MIAMI, FLORIDA – JUNE 04: MicroStrategy CEO Michael Saylor speaks at the Bitcoin 2021 Convention, … [+]
This morning MicroStrategy announced that it acquired an additional 15,400 BTC for approximately $1.5 billion at an estimated $95,976 per bitcoin. The company now holds 402,100 $BTC, at an average purchase price of $58,263 per bitcoin. Shares of MicroStrategy have risen by 467% year-to-date, with most of the value coming from its sophisticated use of bitcoin treasury operations.
In what has been a symbiotic relationship so far, MicroStrategy has issued over $5.8 billion worth of at-the-money equity offerings this year, and issued $5.275 billion in bonds, both with the explicit mandate to purchase more bitcoin. The company has followed through by purchasing over $17.8 billion worth of bitcoin so far this year. The announcements have driven both the price of bitcoin and MicroStrategy shares higher, creating a flywheel effect that investors, corporate treasurers, and financial analysts need to understand.
What makes MicroStrategy special compared to ETFs?
MicroStrategy is a publicly listed U.S. company that was founded in 1989 by Michael Saylor. The company’s operating business is business intelligence software, but as of August 2020 it became known for explicitly adopting bitcoin as its primary treasury asset. By purchasing bitcoin to hold on its balance sheet, it allowed investors to get exposure to bitcoin’s price appreciation before bitcoin ETFs came to the market.
In June 2021, MicroStrategy announced its first convertible bond offering to purchase bitcoin. By raising debt to buy and hold bitcoin, the company was effectively able to deliver leveraged bitcoin price exposure to its shareholders. Because of its operating business and capital structure, MicroStrategy shares are not considered a bitcoin ETF, and this enables them to do things that ETFs can’t. One example is that MicroStrategy can offer long-dated bonds into the market to access debt, which ETFs can’t do. For context, MicroStrategy’s last bond offering paid 0% interest, and the overnight funding rate, which would be the proxy for a leveraged bitcoin ETF, is currently 4.75%.
Another benefit of MicroStrategy not being an ETF is that many institutional investors and funds have restrictions that don’t allow them to own commodity-based ETFs like the recently approved bitcoin ETFs. But they can own shares in companies like MicroStrategy. Other funds are only allowed to own bonds– MicroStrategy can issue bonds and bitcoin ETFs cannot.
MicroStrategy’s value proposition
MicroStrategy has 3 main offerings catered to investors seeking bitcoin price exposure: its listed shares, options and derivatives from its shares, and its bonds. All of them have different risk-return profiles and cater to different types of investors.
Buying MicroStrategy shares is like buying leveraged or supercharged bitcoin. As of November 25th the shares were trading at three times the net asset value of the bitcoin it holds. The buyers are typically investors seeking bitcoin exposure with extra volatility. They range from bitcoiners investing from their retirement accounts to sophisticated investment funds. The owners of these shares can also take advantage of the high volatility and sell option contracts based on the shares they own to generate extra income. Because of its highly volatile premiums, Call and Put options on MicroStrategy shares are also coveted by speculators looking for a leveraged play on leveraged bitcoin.
Convertible bond holders have been happy to provide the capital at 0% interest because they also get the option to convert the bond investment into MicroStrategy shares at a higher price. Having this “option” to convert or buy shares via the bond allows them to re-sell those options in the open market, which generates them income.
For context, MicroStrategy’s last bond offering was issued when the stock was trading at $433, and had a conversion price equivalent of $672.40 until June 1st, 2029. At the time of writing, an option to buy MicroStrategy shares at $670 on January 15th 2027 was trading at $194.70 per share. If a bond holder sold those options in the open market, it would imply an annualized yield of approximately 25%.
How the flywheel comes together
As MicroStrategy raises convertible debt and buys bitcoin, it drives bitcoin’s price higher. As bitcoin price goes higher, so do MicroStrategy shares. As MicroStrategy shares rise, it allows its bonds to convert and it clears capacity for the company to issue even more debt. The company issues more convertible debt and buys more bitcoin, and so on.
What’s the downside?
If bitcoin’s price drops or stagnates, MicroStrategy shares will do the same. The convertible bonds will become due, and the company may not be able to issue new debt to cover the bonds coming due, forcing it to sell some of its bitcoin to pay back the bond holders. This would drive bitcoin prices lower and the MicroStrategy shares even lower. The cycle could continue until enough bitcoin has been sold to repay the $4.275 billion in bonds that are currently outstanding.
The flywheel has worked flawlessly up until now, and many companies such as Metaplanet and Marathon are starting to replicate Saylor’s strategy. MicroStrategy has a massive first-mover advantage in bitcoin treasury offerings, but the landscape will evolve quickly, with leveraged bitcoin ETFs and other investment vehicles. MicroStrategy provides an excellent case study in corporate bitcoin strategy – pioneering an approach that will likely inspire new investment frameworks for both institutional and retail investors across the risk spectrum.
