A Detailed Breakdown of MicroStrategy: Enhanced Version of "Grayscale + Luna"

Author: 0xjs, Golden Finance

Bitcoin breaks $80,000! Bitcoin breaks $90,000! Bitcoin breaks $95,000! Bitcoin breaks $99,000!

Clearly, Bitcoin is bound to soon break the $100,000 mark.

Common sense tells us that the direct reason for a significant price increase is that someone is buying in large quantities with real money, after all, "Money Talks."

In this round of the crypto bull market, there is a significant differentiation among crypto tokens, with the two standout sectors being Bitcoin and Solana. The rise of Solana is mainly driven by crypto players flocking to memes, while the rise of Bitcoin is primarily fueled by buying funds from the U.S. Bitcoin ETF and some listed companies, especially MicroStrategy. This article mainly focuses on MicroStrategy.

On November 21, Golden Finance reporters spent an evening browsing through the documents submitted by MicroStrategy to the U.S. SEC since 2021, deeply analyzing MicroStrategy's behavior and funding sources for buying Bitcoin. The conclusion is that MicroStrategy is an enhanced version of "Grayscale + Luna."

First, let's look at the overall situation of MicroStrategy, then break down the funding sources for MicroStrategy's Bitcoin purchases, and finally compare Grayscale and Luna. Here we go.

MicroStrategy Fearless of Bull and Bear: Spending Over $16 Billion to Firmly Buy Bitcoin

Since implementing its Bitcoin reserve strategy in September 2020, MicroStrategy has steadfastly executed its Bitcoin reserve strategy through market cycles, unafraid of bull and bear markets, such as buying Bitcoin for over $59,000 in April and November of 2021.

MicroStrategy Continues to Buy BTC

Golden Finance reporters found that as of November 22, 2024, MicroStrategy has spent a total of $16.58 billion to buy Bitcoin, currently holding 331,000 Bitcoins, with a market value of nearly $33 billion.

Since the successful issuance of the Bitcoin ETF in January 2024, the Bitcoin managed by Bitcoin ETFs has exceeded 1.24 million, with a total asset value surpassing $120 billion and a net inflow of approximately $30.3 billion. The Bitcoin ETF is an investment target for many investors, not just from a single investor.

It seems that MicroStrategy may be the single entity that has spent the most on buying Bitcoin.

So the question arises, where does all this funding for MicroStrategy's Bitcoin purchases come from?

Golden Finance reporters reviewed the reports submitted by MicroStrategy to the U.S. SEC, and its funding primarily comes from two sources: Convertible Senior Notes and At-the-Market Equity Offerings.

Among them, Convertible Senior Notes are aimed at qualified institutional investors, while At-the-Market Equity Offerings are directly aimed at the secondary market.

Convertible Senior Notes: $7.26 Billion from Qualified Institutional Investors

Here are the notes issued by MicroStrategy since 2020. Except for the $500 million senior secured debt issued in June 2021, the rest are Convertible Senior Notes.

On November 21, 2024, MicroStrategy issued a new $3 billion convertible bond that can be used at any time to buy Bitcoin. Perhaps in the last day or two, when MicroStrategy uses this $3 billion to buy Bitcoin, it will coincide with Bitcoin breaking the $100,000 mark.

Understanding what Convertible Senior Notes are, you will find that they are indeed a good financial instrument.

Convertible Senior Notes are a special type of debt security that includes an option to convert the notes into a predetermined number of shares of the issuer's stock. If the stock price rises, it can be converted into shares; if the stock price is low, it will be repaid with interest. Moreover, Convertible Senior Notes have priority over all other debt securities issued by the same organization and can receive preferential compensation. Therefore, it is a bond with high returns on top and a guaranteed bottom.

Importantly, Convertible Senior Notes generally come with a mandatory redemption clause. After the specified non-redeemable period or when the early redemption clause is triggered, the issuer can initiate mandatory redemption. Before the specified redemption date, investors need to convert the convertible bonds into company stock; otherwise, the issuer has the right to forcibly redeem the convertible bonds at the face value plus accrued interest. In most cases, investors will actively convert them into stock.

