Background: This year, it has risen by nearly 500%, far surpassing Bitcoin
It is well known that Michael Saylor, the boss of MicroStrategy, is a Bitcoin fanatic who keeps hoarding Bitcoin regardless of the bull or bear market. With Trump's victory, Bitcoin has risen to nearly $100,000, and MicroStrategy, which holds 386,000 Bitcoins, has also seen its share price rise steadily, with an increase of about 500% since the beginning of this year, outperforming Bitcoin by 121%.
How does MicroStrategy work? Can MicroStrategy still rise? Is it a leveraged version of Bitcoin or this round of Luna? Let WOO X Research show you!
What strategy does MicroStrategy use to buy Bitcoin?
Currently, most people's impression of MicroStrategy is that it buys Bitcoin. In fact, MicroStrategy is a technology company founded as early as 1989. Its main business is to provide data analysis solutions to help companies analyze data and make decisions.
In August 2020, CEO Michael Saylor saw the value of Bitcoin and believed that it was a scarce digital asset with long-term appreciation potential that could fight inflation and preserve value. He converted the company's $250 million reserves into Bitcoin, which was the beginning of MicroStrategy's crazy hoarding of coins.
As of November 2024, MicroStrategy holds approximately 386,700 bitcoins, accounting for 1.8% of the world's total bitcoin supply.
How did they do it?
1. MicroStrategy issues debt to buy Bitcoin:
- Companies raise funds by issuing debt (such as convertible bonds) and then use the funds to purchase Bitcoin.
- This is the starting point of the strategy, using leverage to increase your exposure to Bitcoin.
2. Bitcoin price rises, MicroStrategy market value rises:
- As the price of Bitcoin rises, the value of MicroStrategy's assets (large amounts of Bitcoin held) also rises, driving the company's stock market cap.
3. Market capitalization increases, increasing the weight of stocks in the index:
- The growth in market capitalization has increased the weight of MicroStrategy's stocks in financial indices (such as S&P 500, NASDAQ, etc.).
- More index funds need to allocate to MicroStrategy stocks, further boosting the share price.
4. MicroStrategy issues shares to buy Bitcoin:
- After the market value increased, MicroStrategy took advantage of the market demand for its stock and issued new shares at a premium, sold them, and bought Bitcoin.
5. Bitcoin price rises, further boosting market value:
- The newly purchased Bitcoin further increases the company's asset value and market capitalization as its price rises.
- The growth in market capitalization has once again increased the attractiveness of the stock in the market.
6. MicroStrategy issues stock again, repeating the cycle:
- MicroStrategy takes advantage of the rise in stock market value to repeat a new round of stock issuance and Bitcoin purchases, creating a "flywheel effect."
The focus of MicroStrategy is to start a positive flywheel cycle, making the market value of Bitcoin and MicroStrategy a perpetual motion machine for growth. Delving into the details can further explore the subtleties of this model.
Currently, MicroStrategy has five convertible bonds in the market with a principal value of US$4.25 billion. The maturity dates are between 2027 and 2032. They are medium- and long-term bonds, and most of them are zero-interest bonds, which means that the principal does not need to be repaid before maturity, which also reduces MicroStrategy's default risk.
In terms of stock issuance, MicroStrategy has announced five stock issuances since the launch of Bitcoin Strategy, raising a total of up to $4.4 billion.
Source: Bloomberg
Will MicroStrategy be liquidated when the coin price falls?
On November 21, Citron, a well-known short-selling institution, said: "Although Citron is still optimistic about Bitcoin, we have hedged by shorting MSTR. I respect Saylor very much, but even he must know that MSTR is overheated."
So are Citron’s concerns justified?
The design of the asset flywheel inevitably reminds people of Luna/UST, which also relies on two assets to make the price soar. It also makes people worry that if the price of one of the assets falls, will it cause a stampede of chain liquidation?
But MicroStrategy's model is very different from Luna:
Low debt ratio: MicroStrategy’s current market value is approximately US$75 billion, with bonds of US$4.25 billion. The overall debt accounts for a low proportion of the company’s financial structure, and the maturity date is between 2027 and 2032.
- No intention to sell Bitcoin: Well-known KOL @TheFlowHorse recently posted that if Michael Saylor sells Bitcoin, it will be the best deal ever. Michael Saylor responded that he will not sell Bitcoin.
- Such a commitment also ensures that MicroStrategy's strategy of "issuing stocks at a premium" can continue.
- The premium has returned to the 2021 level: As can be seen from the figure below, MicroStrategy maintained a premium even during the 2022 bear market and did not fall below it.
Currently, the green line is soaring rapidly, indicating that the market’s confidence in the MicroStrategy Bitcoin strategy has been rebuilt and returned to the level during the 2021 bull market.
Source: CryptoQuant
If Bitcoin plummets, the probability that MicroStrategy will be forced to sell, thereby causing a stock and coin stampede, is very low, and the leverage ratio is not as exaggerated as imagined.
Conclusion: MicroStrategy’s success story has led to a trend of Web 2 companies hoarding BTC
The success of MicroStrategy’s Bitcoin strategic reserve strategy has also attracted other companies to follow suit, including:
- RUMBLE: Video sharing platform announces purchase of up to $20 million in Bitcoin as reserve
- Interactive Strength: Fitness equipment company, announced the purchase of $5 million worth of Bitcoin as reserves
- Hoth Therapeutics: Biopharmaceutical company, announced the purchase of $1 million worth of Bitcoin as reserves
There are countless other examples. More and more companies (small-cap stocks) want to follow MicroStrategy's successful Bitcoin reserve model, but most of them are short-term gimmicks. First, the success of the strategy is partly built on capital intensiveness. Second, if small companies use this strategy, they will be more likely to face investor skepticism and regulatory scrutiny.
But no matter what, Bitcoin will be the biggest winner.
