Continue to increase BTC holdings! MSTR's capital operations have sparked a wave of coin hoarding, with 22 listed companies holding over 1,000 coins

Author: Arain, ChainCatcher

Editor: Nianqing, ChainCatcher

This morning, Bitcoin finally broke through $100,000.

Since U.S. Republican presidential candidate Trump announced his victory in the 2024 presidential election, Bitcoin's market has surged, finally breaking through the price range of $70,000-$80,000 per coin, continuously setting new historical highs.

At this moment, it is in the spotlight. "Bitcoin will become one of the national strategic reserve assets of the United States" seems to be a possibility. Regardless of when this possibility materializes, the public capital market has reacted, with companies rushing to announce their purchases of Bitcoin as a reserve asset.

According to incomplete statistics, around 60 listed companies globally hold Bitcoin. According to data from OKLink Research Institute, since the U.S. election situation became clear, 17 listed companies in the U.S. and Japan have announced their holdings or approval of Bitcoin as a strategic asset.

Unlike previous hype around concepts, the concentrated accumulation of Bitcoin with real money, rather than other cryptocurrencies, indicates that the consensus around Bitcoin in mainstream capital markets is continuously strengthening. According to HODL15Capital data, there are currently 22 listed companies worldwide holding more than 1,000 Bitcoins—valued at over $100 million when measured in U.S. dollars.

Among them, the most notable is MicroStrategy, the company with the largest Bitcoin holdings. Its stock price has increased by 114.52% over the past year, and its market capitalization once reached over $100 billion.

According to the 8-K filing released by the company on December 2, it is continuing to increase its Bitcoin holdings through a financing plan totaling $42 billion, resulting in a continuous increase in its Bitcoin holdings.

1. MicroStrategy's Infinite Ammo

On December 1, MicroStrategy founder Michael Saylor stated on X that, based on HODL15Capital statistics, there are currently 60 listed companies that can issue stocks to purchase Bitcoin. The total Bitcoin holdings of these 60 companies amount to 522,565 BTC.

"Issuing stocks to purchase Bitcoin" is not the main strategy for listed companies to accumulate Bitcoin at present. MicroStrategy (MSTR) is a pioneer in this wave of accumulation and remains the company with the most Bitcoin holdings globally.

At the end of 2019, MSTR had approximately $560 million in cash, cash equivalents, and short-term investments. Thus, in August 2020, this business intelligence software developer began purchasing Bitcoin with idle cash. It first acquired 21,454 Bitcoins for $250 million, followed by an additional $50 million to increase its Bitcoin holdings. This move seemed more like a public relations effort for Bitcoin at the time, rather than the attention it receives today, mainly because cash as ammunition would soon run out—unless the bullets were provided by others.

Subsequently, the situation opened up, and MSTR used the capital operation platform of a listed company to flexibly maneuver between "stocks, bonds, and coins," continuously increasing its Bitcoin holdings—even today, it is challenging to find a similar script among the followers.

MSTR now defines itself as a Bitcoin financial company, with its stock price highly correlated with Bitcoin's performance. According to its latest public 8-K filing, MSTR currently holds 402,100 Bitcoins, with a total expenditure of $23.4 billion and an average purchase cost of $58,263 per coin. Apart from a small amount of idle funds, the sources of funds for MSTR's Bitcoin purchases include:

• Approximately $14.8 billion raised through the unique Shelf registration of U.S. listed companies using ATM to issue equity;
• Approximately $7.8 billion obtained through private placements of convertible bonds, of which $500 million in private convertible bonds maturing in 2025 have been converted or redeemed;
• $500 million in privately issued senior secured notes with an annual interest rate of 12.5% (already repaid);
• $205 million in credit guarantees (of which $161 million has been repaid), with Bitcoin collateral released on March 24, 2023.

It can be said that most of MSTR's ammunition comes from ATM equity issuance and private convertible bonds, with ATM currently providing the most ammunition for MSTR.

ATM (at-the-market offering) refers to issuing shares at current market prices through designated brokers after a listed company submits a Shelf prospectus, allowing the issuer to control the timing and scale of each sale and modify it as needed without submitting additional applications.

