Understand MSTR MicroStrategy's Bitcoin Strategy in One Article

Author: 0xCousin, IOBC Capital

In the history of Wall Street, legendary stories are never in short supply, but the strategic transformation journey of MicroStrategy Bitcoin Treasury Company is destined to become a unique new legend.

A Bitcoin Strategy That Captivated Global Attention

In 2020, the COVID-19 pandemic triggered a global liquidity crisis, prompting countries to adopt loose monetary policies to stimulate the economy, leading to currency devaluation and heightened inflation risks.

During the pandemic, Michael Saylor reassessed the value of Bitcoin. He believed that when the money supply grows at an annual rate of 15%, people need a hedge asset that is not tied to fiat cash flows. Thus, he chose Bitcoin as the strategy for MicroStrategy.

Compared to the BTC ETFs or other Spot Bitcoin ETPs launched by companies like BlackRock, MicroStrategy's Bitcoin strategy is more aggressive. It uses the company's idle funds, issues convertible bonds, and raises capital through stock issuance to purchase Bitcoin, allowing the company to gain potential profits from Bitcoin's rise while bearing the potential risks of Bitcoin's decline, whereas ETFs/ETPs focus more on price tracking.

MicroStrategy's Funding Sources and Bitcoin Purchase Journey

MicroStrategy primarily raises funds to purchase Bitcoin through four avenues.

1. Using Own Funds for Purchases

In the initial three investments, MicroStrategy used its idle cash on the balance sheet to make purchases. In August 2020, MicroStrategy spent $250 million to buy 21,400 Bitcoins; in September, it invested $175 million to acquire 16,796 Bitcoins; and in December, it invested $50 million to purchase 2,574 Bitcoins.

2. Issuing Convertible Senior Notes

To buy more Bitcoin, MicroStrategy began to finance its purchases by issuing convertible bonds.

Convertible senior notes are financial instruments that allow investors to convert the bonds into company stock under specific conditions. These bonds typically have lower interest rates, sometimes even zero, while setting a conversion price above the current stock price. Investors are willing to buy such bonds mainly because they provide downside protection (i.e., the principal and interest can be recovered at maturity) and potential gains when the stock price rises. The interest rates on several rounds of convertible bonds issued by MicroStrategy ranged from 0% to 0.75%, indicating that investors are confident in the rise of MSTR's stock price, hoping to convert the bonds into stock for greater returns.

3. Issuing Senior Secured Notes

In addition to convertible senior notes, MicroStrategy also issued a $489 million senior secured note with a 6.125% interest rate maturing in 2028.

Senior secured notes are collateralized bonds that carry less risk than convertible senior notes, but these bonds only provide fixed interest income. MicroStrategy has opted for early repayment of this batch of senior secured notes.

4. At-the-Market Equity Offerings

As MicroStrategy's Bitcoin strategy began to show results, MSTR's stock price continued to rise, prompting MicroStrategy to adopt more at-the-market equity offerings for financing. This method of raising funds carries lower risk because it is not debt, has no repayment pressure, and does not have a foreseeable repayment date.

MicroStrategy has signed public market sales agreements with agents such as Jefferies, Cowen and Company LLC, and BTIG LLC. According to these agreements, MicroStrategy can periodically issue and sell Class A common stock through these agents. This is known in the industry as ATM.

At-the-market equity offerings are more flexible, allowing MicroStrategy to choose the timing of selling new shares based on secondary market conditions. Although issuing stock dilutes existing shareholders' equity, the correlation with Bitcoin prices and the increase in the amount of Bitcoin per share of MSTR lead to a complex market reaction, resulting in a higher overall volatility of MSTR's stock price.

The journey of MicroStrategy purchasing Bitcoin through the above four methods is as follows:

Produced by: IOBC Capital

Corresponding to the BTC price chart, MicroStrategy's specific purchase history is shown in the following image:

Source: bitcointreasuries.net

As of December 30, 2024, MicroStrategy has invested approximately $27.7 billion in total, purchasing 444,262 Bitcoins at an average holding price of $62,257 per Bitcoin.

