Source: Wall Street See

When summarizing the craziest business stories of 2024, microstrategy must be included. $MicroStrategy (MSTR.US)$ Must be on the list.

MSTR is a $89 billion market cap saas software company in the US stock market, with an roi of up to 2478% in the past five years, even surpassing $NVIDIA (NVDA.US)$。

Since mid-2020, MSTR has spent $22 billion to purchase 0.3867 million bitcoins at an average price of $0.057 million. This position represents 1.8% of the total Bitcoin supply. Valued at $0.097 million, these bitcoins are worth over $37 billion.

This means that the stock market values MSTR at twice the net asset value (NAV) of its Bitcoin holdings. MSTR is the only US-listed company offering such products on a large scale.

However, just five years ago, this company was on the brink of bankruptcy.

Betting big on Bitcoin, a divine move in one battle.

Founded by the well-known 'gambler' Michael Saylor in 1989, MSTR is a B2B SaaS provider for enterprises.

During the internet boom in 2000, MSTR's valuation once reached $50 billion, however, during the peak of the bubble, an accounting scandal broke out causing the company's stock price to plummet from $333 to $0.42, wiping out Saylor's $6 billion fortune in a day.

Over the following two decades, MSTR's market cap fluctuated mostly between $1 billion and $2 billion.

As of 2019, the annual sales of MSTR software business are approximately $0.5 billion, with a profit of $75 million and $0.5 billion in cash, but the company is in a competitive position with$Microsoft (MSFT.US)$Not much progress has been made in the competition among much larger software giants.

During the COVID-19 pandemic, the U.S. government injected around $6 trillion to stimulate the economy. With the U.S. interest rates at 0%, the Fed and central banks worldwide worked overtime on their money printers, causing Saylor to worry about potential severe inflation issues which would significantly devalue the cash on MSTR's balance sheet.

"We have $0.5 billion in real assets, while the government increases the money supply by 20% each year," Saylor explained on the Iced Coffee Hour podcast in June of this year.

With a 15% annual growth in the money supply, MSTR loses $75 million in wealth capital value annually, and yet we earn $75 million... With 2000 employees working tirelessly, doing 0.1 million correct things throughout the whole year, (revenue) remains stagnant.

If the inflation rate is 30% per year, you run desperately only to find that you can't outpace (inflation). So, in other words, everything you do is worthless. Your time is worthless. Your life is worthless.

Saylor did not truly reinvest the cash into the business, nor did he return the funds to shareholders through dividends or share buyback, instead turning his attention to bitcoin.

In August 2020, Saylor started buying bitcoins on a large scale, while announcing that MSTR would become the first U.S. publicly listed company to hold bitcoin as its primary financial asset.

The end result was that MSTR used 0.5 billion dollars in cash to buy bitcoin, issued stocks and convertible bonds, and then used the proceeds to purchase more bitcoin.

Saylor not only bullish on bitcoin, but also sees the business opportunities brought by bitcoin trading restrictions:

• Investment restrictions: Many investors interested in bitcoin cannot purchase and custody the asset on their own on cryptocurrency exchanges. In addition, some cryptocurrency exchange giants have defrauded ordinary investors (e.g., the collapsed FTX).

• Regulatory restrictions: Many pools of funds (retirement, institutions, retirement plans) do not allow direct investment in cryptocurrencies.

• Leverage: Some brave bitcoin investors invest in bitcoin through leverage, but this type of leverage is also limited, the available leverage requiring higher collateral and capital costs, so there are not many people who can raise tens of billions in debt to buy bitcoin.

MSTR's presence solves these problems: a U.S. stock, investors can buy on most trading platforms; not subject to regulations like cryptocurrencies; able to increase leverage by issuing long-term debt and purchasing bitcoin, without the risk of additional margin calls.

Therefore, in 2020, when the regulation of cryptos became stricter, investors who wanted to have low-risk exposure to bitcoin went to buy MSTR stocks, driving its stock price to nearly ten times in half a year: in August 2020, it was only $10 (market cap of $2 billion), but by February 2021, it exceeded $100 (market cap of $20 billion).

