What is MicroStrategy?

MicroStrategy is a publicly traded ($MSTR) business intelligence software company that strategically buys Bitcoin.

Some investors think it’s overvalued; some think this is just the beginning of MSTR’s dominance in the stock market.

It can be valuable to understand how the company works and what it means for Bitcoin investors.

They started adding Bitcoin to the balance sheet in 2020:

The stock is up 3840% following the adoption of a Bitcoin standard.

BTC is up 1240% in the same period.

How is this possible?

For context, Michael Saylor (the founder of MicroStrategy) was a Bitcoin skeptic before 2020.

This was until he began researching it deeply in the spring of 2020.

Microstrategy was presented with a critical dilemma:

• The Federal Reserve had slashed interest rates to near zero.
• Governments worldwide used massive monetary stimulus and money printing to stabilize economies.
• Cash on the balance sheet was a melting ice cube.

The company held over $500 million in cash reserves, and Saylor became concerned about preserving purchasing power.

Everyone knows the feeling (although maybe on a smaller scale).

So what did Saylor do?

Having put the work in to understand the value of Bitcoin, he decided it was the best option to hedge against the declining value of the dollar.

In August 2020, MicroStrategy announced it had purchased 21,454 BTC for $250 million as part of a new capital allocation strategy.

This made MicroStrategy the first publicly traded company to adopt Bitcoin as its primary treasury reserve asset.

Fast forward to November 2024, the company now has 331,200 BTC worth over $33 billion.

What a story.

They hold the most BTC out of any publicly traded company.

And it’s not even close.

How did they get here?

The MSTR Playbook

MicroStrategy is using treasury operations to securitize Bitcoin. The company accumulates Bitcoin through three main methods:

1. Debt – Borrowing money at low interest rates.
2. Equity – Selling shares of MSTR stock (commonly called “ATM” or At-The-Market offerings).
3. Cash Flow – Using profits from its software business to buy Bitcoin.

The Bitcoin it accumulates is held on its balance sheet as long-term collateral.

The goal is to increase its Bitcoin holdings and deliver returns to shareholders through what it calls "Bitcoin Yield."

Here is a graphic illustrating this:

The strategy can be viewed as a “Reflexive Flywheel.”

It looks like a pyramid scheme at first glance.

Here’s how it works step-by-step:

1. Issue Debt to Buy Bitcoin:
   • MicroStrategy raises money by selling convertible notes (bonds that can later convert to shares of MSTR stock).
   • These bonds are attractive to investors because they offer valuable flexibility: investors can convert them into stock if the share price rises or trade them for profit.
2. Bitcoin Price Rises:
   • As Bitcoin appreciates, the value of the treasury increases.
   • This drives a higher market cap since the company owns a growing Bitcoin reserve.
3. Demand Increases:
   • With a higher market cap, MSTR gains more visibility and weight in stock indices, attracting additional investors.
4. Issue Equity to Buy More Bitcoin:
   • MSTR issues new shares (equity) to raise funds. The money is used to buy more Bitcoin instead of for traditional business expenses.
5. Repeat the Cycle:
   • As the BTC price goes up, this cycle repeats. MSTR leverages debt and equity to continually grow its Bitcoin holdings.

This creates a positive feedback loop:

BTC appreciation fuels the stock price, which increases demand for debt and equity, which allows MicroStrategy to raise more money to buy Bitcoin, and so on.

Leverage

MicroStrategy also amplifies its exposure through leverage (3840% MSTR vs 1240% BTC).

They use borrowed money (convertible notes) to obtain more Bitcoin than they otherwise could through stock issuance and cashflow.

For example:

Suppose the company owns 150,000 Bitcoin, funded by:

$3 billion in equity.

$2 billion in debt (leverage).

If the BTC price increases by 50%:

Bitcoin holdings increase from $5 billion to $7.5 billion.

After subtracting $2 billion in debt, equity holders see their $3 billion grow to $5.5 billion.

This is an 83% increase in equity value, even though BTC only increased by 50%.

Equity holders capture all the upside (or downside), leading to a 1.5-2x multiplier effect on the stock.

Convertible bondholders have a slightly different benefit.

The bonds are less risky than the stock because investors can wait until they mature and receive the principal if MSTR doesn’t perform.

All of the upside and none of the downside.

This is at the core of why investors are drooling over this stock.

The high volatility of the stock makes the conversion option valuable, meaning MicroStrategy can issue these bonds at very low interest rates (near 0%):

MicroStrategy raises billions at ultra-low interest rates and uses the money to buy Bitcoin, which it expects to appreciate at a far higher rate than the cost of the debt (Average annual 21% Bitcoin growth vs. 0.8% debt cost).

This is the arbitrage.

Why the Premium?

MicroStrategy trades at a premium to the Bitcoin it holds.

Market Cap 11/23/24: $85.5B

BTC holdings value 11/23/24: ~ $33B

This is ~ 2.5x its Net Asset Value (NAV).

This is not uncommon. Many Fortune 500 companies trade at 20-50x their net asset value.

Here are possible reasons the premium exists:

1. Bitcoin Yield:
   • MicroStrategy delivers “Bitcoin Yield” by increasing the BTC holdings per share through strategic debt and equity issuance.
   • Normally, when a company issues more stock, it dilutes the value of existing shares. Although MicroStrategy uses the cash to increase BTC per share so it is net accretive for shareholders.
   • Year to date, MSTR treasury operations delivered a BTC Yield of 41.8%, providing a net benefit of ~79,130 BTC to shareholders.
2. Refined Bitcoin Product:
   • Just like Standard Oil refines crude oil reserves into valuable products, MicroStrategy “refines” Bitcoin into financial instruments like convertible bonds and high-volatility stock. Investors pay for the financial engineering and enhanced returns.
3. Volatility as a Product:
5. Access to Bitcoin for Restricted Investors:
   • Some institutional investors (fixed-income funds, 401ks, etc.) can’t directly buy Bitcoin. MicroStrategy offers these investors a way to gain exposure to Bitcoin through MSTR stock or its bonds.
6. First Mover Advantage:
   • MicroStrategy has a massive reserve lead on every single public company. This creates a competitive moat and forward-looking potential.

MicroStrategy has become a transformer of Bitcoin volatility. Wall Street loves volatility because it creates value for options, derivatives, and arbitrage strategies. It broke a record for the most traded stock in a single day:

The Risks

1. Bear Markets:
   • MSTR stock could fall more sharply when Bitcoin enters a bear market due to its leverage.
   • Convertible bonds that don’t convert to equity need to be repaid, potentially forcing MicroStrategy to fork over cash.
2. Demand for Debt and Equity:
   • The strategy depends on investors continuing to buy MicroStrategy’s bonds and equity. If demand dries up, the flywheel could slow down.

A bear market is essentially the biggest risk, as investors will likely rotate out of leveraged MSTR into spot BTC.

Closing Thoughts

Overall, MSTR can provide valuable diversification and exposure to various investors.

However, it’s important to remember it’s not a substitute for owning Bitcoin directly.

MSTR shares can be printed, Bitcoins cannot.

MicroStrategy will likely be studied for decades to come.

MicroStrategy is clearly not just a Bitcoin holding company—it’s a transformer of capital, turning the raw energy of Bitcoin into financial instruments for traditional markets.

Hope this helps.