Key Questions Regarding MicroStrategy's "Intelligent Leverage" Bitcoin Purchases

There is considerable debate in the market regarding MicroStrategy's "Intelligent Leverage" strategy for purchasing Bitcoin. Here are my thoughts on several key questions that are hotly discussed in the market:

1. Is MSTR's Leverage Risk High?

To conclude, it is not very high.

According to information disclosed during MSTR's Q3 2024 earnings call, MSTR's total assets were approximately $8.344 billion at that time, as the carrying value of Bitcoin on the balance sheet was only $6.85 billion (with only 252,220 Bitcoins counted at a price of $27,160). Total debt was approximately $4.57 billion, resulting in a debt-to-equity ratio of 1.21.

We will not discuss the accounting standards here; we will only consider the data at the time of actual sale, which reflects the latest market price. If we calculate based on the latest market price of Bitcoin on September 30, 2024 ($63,560), the actual market value of the Bitcoins held by MSTR would be $16.03 billion, resulting in a debt-to-equity ratio of only 0.35.

Now let's look at the data as of December 30, 2024.

As of December 30, 2024, MicroStrategy's total outstanding liabilities were $7.27385 billion, detailed as follows:

Produced by: IOBC Capital

As of December 30, 2024, MicroStrategy held 444,262 Bitcoins valued at $42.25 billion. If the other assets of MicroStrategy remain unchanged (i.e., $1.49 billion), then MSTR's total assets would be $43.74 billion, with liabilities of $7.27385 billion, resulting in a debt-to-equity ratio of only 0.208.

Now let's compare this with the debt-to-equity ratios of leading U.S. listed companies—Alphabet 0.05, Twitter 0.7, Meta 0.1, The Goldman Sachs Group 2.5, JPMorgan Chase & Co. 1.5.

MicroStrategy is a company transitioning from the software industry to the financial sector, and this debt-to-equity ratio is still healthy.

2. Under What Circumstances Could These Convertible Bonds Become an Unbearable Burden in the Future?

To conclude, if MicroStrategy does not continue to issue convertible bonds in the future, then Bitcoin would need to remain below $16,364 for an extended period for the value of the 444,262 Bitcoins held by MicroStrategy to fall below the total amount of its convertible bonds of $7.27 billion. If MicroStrategy only uses ATM financing and idle funds to buy Bitcoin going forward, the "insolvency" price line could become even lower as the number of Bitcoins held by MicroStrategy increases.

If MicroStrategy continues to issue convertible bonds to buy Bitcoin at high prices and Bitcoin enters a bear market, a decline in Bitcoin prices could lead to the value of the Bitcoins held by MicroStrategy falling below the total amount of its convertible bonds, which would also cause MSTR's stock price to slump, thereby affecting its refinancing capability and debt repayment ability, making the convertible bonds an unbearable burden.

MicroStrategy's convertible bonds allow bondholders to convert their bonds into MSTR stock, divided into two phases: First, the initial phase—if the trading price of the bonds falls by more than 2%, creditors can exercise their rights to convert the bonds into MSTR shares and sell them to recover their investment; if the trading price of the bonds remains stable or even rises, creditors can sell the bonds in the secondary market to recover their investment. Second, the later phase—when the bonds are nearing maturity, the 2% rule no longer applies, and bondholders can either take cash and walk away or directly convert the bonds into MSTR stock.

Since the convertible bonds issued by MicroStrategy are low-interest or even zero-interest bonds, it is evident that what creditors actually want is the conversion premium. If, at the repayment date, MSTR's stock price has increased compared to the price at the time of financing, creditors are more likely to consider converting the bonds into stock. Conversely, if MSTR's stock price has decreased compared to the price at the time of financing, creditors will consider demanding principal and interest.