Taking MicroStrategy's already redeemed 2025 Convertible Notes as an example, the maturity date for the 2025 Convertible Notes is December 15, 2025. However, on June 13, 2024, MicroStrategy announced that holders of the 2025 Convertible Notes could choose to convert their notes into 2.5126 shares of MicroStrategy Class A common stock per $1,000 principal amount at the applicable conversion rate (reflecting a conversion price of $397.99 per share) before 5:00 PM New York time on July 11, 2024. Otherwise, MicroStrategy would forcibly redeem all outstanding notes on July 15, with the redemption price equal to the principal plus accrued unpaid interest.

On that day, MicroStrategy's stock price was around $1,300 (MicroStrategy completed a 1:10 stock split on August 8, and the $1,300 price reflects the pre-split price), and clearly, creditors would choose to convert their debt into stock. After obtaining the stock, creditors complete the arbitrage.

Why are institutional investors eager to buy MicroStrategy's convertible bonds? Because the risk is minimal, essentially guaranteeing a profit, and the Convertible Senior Notes have priority claims. Currently, MicroStrategy's total convertible bond liabilities are $7.26 billion, while the market value of the Bitcoin held by MicroStrategy is nearly $33 billion. Even if Bitcoin drops by 75%, the creditors of MicroStrategy's convertible bonds will not lose money.

It can be said that the most important motivation behind convertible bonds is that the issuer encourages investors to actively choose to convert their debt into stock, thus allowing the issuer to avoid using cash to repay the debt.

At-the-Market Equity Offerings: Nearly $10 Billion from the Secondary Market

Here are the market stock issuance data from MicroStrategy since 2020. Over the past four years, MicroStrategy has raised a total of $9.8235 billion directly in the secondary market through the issuance of new shares, and all these funds have been used by MicroStrategy to buy Bitcoin.

At-the-Market Equity Offerings refer to follow-on stock issuances conducted by a public company after its IPO to raise funds. In ATM offerings, the public company sells newly issued stock to the secondary trading market gradually over a period of time at the current market price through designated brokers. The brokers sell the issuing company's stock in the open market to obtain cash proceeds, which are then delivered to the issuing company.

Using MicroStrategy's ATM Equity Offering as an example, on August 1, 2024, MicroStrategy signed a sales agreement ("August 2023 Sales Agreement") with brokers including TD Securities (USA), The Benchmark Company, BTIG, Canaccord Genuity, Maxim Group, and SG Americas Securities. According to this agreement, MicroStrategy can issue and sell its Class A common stock through the sales agents from time to time, with a maximum issuance of $2 billion worth of stock. According to the 8-K document provided by MicroStrategy to the U.S. SEC on November 11, 2024, MicroStrategy issued a total of 7,854,647 shares, raising $2.03 billion, which was used to buy 27,200 Bitcoins.

On October 30, 2024, MicroStrategy announced its 21/21 plan, stating that it aims to raise $42 billion in capital over the next year, including $21 billion in equity and $21 billion in fixed-income securities, to invest in Bitcoin. On the same day, MicroStrategy disclosed that it had reached a sales agreement with TD Securities (USA), Barclays Capital, The Benchmark Company, BTIG, LLC, Canaccord Genuity, Cantor Fitzgerald & Co., Maxim Group, Mizuho Securities USA, and SG Americas Securities to issue $21 billion worth of MicroStrategy stock at market price. The 8-K document submitted by MicroStrategy to the SEC on November 18, 2024, shows that between November 11 and 17, MicroStrategy sold 13,594,000 shares, raising approximately $4.6 billion, which was used to buy 51,780 Bitcoins.

According to MicroStrategy's plan, brokers still have about $16.4 billion worth of newly issued MicroStrategy shares available for sale.

Why is MicroStrategy an Enhanced Version of "Grayscale + Luna"?

Now that we are familiar with MicroStrategy's "Convertible Notes" and "At-the-Market Equity Offerings," let's recall how similar they are to Grayscale and Luna from the last bull market, but in an enhanced version.

Grayscale Vs. Convertible Notes:

Looking back at Grayscale's operating mechanism before it converted to an ETF, Grayscale trust shares were only issued to qualified investors, who purchased GBTC shares (the underlying assets of the Grayscale trust must be corresponding Bitcoin assets) with over-the-counter cash or exchanged physical Bitcoin for GBTC shares, completing arbitrage after a 6-month lock-up period. Meanwhile, GBTC shares and the underlying Bitcoin assets were isolated, and investors could not redeem them.

