Author: Sima Cong

People are risk-averse and averse to reminders that reveal risks.

Any selling itself will exacerbate the price decline. But people choose to turn a blind eye to the "inherent risks". Now, Michael Thaler and its micro-strategy itself is the biggest time bomb or untied, depending on the following:

Although less likely under a Trump presidency than Biden, if the SEC decides to investigate MicroStrategy's "unique" strategy;

According to " 1940 According to the 2016 Investment Company Act, if a company's main business is to hold investment assets rather than actual operations, it should be registered as an investment company and subject to stricter supervision. If MicroStrategy's main asset is Bitcoin, should it register as an investment company?

MicroStrategy is not fully transparent about whether it actually holds the amount of Bitcoin it claims and whether there is on-chain verifiable proof of these assets. ;

According to the most optimistic valuation, the fair price of MicroStrategy is between US$202.45 and US$214.67, and its 2031 and 2032 The conversion prices of convertible bonds due in 2020 are US$232.72 and US$204.33, which objectively requires MicroStrategy to increase its stock price;

According to my valuation Model, EV/EBITDA is 18 times, Implied EV/REV is 3 times, the stock price of micro strategy needs to return to 188.9 US dollars to eliminate the premium, which is equivalent to buying Bitcoin spot at a par price, but this price cannot realize its redemption Convertible bond conversion prices in 2031 and 2032;

Don’t forget that in March 2024, MicroStrategy’s stock price was still in the US$200 range (considering splitting (stock) operation, the Bitcoin price at that time was 70,078 US dollars.

Crazy is happening

Trump quickly filled in his regrets and gaps, or at least provided material.

I meanTweet material from the founder of MicroStrategy.

According to public reports, the vast majority of Microsoft shareholders rejected its proposal to establish a Bitcoin reserve.

Microsoft's board of directors had earlier urged shareholders to reject the National Center for Public Research Policy Research recommends that the company invest 1% of its total assets in Bitcoin as a hedge against inflation. At the annual meeting, MicroStrategy Chairman Michael Thaler gave a three-minute speech in an attempt to persuade Microsoft shareholders to support the proposal. His company has invested billions of dollars in Bitcoin. Data shows that Microsoft's largest shareholders are institutional investors, including Vanguard and BlackRock.

At the meeting, Michael Saylor, chairman of MicroStrategy, a "big Bitcoin investor", quoted MicroStrategy's Using the Bitcoin strategy, the stock price has risen sharply since then as a case study to try to persuade Microsoft shareholders to support the NCPPR proposal.

Saylor highlighted the growing public and political support for Bitcoin, citing incoming U.S. President Donald Trump's statements in support of the cryptocurrency remarks, and the launch of Bitcoin investment products by Wall Street firms. He described the trend as part of a broader "cryptocurrency renaissance."

Microsoft's board opposed the proposal, calling it "unnecessary" and citing existing processes for managing and diversifying the company's financial assets.

Not only is this an option for Microsoft, legendary investor and Bridgewater Associates founder Ray Dalio still chooses gold. Because he believes cryptocurrencies still face unique challenges.

"The reason I worry about cryptocurrencies first and foremost is privacy," Dalio said. "Knowing exactly what you own and where it is is also an effective way to tax it."

Dario said that although Bitcoin has " Advantages,” but the number one cryptocurrency has yet to fully “prove itself.”He also doesn’t believe Bitcoin is a time-tested hedge against inflation.

"The reliability of cryptocurrencies, like, 'Does it correlate to inflation? Does it correlate to those things? No, not really, not really "Well," he said. "It's still very much a speculative vehicle."

Unlike gold, Bitcoin may not, he added. Will soon become the main reserve currency.

"It's unlikely to be a reserve currency, it's not going to work," Dalio said.

But there is Trump in the currency circle. Trump's so-called "crypto-friendly" expectations not only helped Bitcoin reach a historical high of $100,000, but also It brings endless imagination, and the latest picture is like this:

If You check out MicroStrategy Chairman Michael Saylor Post on Twitter account, you will find: the following style of stickers and text is an infinite loop.

It is intended to spare no effort to promote the "broader vision" of Bitcoin.

But this is just an episode in Michael Thaler's vision. His long-term vision is this: in 2045, the price is $13 million One coin accounts for 7% of the world’s wealth.

This is his near-term vision, his vision for next year:

Let’s talk reality.