This model allows for flexible fundraising and theoretically can effectively avoid the significant discount issuance that often occurs in traditional financing. Currently, MSTR's stock price benefits from Bitcoin's price performance, and ATM will also benefit from this; however, if Bitcoin's price falls, MSTR's stock investors' interests will be harmed. The premium of the stock relative to net asset value (Bitcoin) may shrink or even turn into a discount, and continuous ATM may gradually erode the premium, causing the stock price to drop to Bitcoin's actual value.

MSTR's second-largest source of ammunition is private convertible bonds, which often raises market concerns. In fact, the convertible bonds issued by MSTR are all unsecured, priority debt, and convertible bonds mean that investors can convert the bonds into stocks under the terms of the agreement. If most investors choose to "convert," combined with MSTR's consistent use of ATM, MSTR's debt ratio remains within a controllable range, but equity may be significantly diluted. Of course, investors can also choose not to convert within the agreed time and wait for the company to redeem the bonds with principal and interest.

Due to the addition of warrants (options) and other rights, convertible bonds typically have lower coupon rates than ordinary corporate bonds. In the past, most of the convertible bonds issued by MSTR had lower interest rates and higher conversion prices:

1. December 2020 announcement: Issued a total of $650 million in 0.750% convertible bonds, maturing in 2025. The initial conversion price was $397.99 per share, approximately 37.5% premium over the A-class common stock price of $289.45 at issuance;
2. February 2021 announcement: Issued a total of $1.05 billion in 0% convertible bonds, maturing in 2027. The initial conversion price was approximately $1,432.46 per share, approximately 50% premium over the A-class common stock price of $955.00 at issuance;
3. March 2024 announcement: Issued a total of $800 million in 0.625% convertible bonds, maturing in 2030. The initial conversion price was approximately $1,497.68, approximately 42.5% premium over the A-class common stock price of $1,051.01 at issuance;
4. March 2024 announcement: Issued a total of $603.8 million in 0.875% convertible bonds, maturing in 2031. The initial conversion price was approximately $2,337.21 per share, approximately 40% premium over the A-class common stock price of $1,662.1999 at issuance;
5. September 2024 announcement: Issued a total of $1.01 billion in 0.625% convertible bonds, maturing in 2028. The initial conversion price was approximately $183.19 per share, approximately 40% premium over the A-class common stock price of $130.8477 at issuance;
6. June 2024 announcement: Issued a total of $800 million in 2.25% convertible bonds, maturing in 2032. The initial conversion price was approximately $2,043.32 per share, approximately 35% premium over the A-class common stock price of $1,513.46 at issuance;
7. November 2024 announcement: Issued a total of $3 billion in 0% convertible bonds, maturing in 2029, with an initial conversion price of approximately $672.40 per share, approximately 55% premium over the A-class common stock price of $433.7997 at issuance.

(The above conversion prices are subject to anti-dilution adjustments. MSTR executed a 1-for-10 stock split on August 1, 2024, which can be understood as the adjusted conversion price being the conversion price before this date divided by 10.)

Among the convertible bonds issued by MSTR in the past, only the ones announced in February 2021 and November this year were zero-interest convertible bonds, and correspondingly, the conversion premium rates were also high, with Bitcoin being at a high price. Especially in February 2021, Bitcoin was indeed in a high-down phase, followed by about two years of a Bitcoin bear market, during which MSTR did not issue convertible bonds but instead sold stocks through ATM.

From December 2021 to February 2024, Bitcoin prices were relatively low, and MSTR's stock price was also sluggish. During this period, MSTR successively sold stocks worth $1 billion, $500 million (suspended after partial sale), $625 million (suspended after partial sale), $750 million (suspended after partial sale), $750 million, and $2 billion.

It can be seen that in past operations, MSTR did not use the ATM tool to issue new shares at more favorable prices when the stock price was high. On the contrary, when the stock price/Bitcoin market was sluggish, it used equity financing more, while when the stock price/Bitcoin market was booming, it used convertible bond financing. This approach is mainly to control leverage levels.

