MicroStrategy’s journey to becoming a Bitcoin Treasury Company is setting a new, unique precedent in the history of Wall Street.

A Bitcoin Strategy that Captivated Global Attention

In 2020, the COVID-19 epidemic sparked a global liquidity crisis. In response, governments around the world implemented loose monetary policies to stimulate their economies, leading to currency depreciation and increased inflation risks.

During this time, Michael Saylor re-evaluated Bitcoin’s value. He believes that with the money supply expanding by 15% annually, people needed an asset that wasn’t tied to fiat currencies. This led him to choose Bitcoin as MicroStrategy’s core strategy.

In contrast to Bitcoin ETFs and other Spot Bitcoin ETPs introduced by companies like BlackRock, MicroStrategy’s Bitcoin strategy is more aggressive. The company utilized its idle cash, issued convertible bonds, and conducted stock offerings to acquire Bitcoin. This allowed the company to benefit from Bitcoin’s potential price increase while assuming the risk if Bitcoin’s price drops, but ETF/ETPs focus more on price tracking. .

MicroStrategy’s Funding Sources and Bitcoin Acquisition Journey

MicroStrategy mainly raises funds to purchase Bitcoin through four ways.

1. Utilizing Internal Funds for Purchases

For the first three investments, MicroStrategy allocated its idle funds for Bitcoin purchases. In August 2020, it invested $250 million to acquire 21,400 BTC; in September, it spent $175 million for 16,796 BTC; and in December, it used $50 million to acquire 2,574 BTC.

2. Issuing Convertible Senior Notes

To finance further Bitcoin acquisitions, MicroStrategy began issuing convertible senior notes. These are financial instruments that allow investors to convert debt into equity under specific conditions. Convertible bonds typically have low or zero interest rates, with a conversion price set above the current stock price. Investors are drawn to these bonds primarily due to their downside protection and potential upside if the stock price rises. MicroStrategy’s convertible notes typically offered interest rates between 0% and 0.75%, reflecting investor confidence in the appreciation of its stock and the hope that the bonds could eventually convert into equity for higher returns.

3. Issuing Senior Secured Notes

In addition to the convertible senior notes, MicroStrategy also issued $489 million in senior secured notes due in 2028 with an interest rate of 6.125%.

These bonds are secured by collateral, presenting a lower risk to investors compared to convertible notes, though they offer fixed interest returns. MicroStrategy has since repaid these bonds early.

4. At-the-Market Equity Offerings

As its Bitcoin strategy began to show positive results, MicroStrategy’s stock price increased, allowing the company to raise more funds through at-the-market equity offerings. This method carries less risk compared to debt, as it does not require repayment, nor does it involve a fixed repayment schedule.

MicroStrategy has entered into public market sales agreements with financial institutions such as Jefferies, Cowen and Company LLC and BTIG LLC. Through these agreements, it issued and sold shares of its Class A common stock, a method known in the industry as “ATM”.

ATM offers flexibility, as MicroStrategy can choose when to issue new shares based on market conditions. This equity issuance process has caused volatility in the company’s stock price because the issuance of new shares dilutes existing shareholder equity. However, the correlation between Bitcoin prices and MSTR stock price—coupled with the increasing amount of Bitcoin held per share—has led to complex market reactions and higher stock volatility.

The timeline of MicroStrategy’s Bitcoin purchases via these methods is as follows:

Produced by:IOBC Capital

Corresponding to the price chart of BTC, MicroStrategy’s specific purchase history is as follows:

Source: Bitcointreasuries.net

As of December 30, 2024, MicroStrategy had invested approximately $27.7 billion to acquire 444,262 BTC, with an average purchase price of$62,257 per BTC.

Key Questions in MicroStrategy’s Bitcoin Acquisition Strategy

There is a lot of controversy in the market about MicroStrategy’s “Intelligent Leverage” strategy for buying Bitcoin. Here are some of the key questions and my thoughts on them:

1. How High is the Leverage Risk for MSTR?

To address this directly: the leverage risk is relatively low.

According to the Q3 2024 financial report, MicroStrategy’s total assets amounted to approximately $8.344 billion, with a Bitcoin carrying value of $6.85 billion (based on 252,220 BTC at a price of $27,160). Total debt stood at $4.57 billion, resulting in a debt-to-equity ratio of 1.21.

If we calculate using the current market price for Bitcoin (as of September 30, 2024, at $63,560), the actual market value of MicroStrategy’s Bitcoin holdings is $16.03 billion, reducing the debt-to-equity ratio to 0.35.

Let’s look at the data as of December 30, 2024.

As of December 30, 2024, MicroStrategy’s total outstanding liabilities were $7,273.85 million, as follows:

Produced by: IOBC Capital

As of December 30, 2024, MicroStrategy held 444,262 Bitcoins, worth $42.25 billion. Assuming that the rest of MicroStrategy’s assets remain unchanged (i.e., $1.49 billion), MSTR’s total assets are $43.74 billion and liabilities are $7,273.85 million. At this time, MSTR’s debt-to-equity ratio is only 0.208.