After the bankruptcy of FTX in November 2022, the MSTR stock price fell back to the level of more than ten dollars. However, crucially, this incident did not force MSTR to liquidate its holdings of bitcoin, and in the following year, its stock price recovered to around $60.

In 2024, with Trump returning to the White House, the market for bitcoin was pushed to a climax, with the price of bitcoin temporarily reaching $0.099 million per coin, breaking historical records.

As of December 2nd, the price of Bitcoin has been maintained at around $97,000, with a gain of over 129% since the beginning of the year.

The pig on the crest of the bitcoin wave?

There is no doubt that the reversal of MSTR's fate depends entirely on the rise in the price of bitcoin.

It has been noticed that MSTR has issued long-term convertible bonds, with the value of the 4-year bonds at about $1 billion, due in 2028. If the price of bitcoin drops significantly during this period, these bonds may not be converted into equity, and MSTR will have to repay these debts, which may require selling some bitcoin, potentially having a negative impact on the price of bitcoin and MSTR's stock price.

However, in the history of bitcoin, there has never been a situation where the price at the end of a 4-year period is lower than at the beginning.

Analyst Marty Bent recently mentioned that bitcoin's lowest 4-year compound annual growth rate (CAGR) is 26%, while its 50th percentile 4-year CAGR is 91%. If this trend continues, it is a relatively safe bet for MSTR shareholders and convertible bond holders.

MSTR may also benefit from some technical changes in the financial markets, including the possibility of being included in the Nasdaq or S&P indices, which would lead to passive funds needing to purchase index components.

From a macro perspective, the incoming Trump administration appears very positive towards bitcoin and cryptocurrencies. Trump mentioned the idea of a 'strategic bitcoin reserve', which Saylor believes could be a trillion-dollar opportunity, akin to the largest land purchase plan in US history.

The idea of a 'strategic bitcoin reserve' may already be reflected in pricing, as bitcoin has risen by about 40% since the election.

However, if bitcoin can truly be used as a value-preserving asset like gold, soon countries may declare intentions to convert a portion of their forex reserves into bitcoin. Yet, for countries following the first mover, they may face higher costs as they might need to buy after the price increase, increasing their purchasing risk.

Full of Ponzi scheme colors?

As mentioned earlier, the funds used by MSTR to purchase bitcoin are no longer primarily from the company's cash on hand, but from funds raised through issuing stocks and bonds.

It is reported that MSTR raised a total of $8 billion through the sale of convertible bonds, with the funds allocated to purchase more bitcoins. These notes will mature between 2025 and 2032, and if MSTR's stock price reaches an agreed level during this period, they can be converted into MSTR shares.

In November 2024, $3 billion worth of convertible bonds were issued with a 0% interest rate, meaning that investors will not receive any interest income from MSTR during this period. Nevertheless, investors are still willing to purchase these bonds because they value the rights to potentially convert them into MSTR company shares in the future.

Most of MSTR's stock value comes from its holdings in bitcoins, accounting for as much as 99%. Therefore, the company's stock price will fluctuate with the volatility of bitcoin prices, which can be very significant. If the stock price does not reach the target level, the convertible bonds held by investors will not convert into company shares. In such a scenario where the company cannot repay, these bondholders will have priority over common shareholders to recoup from the company's assets.

It is worth mentioning that Saylor has a significant cost advantage in the capital markets. This is because many investors, including fixed income traders, hedge funds, company bond arbitrageurs, and some high-risk high-return options traders, are particularly interested in investment products related to bitcoins. They seek to invest in debts and equities linked to bitcoin price fluctuations, hoping to profit from the volatility of bitcoin prices. MSTR is currently the only large publicly listed company in the market that offers a large-scale investment opportunity in such products.

The trading price of MSTR's stock on the market is higher than the actual value of bitcoins held by the company. Some people may think MSTR's stock is overvalued, but even issuing new shares would dilute the value of existing shareholders' holdings, many investors are still willing to accept this situation.

Why is that? Because they anticipate that MSTR will use the raised funds to buy more bitcoins. If MSTR acquires more bitcoins, the total supply of bitcoins is fixed, and increased demand could drive up the price of bitcoins. Consequently, the bitcoins held by MSTR become more valuable, increasing the company's overall value.