MicroStrategy's Convertible Senior Notes are also aimed at qualified investors, who buy convertible bonds with over-the-counter cash and convert them into MicroStrategy stock upon mandatory redemption to complete arbitrage. The Convertible Senior Notes are also isolated from MicroStrategy's Bitcoin.

During the Bitcoin bull markets of 2020 and 2021, the premium of GBTC attracted a large amount of arbitrage capital, and GBTC once accumulated over 650,000 Bitcoins, which many industry insiders referred to as the "obvious bull market."

In this bull market, MicroStrategy has already attracted over $7 billion from qualified institutional investors through its convertible bonds, and MicroStrategy's 21/21 plan is preparing to issue more bonds.

The difference is that MicroStrategy's convertible bonds have a long maturity date, with the nearest maturity date being in 2027, which is sufficient to last until the next cycle. If needed, MicroStrategy can completely force the redemption of convertible bonds, allowing investors to convert the bonds into nearly zero-cost newly issued MicroStrategy stock, without MicroStrategy actually needing to repay the debt. Even if they wait until the maturity date to redeem, MicroStrategy can issue new convertible bonds to replace the old ones, just as MicroStrategy used cash from the 2024 Convertible Notes issued on September 20, 2024, to redeem the 2028 Secured Notes. Clearly, MicroStrategy's convertible bonds are more robust.

Luna Vs. At-the-Market Equity Offerings:

In the Luna case, burning $1 of LUNA could mint $1 of the algorithmic stablecoin UST. As long as the price of LUNA rises, more UST can be minted, and with more UST, more Bitcoin can be purchased as reserves to stabilize 1 UST = 1 USDT. Luna was directly available to ordinary investors without permission.

MicroStrategy's At-the-Market Equity Offerings are very similar, also directly aimed at ordinary investors in the secondary market. The higher MicroStrategy's stock price, the more dollars it can obtain through At-the-Market Equity Offerings, and the more dollars can be used to purchase more Bitcoin. "Left foot stepping on the right foot" continues to rise. After the Bitcoin ETF was approved in January 2024, establishing a bull market, MicroStrategy's net asset premium (market price per share / corresponding Bitcoin value - 1) has climbed to 2.7. Currently, MicroStrategy holds a total of 331,200 Bitcoins, valued at approximately $32.84 billion, while MicroStrategy's total market value once exceeded $100 billion.

Luna and UST could be minted in both directions; if UST decoupled, arbitrageurs could buy UST at a discount and mint LUNA at 1 UST = 1 USDT, forming a "death spiral" that caused LUNA to collapse. In fact, if the Luna Foundation Guard had bought Bitcoin earlier and in larger quantities during the upcycle (it only bought $1.5 billion worth of Bitcoin), and if UST could temporarily mint LUNA in one direction, Luna might not have collapsed.

MicroStrategy goes a step further; its At-the-Market Equity Offerings are one-directional and will not fall into a death spiral, and are almost at zero cost. MicroStrategy is clearly safer than Luna. Even during the bear market of 2022, MicroStrategy's net asset premium was at least 60%.

Source: mstr-tracker

As long as someone is willing to buy MicroStrategy stock issued at market price, the more Bitcoin MicroStrategy buys during its high NAV premium period, the thicker MicroStrategy's safety cushion becomes. Taken to the extreme, MicroStrategy's market value could equal its Bitcoin market value, and MicroStrategy itself would not bear any risk, as the risk has already been transferred to the stock investors.

In summary, can we say that MicroStrategy is an enhanced version of "Grayscale + Luna"?

Conclusion: Triple Maximism

At the Bitcoin conference held in Nashville at the end of July 2024, MicroStrategy CEO Michael Saylor delivered a keynote speech on the "Bitcoin Revolution."

After four years of practice, he proposed a methodology for individuals, companies, institutions, and nations to respond to the Bitcoin revolution, introducing a triple maximism strategy. For companies, it means buying Bitcoin through three avenues—cash flow, issuing stock when the stock price is overvalued, and issuing debt when interest rates are low.

He said it and he did it.

MicroStrategy has already accumulated 331,200 Bitcoins.