For context, this is relatively low compared to other large U.S. companies:

• Alphabet: 0.05
• Twitter: 0.7
• Meta: 0.1
• Goldman Sachs: 2.5
• JPMorgan Chase: 1.5

MicroStrategy, which transitioned from a software company to one focused on financial assets, appears to be in a healthy position in terms of its debt-to-equity ratio.

2. When Could Convertible Bonds Become a Burden?

The short answer is that it would only happen if Bitcoin’s price falls below $16,364 and MicroStrategy stops issuing new convertible bonds. If that happens, the value of its 444,262 BTC would fall below the total amount of convertible bonds issued ($7.27 billion). However, if MicroStrategy continues to use ATM financing and idle cash to purchase Bitcoin, this “insolvency threshold” could become even lower.

The risk of unbearable debt arises if MicroStrategy issues excessive convertible bonds when Bitcoin is high, and then Bitcoin enters a bear market. This could cause the value of its holdings to drop below the bond value, negatively affecting its stock price, refinancing ability, and debt repayment capacity.

MicroStrategy’s convertible bonds allow bondholders to convert their bonds into MSTR shares in two stages:

• Initial stage: If the bond’s market price drops by more than 2%, bondholders can convert them into shares and sell them for a profit.
• Later stage: As the bonds near maturity, the 2% rule no longer applies. Bondholders can either cash out or convert the bonds into shares.

Since the convertible bonds issued by MicroStrategy are low-interest or even zero-coupon bonds, it is obvious that what creditors want is the conversion premium. If on the repayment date, MSTR’s stock price has increased to a certain extent compared with the price at the time of initial financing, then the creditor is more likely to consider a debt-for-equity swap. If MSTR’s stock price drops to a certain extent compared to the price when it was originally financed, creditors will consider demanding principal and interest.

If the creditor does not choose to convert to MSTR stock and ultimately needs to repay the creditor, MicroStrategy also has multiple options:

• Issue new stock to raise funds for repayment
• Issue new debt to repay the old debt (as they did in September 2024)
• Sell a portion of its Bitcoin holdings to repay the debt

Therefore, at present, it is unlikely that MicroStrategy will fall into an “insolvent” situation.

3. Why Are Investors Now Concerned with the Amount of Bitcoin Per MSTR Share?

The amount of Bitcoin per MSTR share will ultimately determine its net asset value per share.

Both convertible bonds and ATM offerings involve issuing new shares, which dilutes existing shareholder equity. The goal of this dilution is to acquire more Bitcoin, which, according to MSTR’s management, benefits shareholders by increasing the amount of Bitcoin per share (BTC yield KPI).

As long as MSTR’s market value is higher than the total value of its Bitcoin holdings (creating a market premium), diluting shares to buy Bitcoin can still increase the amount of Bitcoin per share. This, in turn, increases the company’s net asset value per share, making the dilution more acceptable to shareholders.

Currently, MicroStrategy holds 444,262 BTC,valued at approximately $42.256 billion. With an MSTR market value of $80.37 billion, MSTR’s market value is 1.902 times the value of its Bitcoin holdings, giving it a premium of 90.2%. Each of the 244 million MSTR shares corresponds to approximately 0.0018 BTC.

This strategy is what they call “intelligent leverage”—turning the gap between the company’s market value and Bitcoin holdings into a capital advantage.

4. Why Has MicroStrategies Been More Aggressive in Purchasing Bitcoin in the Past Two Months?

In short, it’s likely because MSTR’s stock price has been high.

MicroStrategy has significantly increased the scale of financing to buy coins in the past two months. In November and December 2024, MicroStrategy significantly increased its Bitcoin purchases, spending $17.69 billion (63.8% of total investment) to acquire 192,042 BTC (43.2% of the total Bitcoin purchased). Only $3 billion of this was through convertible bonds; the remaining $14.69 billion came from ATM financing.

Overall, MicroStrategy’s Bitcoin strategy has been characterized by a dollar-cost averaging approach over time, but it has been more aggressive in bull markets than in bear markets.

This could be due to MSTR’s stock price growth in a bull market. In August 2024, after a stock split, MSTR’s price tripled, and by the end of the year, its stock had risen by more than 4 times, while Bitcoin had only risen by 2.2 times.

In the Q3 2024 earnings call, MicroStrategy’s CEO introduced an ambitious “42B Plan.”

British author Douglas Adams, in The Hitchhiker’s Guide to the Galaxy, famously stated that the supercomputer “Deep Thought” provided “the ultimate answer to the ultimate question of life, the universe, and everything,” and that answer was 42.

MicroStrategy sees this as a magical number and has thus proposed its own 42B financing plan. The number 21 is also significant, as Bitcoin’s total supply is capped at 21 million. Accordingly, MicroStrategy plans to issue $21 billion in ATM and $21 billion in Fixed Income securities over the next three years to continue growing its Bitcoin holdings.