In short, MSTR raises funds through the issuance of stocks and bonds to purchase bitcoins, driving up bitcoin prices, which in turn boost the company's stock price, ultimately attracting more investors. Through a self-reinforcing cycle, MSTR has established a pattern similar to a perpetual motion machine.

Therefore, some people believe that MSTR's capital raising and share dilution strategy is similar to a Ponzi scheme, using new investors' funds to pay returns to early investors, rather than generating profits through legitimate business activities or investments.

Roche, founder of Discipline Funds, previously discussed the relationship between MSTR and Bitcoin on his website, pointing out that the company's approach is extremely clever, but at the same time extremely risky. In a way, it looks very much like a Ponzi scheme.

Roche said that if it were him, he would definitely want to cash out, declare victory, and then go buy... anything he wanted.

With Bitcoin surging, this scenario is about to enter a frenzy mode.

MSTR recently announced a plan to issue $21 billion in bonds and $21 billion in shares - a total of $42 billion to purchase Bitcoin.

During the third quarter earnings conference call in 2024, the current CEO of the company, Phong Le, mentioned that the "42" pays tribute to the science fiction novel "The Hitchhiker's Guide to the Galaxy", in which a supercomputer is designed to find the ultimate answer to life, the universe, and everything, after a long period of calculation, it gives the answer "42". The "21" refers to the total limit of Bitcoin, which is 21 million coins.

How high can MSTR still fly?

Based on calculations, the $8 billion worth of convertible bonds indicate that MSTR is betting on maintaining a premium of its stock price relative to Bitcoin, and that Bitcoin will rise by at least 40-50%.

Otherwise, MSTR may have to sell some of its Bitcoin, which could trigger a downward spiral. However, this scenario may require Bitcoin to fall to levels of $0.02 million-$-0.03 million and maintain for many years.

Given that interest rates are controllable, MSTR may choose to roll over old debt with new bonds. With a strong brand in the crypto field, MSTR has enough support to transform its software business into a crypto platform over the next decade and create valuable operational business in this area.

Of course, after experiencing this unprecedented surge in cryptocurrencies, it may be too early to tell whether they will continue to rise or face a long period of correction. As a company dependent on Bitcoin, MSTR is bound to suffer a major blow in the latter scenario.

Recently, economist and market strategist Peter Schiff, who has always been skeptical of cryptocurrencies, suggested shorting MSTR's stocks as a good idea. Schiff predicts that the company may fail to meet its debt obligations due to a drop in Bitcoin prices and eventually face bankruptcy.

Schiff stated in a recent program:

The issue is that MicroStrategy has promised to repay so many people so much money, if Bitcoin prices fall, it won't be able to do so because it doesn't have the money as it has invested it in Bitcoin.

In the short term, many are betting that MSTR's stock premium relative to its underlying Bitcoin will decrease. Currently, about 15-20% of MSTR's outstanding shares are being shorted.

Additionally, MSTR plans to issue an additional $21 billion in convertible bonds. If this plan is completed, the company will have $30 billion of the entire US convertible bond market (approximately 4%). Is this too much or too little? What is the demand for such Bitcoin-linked convertible debt products?

If the demand is not significant, Saylor will lose his capital cost advantage, and Bitcoin's price may need to double (to $0.2 million) to justify the current valuation. If it reaches this point, why not just own Bitcoin directly?

Crypto analyst Willy Woo previously warned that SEC's regulatory intervention in MSTR's stock issuance, custody risks and competitive risks could all be detrimental to MSTR.

And in the worst case scenario, according to the summary by legendary investor Geo Chen:

As the crypto market cycle matures and price bubbles, MSTR's bitcoin investments and high leverage strategies could result in the disappearance of stock price premiums, forcing the company to sell bitcoin to repay debts during price declines, potentially triggering market panic and selling, especially if convertible bonds fail to convert to stocks.

Such high leverage operations and the market reaction to MSTR's stock could potentially trap the company in a value trap, and even trigger a crypto market winter.

Editor / jayden