The suggestion that big companies like Microsoft promote the creation of Bitcoin reserves may be part of more than just what Michael Thaler calls a broader "cryptocurrency renaissance" As part of this, as well as his tireless tweet promotion, this is more of a realistic consideration, even imminent.

And this risk is represented by the following pictureCovered up:

A charismatic leader like a savior, a once-in-a-lifetime performance that even surpasses NVIDIA's stock price performance and Bitcoin's historical highs!

The so-called establishment of Bitcoin reserves, the essence and the first step is to buy, which is very important to Michael Thaler and his MicroStrategy are vital, a matter of life and death.

Michael Thaler's "Debt/Equity, Bitcoin, Stock Price" game is a double Ponzi structure, which has become the current cryptocurrency field The biggest time bomb.

Inherent risks

First of all, we need to note that although Michael Thaler has been sparing no effort The promotion of Bitcoin is a grand vision of the future, but both himself and MicroStrategy 's executive team has been selling shares (https://www.secform4.com/insider-trading/1050446.htm), which is an obvious contradiction and warning sign. Of course, you can think that they are selling shares because Exchange funds to buy Bitcoin.

According to its website, MicroStrategy "provides software solutions and expert services for everyone." Provide actionable suggestions." Since 2000, the company has racked up net losses of $1.4 billion. Additionally, its revenue has deteriorated over the past decade.

As a software solutions company, it is bankrupt. Yet its CEO, Michael Thaler, transformed a faltering tech business into a leveraged Bitcoin holding.

The chart below shows that once they started buying Bitcoin in 2020, its price closely correlated with Bitcoin. The company is essentially a leveraged Bitcoin holding, so the relationship is likely to strengthen further as it buys more Bitcoin.

According to its public disclosure, as of 2024-12-8, it held 423,650 BTC.

Where does the money come from?

Convertible debt financing

MicroStrategy borrowed $7.27 billion using convertible bonds alone

The secrets and risks are here

Convertible bonds are unique because they offer investors the benefits of a bond with the bonus of equity exposure. Assuming there is no default by the convertible bond issuer, bondholders will receive their initial investment back at maturity , earn interest, and own call options that allow them to purchase the company's stock at a specific exchange rate. On November 21, 2024, MicroStrategy issued 30. 0% of US$100 million The convertible note will mature on December 1, 2029.

The shares were traded at $430 and the investment price was $672. The investor is willing to accept the call option instead of paying interest. If MicroStrategy's stock rises more than 50% over the next five years, the stock option has value, and the investor will receive 0% if the stock does not exceed $672.

There's also opportunity cost to consider. MicroStrategy's S&P credit rating is junk (B-), according to the ICE BOA Index, a bond-like yield. That's 6.75%. A five-year compounded investment return of 6.75% provides a total return of 47% over five years. total return, hopefully MicroStrategy stock could double in five years and break even, rather than holding a similarly rated junk bond

It looks like this on paper. is genius. The plan is simple: borrow money at zero interest on convertible bonds, buy Bitcoin, and pay off the debt when the stock exchanges for cheap. As long as the stock price keeps rising - Bitcoin is at least hovering around $100,000 - we're talking about that. Just one of the most successful feats of financial engineering ever.

Bitcoin miner Mara also joined the bandwagon, investing $8.5 million in convertible bonds to refinance the debt and naturally purchase more Many Bitcoins. The terms are pretty sweet: zero interest and a 40% conversion premium.

The real attraction is MicroStrategy stock -- or, more accurately, its volatility.

How can it raise $3 billion with zero coupon and a conversion price of $672.40 per share when the stock trades at $433? The answer lies in the stock’s explosive volatility, driven and amplified by its Bitcoin holdings. This volatility significantly increases the value of the call options embedded in the bond, which in turn offsets the cost of the bond itself. As a result, the company is able to borrow money at far lower interest rates than traditional debt.

MicroStrategy stock is volatile. Its 252-day historical volatility is currently (2024-12-7) at 106% (meaning an average daily move of 6.6%! The implied volatility of 30-day options on its stock is 2.5 times higher than similar duration options on Bitcoin itself.

MicroStrategy isn't embarrassed about this: In its third-quarter earnings report, management gave a shout-out to MicroStrategy Options trades have higher implied volatility than any S&P 500 stock.

Option prices are derived from the current stock price, strike price, time to expiration, and implied volatility. rates, interest rates, and dividends. All of these factors are known except for implied volatility.