From this, we can infer two scenarios for MSTR to continue financing and increasing Bitcoin holdings when Bitcoin prices rise or fall:

If Bitcoin prices rise, and MSTR's stock price rises, MSTR will use both stock and bond financing, thus the bond conversion price will be higher, and ATM pricing will be at a high level, allowing MSTR to raise more money to purchase Bitcoin while keeping leverage levels unchanged.

If Bitcoin prices fall, and MSTR's stock price falls, it will pause convertible bond financing and use ATM to maintain leverage levels, but ATM pricing will be affected by market prices. In extreme cases, MSTR can alleviate debt pressure by issuing stocks, or sell Bitcoin to repay debts, or bondholders may choose to convert their bonds into stocks, etc. In this scenario, as long as this game can continue, the first to bear the brunt are MSTR stockholders, followed by creditors.

Coincidentally, with Bitcoin prices rising this year, MSTR announced its "21/21 Plan" during its third-quarter report, which aims to raise $42 billion through $21 billion in equity and $21 billion in bonds to purchase Bitcoin over the next three years. So far, this plan has executed $3 billion in convertible bonds and $9.7 billion in equity.

2. The Game of Financing to Buy Coins Continues

Currently, the market's contradictions regarding MSTR mainly focus on two points:

1. Will MSTR, which is thriving in the capital market, fall into a death spiral?
2. Is MSTR's current price too high?

MSTR now defines itself as a Bitcoin financial company, and in fact, its stock price is anchored to Bitcoin prices. As mentioned earlier, MSTR intends to control leverage levels through equity financing. As long as leverage levels remain within a reasonable range and there are participants willing to play the game, it can continue indefinitely.

MSTR's existing debt mainly consists of credit bonds, with no risk of liquidation. It can also be inferred that most private bondholders primarily lock in MSTR stocks rather than low-interest bonds with 5-7 year terms (which would lose out when considering compound interest).

Taking the private convertible bonds maturing in 2025 as an example, MSTR settled this batch of convertible bonds in July this year, adjusting the conversion price to $39.8 per share. This conversion cost (not accounting for creditors' capital costs) is one-tenth of MSTR's latest stock price, making it clear whether to retain the bonds or convert them into stocks. Ultimately, most bondholders of this total $650 million convertible bond batch chose to convert, with MSTR only redeeming $300,000, shifting the pressure onto MSTR's stock.

Regardless, these bondholders are "profiting" on paper. As long as market participants can continue to gain from this, the game can certainly go on.

If one day the bondholders no longer wish to convert into stocks and want to be redeemed, MSTR can also redeem them with cash, and in extreme cases, it can sell Bitcoin. In fact, MSTR has indeed sold Bitcoin before, but that was a "sneaky operation":

From November 1, 2022, to December 21, 2022, MicroStrategy, through its wholly-owned subsidiary MacroStrategy LLC ("MacroStrategy"), acquired approximately 2,395 Bitcoins for about $42.8 million in cash, at a cost of about $17,871 per coin;

On December 22, 2022, MacroStrategy sold approximately 704 Bitcoins, generating cash proceeds of about $11.8 million, with an average price of about $16,776 per coin after deducting fees and expenses.

On December 24, 2022, MacroStrategy acquired approximately 810 Bitcoins for about $13.6 million in cash, at a cost of about $16,845 per coin, including fees and expenses.

Although the result of this operation was an increase of 2,500 Bitcoins, the back-and-forth operation caused some losses. However, this operation proves that the Bitcoins held by MSTR are not forever unsellable.

Of course, for creditors, it is best to make money through MSTR's stocks rather than being redeemed, so the stock price is a key factor, which is the valuation issue.

Compared to its Bitcoin holdings, MSTR's original software business is almost negligible. If we were to value MSTR, we should separately value the software business and the Bitcoin trading business and then sum them up. However, today, the software business has minimal impact and can almost be ignored, similar to many shell companies.

However, the valuation of the Bitcoin trading part is not like that of a fund company because, for MSTR, this is neither a wealth management business nor a securities business. MSTR stockholders may benefit from MSTR's continuous accumulation of Bitcoin.

Currently, MSTR holds 402,000 Bitcoins, valued at approximately $40.2 billion based on the latest Bitcoin prices. As of the time of writing, MSTR's total market capitalization is approximately $82.3 billion, which is about twice the value of its Bitcoin holdings. If one day, Bitcoin's price doubles from today's price or MSTR's Bitcoin holdings double while MSTR's market capitalization remains unchanged, the ratio of total market capitalization to the value of Bitcoin holdings will become 1.

