Author: Tanay Ved, Coin Metrics; Compilation: 0xjs @金色财经

Key points of this article:

• MicroStrategy is a Bitcoin treasury company and Bitcoin's leveraging agent, which amplifies the upward and downward price movements of BTC.

• The company currently holds 386,700 BTC (worth approximately $36 billion), accounting for 1.9% of Bitcoin's current supply, making it the world's largest BTC corporate holder.

• MicroStrategy funded its Bitcoin acquisition through convertible bonds, leveraging low borrowing costs and higher equity premiums during the bull market to expand its BTC holdings.

INTRODUCTION

Bitcoin's post-election momentum brought its price close to the $0.1 million mark for the first time in its 15-year history. Although much of Bitcoin's supply is still self-hosted, Bitcoin's growing maturity has also opened up more accessible investment channels, including “crypto stocks” — publicly traded stocks that provide exposure or agency for Bitcoin and other digital assets through traditional brokerage accounts. These companies include Bitcoin miner Marathon Digital (MARA) to full-stack operators Coinbase (COIN) and MicroStrategy (MSTR), which is the largest Bitcoin enterprise holder with 386,700 BTC in its treasury. Spot Bitcoin (BTC) and Ether (ETH) ETFs launched this year have further expanded the channel for institutional investors.

In this week's Coin Metrics Network Status Report, we analyzed MicroStrategy's performance, its Bitcoin holdings, and its role as a leveraging agent in the crypto stock sector, and discussed the risks and rewards of its acquisition strategy and approach.

The crypto stock landscape

Although MSTR isn't part of the S&P 500, its return has been over 700% since 2022, and 488% so far this year, surpassing the performance of other stocks in the S&P 500. It has far outperformed major crypto and tech stocks such as Coinbase (COIN) or Nvidia (NVDA), thanks to its unique role as a “Bitcoin treasury company.” Therefore, the strategy behind its performance is worth a close look.

Source: Google Finance

MicroStrategy: Software Company or Bitcoin Hoarding Machine?

Some might be surprised to learn that MicroStrategy, founded in 1989, is an enterprise software company focused on business intelligence. However, in August 2020, co-founder and then CEO Michael Saylor made a bold move, using Bitcoin as the company's primary reserve asset as part of a “new capital allocation strategy.” This turned MicroStrategy into a Bitcoin hoarding machine. Four years later, it has become the largest single enterprise holder of Bitcoin, with 386,700 BTC (worth around $36 billion) and a market capitalization of around $90 billion. MicroStrategy's Bitcoin holdings far exceed those of other companies' vaults, 12 times that of miners like Marathon Digital (MARA) and 34 times that of Tesla (TSLA).

Source: Coin Metrics Network Data Pro and BitBo Treasury

MicroStrategy's most recent purchase was on November 24. It purchased 55,500 BTC and currently holds 386,700 BTC at an average cost of $56,761, accounting for about 1.9% of Bitcoin's current supply. Only Bitcoin spot ETFs surpass this level. Bitcoin spot ETFs collectively hold about 5.3% of the supply, which is three times that of MicroStrategy. This strategy effectively turns MicroStrategy into a Bitcoin investment tool as a leveraged investment in Bitcoin. Michael Saylor himself described the company as “a capital operation that securitizes Bitcoin, providing 1.5 to 2 times leveraged equity.” As shown in the chart below, MicroStrategy's performance relative to Bitcoin reflects this approach, amplifying gains during rises and losses amplifying losses during declines.

Source: Coin Metrics Reference Rates and Google Finance

Compared to BTC, this method of leverage essentially increases the volatility of MSTR, which usually amplifies BTC's price fluctuation by 1.5 to 2 times. In addition to Bitcoin exposure, MicroStrategy's stock price is also influenced by broader stock market trends and investor sentiment towards Bitcoin, making it a high-risk, high-return representative of the asset's performance.

Source: Coin Metrics Market Data Stream and Google Finance

How is MicroStrategy funding its BTC purchases?

How is MicroStrategy funding its massive Bitcoin purchases? The cornerstone of its strategy is to borrow money to buy Bitcoin by issuing convertible bonds. It's a fixed income instrument that acts as a mixture of debt and equity, and can be converted into a certain amount of company stock at a predetermined price at a future date.

By issuing these convertible notes in the fixed income market or directly to institutional investors, MicroStrategy is able to raise cash to rapidly expand its Bitcoin holdings, and borrowing costs are generally very low. These bonds are attractive to investors because they offer the potential for equity conversion at a price higher than the issue price, and actually act as call options, and demand for MicroStrategy's growing Bitcoin reserves during a bull market will be further amplified. This creates a reverse cycle: higher BTC prices drive MSTR stock premiums higher, enabling the company to issue more debt or equity to fund additional BTC purchases. These purchases increased buying pressure and further boosted the price of Bitcoin — and the cycle continued, strengthening during the bull market.

Source: Microstrategy Q3 2024 Report

The table above highlights MicroStrategy's outstanding convertible notes, which will expire between 2025 and 2032. The company also recently raised $3 billion through another convertible bond offering due in 2029, with a 0% interest rate and 55% conversion premium, bringing its total outstanding debt to over $7.2 billion.

Is MicroStrategy's BTC Strategy Risky?

While their strategy has been hugely successful so far, one question remains: “What could possibly go wrong? Is this another bubble waiting to burst?” MicroStrategy's market capitalization is close to $90 billion, and its Bitcoin holdings are worth around $37.6 billion, and the company is currently trading at a price that is about 2.5 times (250%) above its net asset value (NAV). In other words, MicroStrategy's stock is 2.5 times the value of its underlying Bitcoin reserve. This high valuation premium has drawn the attention of market participants, who question how long this premium can last and what consequences it might have if it collapses or turns negative.

Participants are also trying to take advantage of the premium on MSTR stock by shorting MSTR shares and buying BTC as a hedge. Due to the liquidation of some short positions, the stock's short holdings have dropped from around 16% in October to around 11%. To assess the risk that MicroStrategy might liquidate part of its Bitcoin holdings and the impact of falling MSTR/BTC prices and net asset value premiums, focusing on the health of its legacy software business may better understand its ability to repay these debts.

Source: MicroStrategy Q3 2024 Report

Although the quarterly revenue of traditional businesses has been relatively stable since 2020, operating cash flow has shown a downward trend. Meanwhile, since 2020, cumulative debt has grown substantially to $7.2 billion, thanks to the issuance of convertible bonds to fund Bitcoin acquisitions, and debt growth accelerated during the bull market. This reflects the company's reliance on Bitcoin's appreciation to maintain financial stability. Despite this, the relatively low interest costs of these bonds are likely to be borne by the software business. If bondholders convert their bonds into equity at a higher share price at maturity, most of the debt will be settled without cash repayment. However, if market conditions worsen and MicroStrategy's stock premium falls, the company may need to explore other strategies to meet its obligations.

conclusions

MicroStrategy's bold approach highlights Bitcoin's potential as a corporate reserve asset. By leveraging its huge Bitcoin reserves, the company has expanded its market performance, establishing itself as a unique agent for BTC.

However, this strategy has inherent risks associated with Bitcoin price fluctuations and the sustainability of stock premiums, which require closer attention as market conditions evolve.

MicroStrategy's model is likely to inspire wider adoption — not only within enterprises, but possibly further solidifying Bitcoin's position as a store of value and a high-quality reserve asset at the sovereignty level.