If creditors do not choose to convert into MSTR stock and repayment to creditors is indeed required, MicroStrategy has several options:

• Continue issuing new shares to raise funds for repayment;

• Continue issuing new debt to repay old debt; (This has already been done in September 2024)

• Sell some Bitcoins to make repayments.

Therefore, at present, the likelihood of MicroStrategy falling into an "insolvency" situation is low.

3. Why Are Investors Starting to Care About MSTR's Bitcoin Per Share?

To conclude, the Bitcoin per share will determine MSTR's net asset value per share.

Whether issuing convertible bonds or ATM, both involve diluting equity to achieve financing. The purpose of financing is to increase Bitcoin reserves. For MSTR's shareholders, equity dilution is a negative factor, traditionally not seen as a good thing. The management of MicroStrategy tells MSTR shareholders the story of the BTC Yield KPI.

Essentially, it states that as long as MSTR's market value is higher than the total value of the Bitcoins held, i.e., there is a market value premium, then diluting MSTR's equity to buy BTC can enhance the Bitcoin per share of MSTR. An increase in MSTR's Bitcoin per share means that MSTR's net asset value per share is growing, making it worthwhile for shareholders to dilute equity to finance Bitcoin purchases.

Currently, MicroStrategy holds 444,262 BTC, with a total holding value of approximately $42.256 billion. With MSTR's current market value at $80.37 billion, MSTR's market value is 1.902 times the value of its Bitcoin holdings, indicating a current premium rate of 90.2%. MSTR's total share capital is 244 million shares, with each share corresponding to approximately 0.0018 BTC.

This is the essence of "Intelligent Leverage," transforming the difference between the company's market value and the market value of Bitcoin holdings into a capital operation advantage.

4. Why Has MicroStrategy Become More Aggressive in Buying Bitcoin in the Last Two Months?

To conclude, it may be because MSTR's stock price is very high.

MicroStrategy has significantly increased the scale of financing for Bitcoin purchases in the last two months. In November and December 2024, MicroStrategy invested a total of $17.69 billion through ATM and convertible bonds (accounting for 63.8% of total investments), purchasing 192,042 Bitcoins (accounting for 43.2% of total purchases). Among these, only $3 billion were convertible bonds, while the remaining $14.69 billion were raised through ATM.

Overall, the entire process of MicroStrategy strategically allocating Bitcoin has characteristics of regular investment over time; however, in terms of quantity and amount, it seems to be more aggressive in a bull market than in a bear market.

I cannot fully understand this characteristic and can only boldly speculate that it may be due to MSTR's stock price increasing more significantly in a bull market. In August 2024, after a stock split, MSTR's stock price tripled, increasing more than fourfold over the year, while Bitcoin's increase this year was only 2.2 times.

MicroStrategy's CEO mentioned a beautiful "42B Plan" during the Q3 2024 earnings call.

British author Douglas Adams stated in "The Hitchhiker's Guide to the Galaxy" that the supercomputer "Deep Thought" provided the answer to "life, the universe, and everything" as 42.

MicroStrategy believes this is a magical number and thus proposed the 42B financing plan. The number 21 is also magical, as the maximum total supply of Bitcoin is 21 million. Therefore, MicroStrategy plans to issue $21 billion in ATM and $21 billion in fixed income over the next three years to continue increasing its Bitcoin holdings.

Assuming MicroStrategy ultimately raises $42 billion through issuing new shares, and assuming the stock price is $330 at the time of issuance, the total share capital will become 371.3 million shares. If MicroStrategy buys Bitcoin at an average price of $100,000, the company could acquire 420,000 Bitcoins, bringing MicroStrategy's total holdings to 864,262 Bitcoins. At that point, the Bitcoin per share would increase to 0.00233, representing a growth of approximately 29.4%. At this time, MSTR's total market value would be $122.53 billion, with the total value of the BTC holdings at $86.4 billion. In this scenario, the market value premium would still exist.

