The market is facing adjustments; can MicroStrategy maintain its "perpetual motion machine" model?

Recently, the price of Bitcoin has been fluctuating sharply around the $100,000 mark, especially after spiking to $104,000 last week and then crashing to $90,500, which many believe signals a peak in sentiment and a loosening of positions. Some highly profitable institutional investors have begun to gradually exit, such as Meitu, which has liquidated all of its crypto assets, raising concerns that this wave of profit-taking could accelerate.

Amidst the generally bearish market sentiment, MicroStrategy has gone against the trend, announcing on Monday that it has purchased an additional $2.1 billion worth of Bitcoin. This aggressive strategy, while injecting a boost into the market, has also sparked controversy regarding the sustainability of its investment strategy. The market is worried that if Bitcoin prices continue to plummet, MicroStrategy could find itself in trouble, potentially triggering a black swan event that affects the entire crypto market.

MicroStrategy: The Bitcoin Holding Giant and Market Aggressor

As the publicly traded company with the largest Bitcoin holdings globally, MicroStrategy's strategy has always attracted attention. Data shows that the circulation of Bitcoin is increasingly concentrated in the hands of a few large institutions. The top five Bitcoin holding entities, excluding Satoshi Nakamoto, control 9.9% of the circulating supply. Among them, Coinbase holds 1.12 million BTC, worth over $112 billion; Binance holds 687,000 BTC, worth nearly $68.9 billion; BlackRock, MicroStrategy, and Bitfinex rank third to fifth, respectively. Excluding Satoshi, the top ten holding entities currently control about 14.82% of the total Bitcoin circulating supply. The holdings of these institutions directly influence market trends.

Compared to other institutions, MicroStrategy's investment strategy is particularly aggressive. If the rise of Bitcoin in the $40K-$70K range was driven by ETFs, then the increase in the $70K-$100K range was largely propelled by MicroStrategy. MicroStrategy is known as the "perpetual financing machine," and its accumulation strategy has played a key role in the rise of Bitcoin prices.

MicroStrategy aims to use prudent leverage to acquire as much BTC as possible, boost its stock price, and outperform Bitcoin itself. As of December 8, 2024, MicroStrategy holds a total of 423,650 Bitcoins, with a cumulative investment of about $25.6 billion and an average cost of $60,324. This year, its quarterly BTC yield has reached 43.2%, with a year-to-date yield of 68.7%. At the same time, MicroStrategy's stock performance has far exceeded Bitcoin, rising 613% this year, making it the best-performing "Bitcoin shadow stock."

MicroStrategy Stock Price

MicroStrategy Bitcoin Holdings

MicroStrategy's Infinite Funding Model

MicroStrategy (MSTR) is a publicly traded software company in the U.S. that went all-in on BTC starting in 2020. Initially, it purchased Bitcoin using its own cash flow, but later primarily raised funds through issuing convertible senior notes to continue large-scale Bitcoin purchases. These notes typically have fixed maturity dates and low interest rates, and as Bitcoin prices rise, the value of MSTR's Bitcoin assets increases, thereby boosting its stock price and creating a positive feedback loop. Through continuous debt issuance and Bitcoin purchases, MSTR has established a self-reinforcing funding chain.

MSTR's financing model features low risk and high returns; convertible notes essentially act as contracts layered with free call options. For creditors, this is a no-lose business: if Bitcoin drops and MSTR has cash, creditors can get their cash back; if Bitcoin drops and MSTR has no cash, creditors still have a final safety net, which is converting to stock to recoup their investment; if Bitcoin rises, MSTR will rise, allowing for stock conversion, and creditors can receive more stock returns. In the worst-case scenario, if MSTR goes bankrupt, they are still "senior" to common stockholders, meaning they benefit first in bankruptcy or liquidation events.

MSTR's strategy has achieved tremendous success. Since the company fully invested in Bitcoin, its stock price has skyrocketed, with an annualized return rate of 80%, and the stock has risen over 2600% since August 2020, currently boasting a market cap of nearly $93 billion, far outperforming Bitcoin itself and all other major U.S. stocks.

The impressive performance has put MSTR on a relentless path to attract global capital and invest in Bitcoin. On October 30, while announcing its third-quarter report, MSTR unveiled a "21/21 plan," which aims to raise $42 billion through $21 billion in equity and $21 billion in notes over the next three years to purchase more Bitcoin. From November to date, MSTR has invested about $13.5 billion to increase its BTC holdings through this model, accounting for 32% of the total funds in the "21/21 Plan," demonstrating strong market confidence in MSTR.

Could MicroStrategy Become a Black Swan in the Crypto Space?

In recent years, the crypto market has experienced many fluctuations and severe crashes, particularly the bankruptcies of Luna and FTX, which have made investors particularly sensitive to the risks of similar companies.

MSTR currently has a market cap of $93 billion, approximately 2.2 times its Bitcoin holdings (with Q3 core revenue of only $116.1 million). When Bitcoin rises, the stock price soars, and its financing capability strengthens, creating a positive cycle. However, once Bitcoin prices enter a phase of fluctuation or decline, it could continuously erode market confidence in the future BTC price development, thereby affecting the stock price, which could translate into doubts about MSTR's financing ability. Under the resonance of these two factors, MSTR's premium is likely to converge quickly. This valuation discrepancy is also why funds like Citron have shorted MSTR stock.

As is well known, leverage is a double-edged sword. If BTC prices fall, the worst-case scenario for MSTR could be having to sell its held Bitcoins to repay debts, triggering a "vicious death spiral." Fortunately, MSTR's debt is unsecured and does not directly depend on its Bitcoin holdings. Although the company has previously issued notes secured by Bitcoin, as of the third quarter of 2024, these notes have all been repaid. Moreover, its earliest debt maturity date is February 2027, meaning there is no significant repayment pressure in the short term.

Regarding annual interest repayments, MSTR currently has a total debt of about $7.3 billion, with an average interest rate of only 0.476%, resulting in annual interest expenses of about $34.6 million, which is relatively controllable.

In other words, MSTR is using off-exchange leverage without a liquidation mechanism. Theoretically, even if MSTR's stock price were to plummet to zero, it would still not be forced to sell these Bitcoins. However, for MSTR's CEO Michael Saylor, the long-term value of the company is far greater than the value of the BTC it holds. After several rounds of equity issuance, his ownership stake is currently not high; assuming the company faces bankruptcy liquidation, the amount of BTC he could obtain would be minimal, which forces him to take on the responsibility of managing the company's market value. When MSTR's price-to-earnings ratio is undervalued due to panic, selling BTC to recoup funds and repurchasing MSTR from the market would be a profitable operation.

Ultimately, whether MSTR is a guardian of Bitcoin or a risk creator depends on Bitcoin's performance. Currently, it seems unlikely to face significant direct risks, and its financing is progressing smoothly. However, Bitcoin's price cycle has historically aligned with its four-year halving cycle. According to historical patterns, 2025 is expected to be a very promising year, but the likelihood of a bear market afterward is high, which would increase MSTR's risk level.

Conclusion

In the current context of Bitcoin price corrections, MicroStrategy's accumulation strategy, while injecting confidence into the market, has also raised profound questions about its sustainability. Although MicroStrategy's risks currently seem manageable, the future trajectory of Bitcoin prices will determine whether it becomes a guardian of Bitcoin or a risk creator. For investors, timely assessment of potential risks, especially when Bitcoin enters an adjustment cycle, and effective risk management have become crucial topics.