Implied volatility measures what investors think the underlying stock will do in the future. How much will it fluctuate?

Convertible debt is priced based on the company's credit risk, the bond's interest rate, and the value of the call option. The higher the redemption value, the more the issuing company can earn. In this case, MicroStrategy stock orders Incredibly high implied volatility drives up option values, allowing companies to raise more capital

Courtesy of The Block, showing MSTR's implications. Volatility is roughly twice that of Bitcoin

Once MicroStrategy reinvented itself as a Bitcoin binge buyer, volatility spiked, first topping 70 %, and later exceeded 100%. This dynamic is self-reinforcing: Obtaining more Bitcoin amplifies stock price movements, allowing MicroStrategy to issue convertible bonds on increasingly favorable terms and then use it to buy more Bitcoin—further exacerbating volatility. . So the cycle continues.

Michael Saylor is touting Bitcoin to drive up the implied volatility of his stock, allowing him to issue debt as cheaply as possible.

He himself is the promoter and accomplice of this mechanism.

Because investors limited to fixed income investments now have a way to gain exposure to Bitcoin mouth. However, for others who want to own Bitcoin, there are better options. MicroStrategy’s stock is valued at at least double its Bitcoin holdings. And, as a reminder, its software business has almost no value. One could even say it has a negative value. Therefore, investors looking to buy Bitcoin should only buy Bitcoin or one of the many Bitcoin ETFs available.

As of 2024-12-12, the premium relative to the current price of Bitcoin is 2.2 times.

How it works

Historically, the energy sector’s convertible bond trades have been “the richest,” with the highest implied volatility 35-40%, while recent convertible bond issuances by technology companies have reached levels of 40-45%. According to IFR, MicroStrategy's convertible bonds are trading with an implied volatility of 60%, which is unprecedented in the equity-linked market.

Investors in these bonds use various trading strategies to obtain volatility returns, one of the classic methods is the so-called gamma trading. This strategy involves buying bonds and shorting stocks, dynamically adjusting the size of the short position to keep the combined position neutral to the stock price. The net effect is to buy when stock prices are low and sell when stock prices are high while remaining long in convertible bonds.position.

The specific operation is as follows:

Investors first make a purchase decision based on the "delta" ( A measure of the sensitivity of a bond price to changes in stock prices) shorting a corresponding proportion of MicroStrategy stock. As stock prices rise and bonds approach "parity," the bond's delta increases and investors need to sell more shares to remain neutral. When delta reaches 1, the investor's short position will be equal to the number of shares expected to be received from the conversion of the convertible bond. On the contrary, when the stock price falls, the bond falls sharply "out of the money", the delta value drops, and investors need to buy back the stock and reduce the short position. Continuous position sizing can reap benefits from a stock's volatility independent of its overall trend.

This can be compared to the use of wind energy: as long as there is wind, regardless of the wind direction, the turbine can rotate to generate electricity. For traders, volatility is the "wind" that drives their strategies. For MicroStrategy, its stock is a perfect fit for this kind of trade: high volatility, good liquidity, and easy to borrow for shorting.

Gamma trading strategy is not suitable for amateur investors. It is very complex and requires constant position adjustments.

If stock volatility calms down, these volatility-based arbitrage opportunities may disappear, leaving the windmills of gamma trading idle. (This may happen, for example, because investors in convertible bonds sell shares when prices rise and buy when prices fall, thus dampening volatility.)

MicroStrategy's share price volatility has cooled in recent weeks, which may have resulted in losses for some investors, although those losses were miniscule compared to the bumper gains from previous convertible bonds.

What could go wrong?

The potential reward for convertible bondholders is a price for MicroStrategy stock above the conversion price.

The risks of owning debt are twofold.

First, assuming the company does not default, bond investors will get their money back if the stock price falls below the conversion price. However, they will gain nothing in five years.

When peopleThe worst-case scenario emerges when you consider how MicroStrategy will repay its $7.2 billion in convertible debt when it matures. Unlike most companies, the answer isn't in the revenue it earns. Since 2000, their cumulative after-tax net income has been negative $1.5 billion. The average quarterly loss over the past eight quarters was $316 million. The last time they posted a quarterly profit was in 2021. Even at MicroStrategy's peak profitability, its cumulative net revenue was only about $650 million.

The company can issue more shares to repay its bondholders. This would dilute existing shareholders and potentially reduce the share price and the value of the convertible options.

