In the summer of 2020, as the Covid-19 pandemic upended economies around the world, an obscure US software firm decided to diversify. MicroStrategy, whose head office is situated next to a shopping mall and metro station in Tysons Corner, Virginia, had decided the steady business of “software as a service” was not racy enough.
Instead, it would branch out by investing up to $250m in alternative assets – “stocks, bonds, commodities such as gold, digital assets such as bitcoin or other asset types”.
Less than five years later, that bitcoin side hustle has gone stratospheric. MicroStrategy’s share price has swollen twentyfold, lifting its market capitalisation to almost $75bn and catapulting the stock into the Nasdaq 100 index of top technology shares.
The audacious bet by its co-founder and chair, Michael Saylor, has made MicroStrategy a top pick with UK investors, as digital currencies and tokens were boosted by Donald Trump’s election victory, despite worries that a sharp reversal in crypto prices could threaten its survival.
Saylor’s strategy evolved into the world’s first “bitcoin treasury company”, with MicroStrategy pursuing a seemingly relentless approach of buying up bitcoin, funded by issuing billions of dollars of bonds and new shares. The company’s fans call this process a flywheel, in which issuing debt to buy bitcoin boosts the MSTR stock, allowing it to issue more shares to raise funds to buy more bitcoin.
Saylor, who has compared bitcoin to Manhattan real estate in the year 1650, insists the company will pursue a long-term strategy of buying bitcoin, quarter by quarter.
An aeronautical and astronautical engineering graduate whose dreams of becoming a pilot or astronaut were thwarted by a medical condition, Saylor told Yahoo Finance recently that he expected to always buy bitcoin at the top of the market, predicting: “It’s going to appreciate against the dollar forever.”
Critics point out that Manhattan property offers a guaranteed rental income as well as the prospect of asset value growth. Saylor, though, uses a measure called BTC Yield, which MicroStrategy calls a key performance indicator, tracking changes in the ratio between its bitcoin holdings and the number of company shares.
While non-holders may look at bitcoin’s $100,000 price tag in December and think they’ve missed the boat, Saylor argued: “You’re getting a 90% discount from $1m a coin. I’m sure that I will be buying bitcoin at $1m a coin – probably a billion dollars a day of bitcoin at a million a coin.”
Michael Lebowitz, a portfolio manager at RIA Advisors, has claimed that MicroStrategy is “preying on investors” and pumping up optimism in bitcoin to drive higher volatility in its stock.
“MicroStrategy’s stock valuation is at least double that of the bitcoin it holds. And, as a reminder, its software business has almost no value. One could even argue it has a negative value,” Lebowitz wrote in December. “Accordingly, investors who want to buy bitcoin should just buy bitcoin or the numerous bitcoin ETFs available.”
In the third quarter of 2024, total revenues at MicroStrategy’s software business fell by 10.3% year on year, and the company’s net loss more than doubled to $340.2m.
During November, MicroStrategy was the most-bought equity by customers at the UK investment service Interactive Investor (ii), ahead of regular favourites such as Nvidia, Tesla and Lloyds Banking Group.
As of 31 December, MicroStrategy had spent $27.9bn acquiring a total of 446,400 bitcoins, at an average purchase price of approximately $62,428 each. Those bitcoins – equivalent to about 2% of the 21m bitcoins that can ever be produced – are now worth about $42bn.
MicroStrategy has acquired 2,138 BTC for ~$209 million at ~$97,837 per bitcoin and has achieved BTC Yield of 47.8% QTD and 74.1% YTD. As of 12/29/2024, we hodl 446,400 $BTC acquired for ~$27.9 billion at ~$62,428 per bitcoin. $MSTR https://t.co/58aXM7g6u2
— Michael Saylor⚡️ (@saylor) December 30, 2024
This strategy has driven MicroStrategy’s share price up by almost 400% during 2024, a year in which bitcoin’s value more than doubled.
The flywheel had been expected to spin faster after MicroStrategy was added to the Nasdaq 100, as exchange-traded funds that follow the index must now automatically buy its stock. “It’s as if bitcoin was joining Nasdaq,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
But shareholders who bought in November may have seen their investment fall. MicroStrategy’s shares surged by 58% in November but have fallen by more than 20% in December.
In October, MicroStrategy announced it planned to issue $21bn of equity and $21bn of fixed income debt over the next three years to fund more bitcoin purchases.
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Shortly before Christmas, the company said it would ask shareholders for permission to issue billions more shares, increasing the number of its class A common stock from 330m shares to 10.33bn.
MicroStrategy is attractive to investors who are eager to get exposure to bitcoin without owning the cryptocurrency itself. They can hold its stock through a savings account such as a Roth IRA in the US, or an Isa in the UK.
“MicroStrategy has been a popular investment among investors with a high appetite for risk for a couple of years,” said ii’s Lee Wild, describing it as “a bitcoin proxy”. “Further interest has been piqued by significant increases in the price of bitcoin, especially in February and November this year.”
A key part of MicroStrategy’s approach is to issue convertible bonds with low, or no, interest payments. They are structured so that investors could be repaid in the company’s shares if the price rises sharply by the time the bond matures, in effect giving bond investors exposure to bitcoin.
In December, the company sold $3bn of convertible debt which matures in 2029. Those notes pay no interest but could be converted to stock at a price of $672, 55% higher than MicroStrategy’s share price of $433 on the day the debt was sold.
RIA Advisors’ Lebowitz said MicroStrategy’s convertible bondholders would profit if the price of its shares is higher than the conversion price when their debt matures. But if not, they only get their original money back – missing out on years of interest payments had they lent the money elsewhere.
The worst-case scenario could be that MicroStrategy sells bitcoins to repay its $7.2bn of convertible debt as it matures, which Lebowitz said would be “very problematic if the price is much lower” than when the crypto was bought.
He called MicroStrategy “essentially a leveraged bitcoin holding company”. “The problem with such a leveraged scheme is that the company is putting all its eggs into bitcoin,” he said. “A sharp decline in bitcoin will likely accompany the collapse of MicroStrategy. The other risk, although less likely under the Trump presidency than Biden, is if the Securities and Exchange Commission (SEC) decides to investigate MicroStrategy over their ‘unique’ strategy.”
Saylor, before he took up his role as one of bitcoin’s loudest evangelists, was most famous for losing $6bn of personal wealth in a single day in 2000, when MicroStrategy was forced to restate two years of revenues and its stock promptly dropped by 62%.
MicroStrategy is not the only company pursuing the goal of becoming a bitcoin treasury. The crypto miner RiotPlatforms announced earlier this month it had acquired more than 5,000 bitcoins at an average price of $99,669 each, funded by a $525m convertible bond, while Tesla owns 11,509 bitcoins. But Microsoft’s shareholders voted against adding bitcoin to the company’s balance sheet this month.
Min Jung, a research analyst at Presto Research, has cautioned that MicroStrategy would be vulnerable to a drop in the value of bitcoin. “For now, bitcoin’s favourable price movement allows MicroStrategy to sustain a positive feedback loop: rising MSTR stock prices enable additional fundraising, which funds further bitcoin purchases, driving up bitcoin prices and stock value,” he said this month. “While effective during a bull market, this strategy’s sustainability depends heavily on continued bitcoin price appreciation.”
While bitcoin’s loyal fans believe in holding on to their crypto during downturns, it is not yet clear whether MicroStrategy investors will take the same approach.
