MicroStrategy has been “accumulating” Bitcoin for 7 consecutive weeks. As of December 22, 2024, the company holds 444,262 BTC with an average price of $62,257 per BTC.
This is not a spur-of-the-moment FOMO decision, but rather a continuation of a bold model that MicroStrategy has been implementing for the past four years.
A Bold Transformation to Become a Bitcoin Titan
Founded in 1989, MicroStrategy was initially a software company specializing in providing data analytics solutions and mobile services.
In 2020, as the global economy became unstable due to the COVID-19 pandemic, the company made a bold move: investing heavily in Bitcoin.
This decision was not accidental. Michael Saylor, the company’s chairman, recognized that inflation was rising and the US dollar was depreciating. He believed that Bitcoin would be a safer reserve asset than cash, helping to preserve the company’s value.
“The solution to inflation is a store of value asset that is not dependent on the government, existing in the form of a bearer instrument (i.e., an asset that can transfer ownership by physical delivery).”
“Bitcoin is the best digital asset that meets this requirement for billions of people around the world, as long as they have a mobile phone. There is no more attractive savings solution,” Michael Saylor stated on X.
In August 2020, MicroStrategy invested $250 million in Bitcoin, marking the beginning of the company’s long-term Bitcoin accumulation strategy. Saylor argued that holding Bitcoin would not only help the company protect its assets but also create opportunities for exceptional growth in the future.
This transformation attracted the attention of investors and the media. MicroStrategy was no longer just a software provider but had become one of the largest Bitcoin investors in the world.
The Secret to “Hatching Golden Eggs” from Bitcoin and Convertible Bonds
MicroStrategy uses convertible bonds to raise capital at low interest rates to increase its Bitcoin holdings.
How Convertible Bonds Work
A convertible note is a type of bond that gives investors the right to convert their investment into company stock at a specified time in the future.
This type of bond typically has a fixed interest rate that is lower than other types of bonds because investors benefit from the ability to convert to stock when the share price rises.
The way convertible bonds work is quite simple: when issued, the company specifies the conversion ratio and the conversion period. On the maturity date, investors can choose between receiving the principal and interest or converting the bond into stock.
How Has MicroStrategy Utilized This Tool?
MicroStrategy has turned convertible bonds into a powerful financial tool to raise capital for its Bitcoin buying strategy.
For example, in its most recent issuance on November 21, 2024, MicroStrategy offered $3 billion in convertible bonds with a maturity date of June 2029 and a 0% interest rate. The conversion ratio is 1.4872 shares of MSTR for every $1,000 borrowed, equivalent to a conversion price of $672.4 per share.
Investors will wait until the maturity date to receive their initial $1,000, or they can choose to convert to stock if the market price is higher than the conversion price (e.g., if the price of MSTR in June 2029 is $750 per share).
The question is, if the expected stock price is $750 in the future, why don’t investment funds buy directly on the exchange at the current price of $350?
The reason is that if they simply buy and hold the stock, investment funds face the risk of price declines (for example, the price of MSTR could drop to $200 after 5 years). Meanwhile, if they buy MicroStrategy’s convertible bonds, they are guaranteed to have $1,000 regardless of market fluctuations.
In short, from the investors’ perspective, they are willing to accept extremely low-interest rates (compared to the market interest rate of 5%) for the opportunity to convert to stock in the future, while still preserving their capital.
For MicroStrategy, by issuing convertible bonds, the company can access large capital at low-interest rates to purchase Bitcoin without facing the pressure of periodic payments.
Betting on the Maturity Date
A notable aspect of this model is that the maturity dates for MicroStrategy’s debts range from 2027 to 2032. Setting maturity dates this way allows MicroStrategy to wait for Bitcoin to grow for another 1-2 cycles.
Upon maturity, if many investors want to receive cash, MicroStrategy can rely on the growth of its total reserve assets to continue issuing bonds or stocks, then use the proceeds to pay off old debts. This cycle continues.
$15 Billion in Profit, 400% Stock Growth
Thanks to this strategy, as of December 22, 2024, MicroStrategy has accumulated a total of 439,000 Bitcoin with a value of over $42 billion, yielding a 57% profit ($15 billion).
Holding 2.1% of the total Bitcoin supply, MicroStrategy has also become the public company with the largest Bitcoin holdings in the world, far surpassing its competitors.
Accumulating Bitcoin has not only brought profits to MicroStrategy but has also positively impacted its stock price, as the price of MSTR shares has a correlation of up to 65% with the price of Bitcoin (according to Yahoo Finance calculations).
In tandem with Bitcoin’s strong growth, MSTR’s share price has increased by 124% in the last three months. Year-to-date, this figure has exceeded 400%.
Risks Hidden in MicroStrategy’s Strategy
MicroStrategy’s Bitcoin investment strategy has achieved initial success but also carries significant risks.
Bitcoin Price Decline While Carrying a Large Debt
Bitcoin’s price is highly volatile. If the price drops sharply, the value of MicroStrategy’s assets will also decrease, resulting in substantial losses.
Moreover, at the maturity date, there is a possibility that Bitcoin will be at a low price, causing the market price of the stock to fall below the conversion price (due to the price correlation between the two assets).
In this situation, the company would be forced to sell Bitcoin at a loss to pay investors in cash or find a way to borrow money again at a higher interest rate (as new investors would no longer be interested in convertible bonds).
Selling large amounts of Bitcoin could further depress its price and keep it low until the next maturity date. This would create a “death spiral,” the opposite of the “flywheel effect” the company expects.
Rising Interest Rates and a Tightening Credit Market
If inflation returns, prompting the Fed to simultaneously implement policies to raise interest rates and tighten credit, this would be a disastrous scenario for MicroStrategy.
Tightening the credit market would cause capital to flow back to safe assets instead of risky models, making it difficult for MicroStrategy to issue new bonds.
Rising interest rates would make investors less interested in MicroStrategy’s bonds (which currently have interest rates from 0% to 0.75%). Combining these two policies, the company would have to seek new loans at expensive interest rates – contrary to the method of borrowing new low-interest debt to pay off old high-interest debt that the company is currently employing.
MicroStrategy has borrowed a lot of money (over $7 billion in 2024 alone) and plans to raise tens of billions of dollars more in the next three years. With such a large debt, the risks in the company’s model could create a serious chain reaction.
Read more: Fed Chairman’s Statements & Bitcoin Price Trends.
