a harbinger of future financial transformation.