5. After MicroStrategy, What Other Catalysts Could Drive Bitcoin Prices Up?

To conclude, aside from publicly listed companies purchasing Bitcoin driven by MicroStrategy, the only other potential catalyst I can think of is more national strategic reserves, but I do not hold high expectations for this bull market.

The recent cycle of Bitcoin price increases has been primarily driven by several major buyers:

1. Long Term Holders with Strong Consensus on Bitcoin

The long-term rise of Bitcoin does not require justification; it is as natural to BTC enthusiasts as monkeys climbing trees and mice digging holes, as it is digital gold.

After Bitcoin fell below $16,000, the most mainstream Antminer S17 series mining machines were at shutdown prices, and other miners like the M30S, H2, and T19 were also in the shutdown price range. This price range would see a rebound even if nothing happened; the transition from bull to bear is like a basketball falling freely from a height, bouncing multiple times with decreasing intensity after hitting the ground.

Source: glassnode

As seen in the above chart, Long Term Holders have been continuously accumulating since the end of 2022.

After more than a decade of development, Bitcoin's consensus has become strong enough, with on-site investors and Long Term Holders having consensus near the shutdown price of mainstream mining machines.

2. ETFs Bringing Incremental Funds to Traditional Financial Markets

Since the approval of BTC ETFs, a total of 528,600 BTC has flowed in, bringing nearly $36 billion in incremental buying power to Bitcoin in this bull market, along with $2.6 billion for ETH.

Source: coinglass.com

Additionally, the approval of BTC ETFs (and ETH ETFs) will create a ripple effect, prompting more traditional financial institutions to pay attention to and invest in the crypto space.

3. MicroStrategy's Continued Purchases Leading to Imitation by Other Listed Companies, Creating a Davis Double-Whammy

According to data from Bitcointreasuries, as of December 30, 2024, there are 149 entities holding a total of over 2.95 million Bitcoins. Moreover, this number has been rapidly increasing recently.

Source: bitcointreasuries.net

Among these entities holding Bitcoin, 73 are publicly listed companies, 18 are private enterprises, 11 are countries, and 42 are ETFs or funds, along with 5 DeFi protocols.

MicroStrategy is the first publicly listed company to adopt the "Bitcoin Treasury Company" strategy, but it is not the only one. Companies like Marathon Digital Holdings, Riot Platforms, and Boyaa Interactive International Limited have also implemented this strategy, but MicroStrategy's influence remains the largest.

4. National Strategic Reserves

Some governments currently hold Bitcoin. The specific details are shown in the following image:

Source: bitcointreasuries.net

Although these countries hold Bitcoin, most of it was seized by law enforcement during operations. They have not sold it temporarily, so they do not qualify as stable holders.

Among these countries, only El Salvador is likely a true BTC holder. Since 2021, El Salvador has been buying Bitcoin, purchasing 1 Bitcoin daily, and currently holds 6,002 BTC, valued at over $560 million.

Additionally, Bhutan holds 11,688 BTC through Bitcoin mining. However, Bhutan does not qualify as a BTC holder, as it has reduced its holdings in recent months.

Former U.S. President Trump stated during his campaign that if elected, he would establish a Bitcoin strategic reserve.

If we consider what could further drive Bitcoin prices up after MicroStrategy, the first choice would be if Trump were to promote a Bitcoin strategic reserve for the U.S. government, subsequently encouraging more countries to establish strategic reserves of Bitcoin.

Conclusion

MicroStrategy's Bitcoin strategy is not only a business experiment in corporate transformation but also a significant innovation in financial history. Through ingenious capital operations, intelligent leverage, and profound insights into Bitcoin's value, it has not only achieved remarkable growth in its market value but has also brought Bitcoin more deeply into the view of traditional finance, breaking down barriers between crypto assets and mainstream capital markets.

MicroStrategy's bold attempt may just be the prologue to Bitcoin's legend, or perhaps just a small step in Bitcoin's true rise, yet it could represent a significant leap into a new financial era.