However, there is currently no reference axis. The existing PE and PB ratios need to be compared with peers, and Bitcoin is also a highly volatile asset, ultimately leaving the question to the market for self-voting.

Interestingly, MSTR's underwriting team has been continuously expanding and becoming more well-known over the past two years. Initially, Jefferies LLC was the only underwriter for its private bonds and ATM. Until September 2022, Jefferies LLC no longer underwrote for it, and Cowen and Company, LLC (part of the Dominion Securities Group) and BTIG, LLC became the new underwriters. With the expansion of scale, perhaps due to being included in the MSCI index, new underwriters joined in August this year, including TD Securities (USA) LLC, Barclays Capital Inc., The Benchmark Company, LLC, Canaccord Genuity LLC, Cantor Fitzgerald & Co., Maxim Group LLC, Mizuho Securities USA LLC, and SG Americas Securities, LLC (affiliated with Société Générale).

Notably, according to MSTR's third-quarter report, Capital International Investors, Vanguard Group Inc, Morgan Stanley, and Blackrock, Inc. are also increasing their stock holdings, now becoming its top four institutional shareholders.

In contrast to these institutions rushing in, a well-known short-selling firm—Citron Capital—stated on X in November this year that MSTR's current stock price is overheated, "Nearly four years ago, Citron was the first to tell readers that MicroStrategy (MSTR) was the ultimate way to invest in Bitcoin, setting a target of $700. Fast forward to today: MSTR has soared to over $5,000 (adjusted). Hats off to Michael Saylor's visionary Bitcoin strategy… Now, as Bitcoin investment becomes easier than ever, MSTR's trading volume has completely detached from Bitcoin's fundamentals. While Citron remains bullish on Bitcoin, we have hedged by shorting MSTR."

3. The Accumulation Wave of Listed Companies: Who Will Be the Next MSTR?

MSTR's capital operation strategy is the most successful case in this wave of listed companies accumulating Bitcoin.

Within the regulatory framework, MSTR was the first to use its idle funds to purchase Bitcoin, paving a compliant path for capital entry before the emergence of ETFs and providing a compliance model for listed companies.

In its third-quarter 2020 financial report, MSTR classified Bitcoin as an indefinite intangible asset according to accounting standards compilation ("ASC") 350 "Intangible Assets—Goodwill and Others," recorded at cost, less any impairment losses incurred since acquisition. Additionally, according to ASC 820 "Fair Value Measurement," the fair value of Bitcoin is determined non-recurring based on active trading quotes on major exchanges, with impairment losses recognized in the company's consolidated income statement as "digital asset impairment losses," while gains are recorded upon sale, and net amounts are presented in the company's income statement after deducting any impairment losses.

Following MSTR, companies like Meitu and Tesla began using their own funds to purchase Bitcoin. After these companies followed MSTR for a period, the Financial Accounting Standards Board (FASB) finally issued the first cryptocurrency accounting rules in December 2023.

According to HODL15Capital statistics, there are currently 60 listed companies purchasing Bitcoin, with 22 of them publicly holding more than 1,000 Bitcoins, and MSTR's holdings have an overwhelming numerical advantage compared to other listed companies.

However, apart from MSTR, other listed companies currently mainly purchase Bitcoin with their own funds or hold Bitcoin due to involvement in cryptocurrency, mining, and other fields. Additionally, for some large companies on the list, their main business dominates, and allocating a portion of cash to invest in Bitcoin seems more like a configuration of idle funds. But for some small and medium-sized listed companies with weakening main businesses, MSTR undoubtedly provides a successful capital operation model.

Before launching its Bitcoin strategy, MSTR was a small to medium-sized company that suffered from the internet bubble, with its market value hovering between $1 billion and $2 billion for years, and its business scale stagnating, barely holding its ground against giant competitors. After launching its Bitcoin strategy, MSTR transformed itself, not only becoming "well-armed" but also being included in the MSCI Global Standard Index, once becoming a company with a market value of over $100 billion.