If MicroStrategy raises $42 billion through new share issuance, and assuming the stock price is $330, the total number of shares would increase to 371.3 million. If MicroStrategy then purchases Bitcoin at an average price of 100,000 USD per Bitcoin, it could add 420,000 Bitcoins to its holdings, bringing the total number to 864,262 BTC. At that point, the Bitcoin per share will rise to 0.00233, reflecting a 29.4% increase. In this scenario, MicroStrategy’s market cap would reach $122.53 billion, with the total value of its Bitcoin holdings at $86.4 billion. The market cap premium would still remain.

5. What Could Drive Bitcoin’s Price Up after MicroStrategy?

Aside from MicroStrategy’s ongoing Bitcoin purchases, the main factor that could drive Bitcoin’s price higher would be more countries adopting Bitcoin as part of their strategic reserves. However, expectations for this to happen during the current bull market are not particularly high.

The current Bitcoin rally has been driven by several major buying forces:

(1) Long-Term Holder with Strong Consensus on Bitcoin

The long-term rise of Bitcoin doesn’t need a specific reason. For Bitcoiners, this is as natural as monkeys climbing trees or mice digging holes, because Bitcoin is digital gold.

After Bitcoin fell below $16,000, many of the most popular mining machines, like the Antminer S17 series, were close to the shutdown price range. Other miners like the Whatsminer M30S, Hippo H2, and Antminer T19 were also in the shutdown zone. In this price range, even without any major events, a rebound is expected. The transition from bear to bull market is like a basketball free-falling from a height: after hitting the ground, it will rebound multiple times, each time weaker than the last.

Source: Glassnode

As shown in the graph, by the end of 2022, Long-Term Holders were actively increasing their positions.

After over a decade of development, Bitcoin’s consensus is strong enough that investors and Long-Term Holders have a shared understanding of Bitcoin’s value, even near the shutdown prices of mainstream mining rigs.

(2) ETFs Bring New Funds from Traditional Financial Markets

Since the approval of the Bitcoin ETF, a total of 528,600 BTC have been net bought. During this bull market, the ETF has added nearly $36 billion in buying pressure on Bitcoin, and $2.6 billion on Ethereum.

Source: Coinglass.com

Moreover, the launch of Bitcoin and Ethereum ETFs has a ripple effect, attracting more traditional financial institutions to start paying attention to and investing in the crypto space.

(3) MicroStrategy’s Ongoing Purchases, Followed by Other Public Companies, Creating a “Davis Double-Click”

According to data from Bitcointreasuries, by December 30, 2024, 149 entities collectively held over 2.95 million BTC. This number has been growing rapidly in recent months.

Source: Bitcointreauries.net

Among these entities, 73 are public companies, 18 are private companies, 11 are countries, 42 are ETFs or funds, and 5 are DeFi protocols.

MicroStrategy was the first public company to adopt the “Bitcoin Treasury Strategy,” but it’s not the only one. Companies like Marathon Digital Holdings, Riot Platforms, and Boyaa Interactive have also taken similar steps. Still, MicroStrategy remains the most influential player in this space.

(4) National strategic reserves

Some governments are already holding Bitcoin as part of their reserves. The specific details are as follows:

Source: Bitcointreasuries.net

Although these countries hold Bitcoin, most of it was seized by law enforcement during various investigations. They haven’t sold it yet, so they don’t qualify as stable holders.

Among these countries, El Salvador stands out as the only true BTC holder. Since 2021, El Salvador has been purchasing 1 BTC per day and currently holds 6,002 BTC, worth over $560 million.

In addition, Bhutan also holds 11,688 BTC through mining, but it is not a BTC Holder and has reduced its holdings in the past two months.

During the campaign, U.S. President Trump stated that, if elected, he would establish a Bitcoin strategic reserve.

If there’s any factor that could drive Bitcoin’s price up after MicroStrategy, it would be the possibility of President Trump pushing for a U.S. government Bitcoin reserve, which could inspire more countries to follow suit.

Summary

MicroStrategy’s Bitcoin strategy is not only a business experiment in corporate transformation, but also a major innovation in financial history. Through clever capital strategies, intelligent leverage, and a deep understanding of Bitcoin’s value, the company has not only experienced impressive growth in market cap but has also helped bring Bitcoin into the mainstream financial sector, breaking down barriers between crypto assets and traditional capital markets.

This bold move by MicroStrategy might be just the beginning of Bitcoin’s journey to legend. It could be a small step in Bitcoin’s rise to global prominence, or it could mark a major leap in the evolution of the financial world.

References:

https://www.microstrategy.com/press/microstrategy-announces-third-quarter-2024-financial-results-and-announces-42-billion-capital-plan_10-30-2024

https://www.hope.com/for-corporations

https://bitcointreasuries.net/

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