Instead, MicroStrategy could issue more debt to pay off old debt. However, if Bitcoin prices fall, bondholders may not accept convertible debt and instead demand higher interest rates.

Finally, they can sell Bitcoin to repay their bondholders. Such a plan might work if Bitcoin trades at a high price. However, if the price is much lower, this can be very problematic. Of course, if one of the world's three largest Bitcoin holders sells in large quantities, it could severely damage Bitcoin's price.

MicroStrategy's 5 previously issued convertible bonds - are now deeply "in the money," with conversion prices ranging from $143.25 to $232.72.

If the price of Bitcoin (and MicroStrategy stock price) plummets. So what happens? If the tables are turned, how will MicroStrategy repay the principal of up to $6.2 billion in bonds?

In-the-money refers to the state when the conversion value is higher than the face value of the bond.

Formula: Conversion Value> Bond Face Value

Investor Tendency:

< p style="text-align: left;">In the in-the-money state, investors tend to convert bonds into stocks because they can earn higher returns.

The market price of convertible bonds reflects its dual attributes:

Bond value (debt attribute);

Conversion value (stock attribute)

When MicroStrategy's stock price is much higher. At the conversion price, the price of the convertible bond is mainly determined by the conversion value of the stock. At the current stock price, the "debt value" of the bond has been fully covered or even exceeded by the conversion value of the stock.

Each bond has a unique identification number, such as CUSIP (commonly used in the U.S. bond market) or ISIN (international standard).

Currently, the prices of MicroStrategy's previous five convertible bonds have fully reflected their conversion values, similar to a "parity" state.

If the price of Bitcoin (and MicroStrategy's stock price) plummets, MicroStrategy will face destruction:

First of all, MicroStrategy’s free cash flow cannot cover its debt, and its software business is losing money;

Selling Bitcoin to raise cash may be a last resort, but can you imagine one of the world's three largest Bitcoin holders standing up and calling for the sale of even 10,000 Bitcoins;

And the man who stood up was exactly the man who spared no effort to promote the grand renaissance of Bitcoin: Michael Saylor?

In this case, the rigid payment required by creditors and the sharp decline in Bitcoin prices may cause a greater shock than the FTX incident;< /p>Use numbers to show

The essence of micro-strategy is a double Ponzi structure:

First, the essence of the convertible bond model of the micro-strategy is a Ponzi takeover of the stock price, using high volatility to earn income (gamma trading shown above), regardless of whether the stock rises or falls, as long as the volatility is , it is profitable, because this strategy is extremely risky. Once the volatility drops, convertible bond investors must hope to find a taker in the stock price, otherwise they will lose everything.

This is a Ponzi scheme of stock prices;

Second, the conversion price of convertible bonds previously issued by MicroStrategy is roughly is 143 to 232, the current stock price is far higher than the conversion price, but if Bitcoin falls sharply, and the recent convertible bond conversion price is 672 US dollars, which means that objectively the taker needs to take over the order immediately, but note that even using the most optimistic valuation model, the stock price of MicroStrategy is only between 203 and 215 (including its Bitcoin price), so once It cannot be converted, and MicroStrategy needs to repay debt, but MicroStrategy's free cash flow is only about 10 million (2023 financial report); it can only borrow new debt to repay old debt, which is the second part of the Ponzi structure, debt Ponzi.

First evaluate the company’s valuation

Adopt the most optimistic valuation assumption as follows: the company’s market value minus the market value of its BTC holdings, and divide this indicator Combined with TTM recurring EPS, the underlying business trades at a P/E ratio of 202.5. Assume that the appropriate P/E and P/S ratios for the underlying business are 25 and 5, respectively. These are very broad assumptions because the underlying business will grow very little revenue and EPS over the long term. Under these conditions, MSTR’s fair value price (including its BTC position) is calculated to be between $202.45 and $214.67.

Please Note that according to the most optimistic valuation and my personal valuation model;

The fair price of the micro strategy is between US$202.45 and US$214.67 , while its 2031 and 2032 The conversion prices of convertible bonds due in 2020 are US$232.72 and US$204.33, which objectively requires micro-strategy to increase the stock price;

According to the valuation model calculation, MicroStrategy's stock price needs to return to US$188.9 to eliminate the premium, and this price is extremely fatal because this price cannot realize the redemption of its convertible bond conversion price in 2031 and 2032.

At the same time, based on the current Bitcoin price (US$100,924) and the micro-strategy stock price (US$411), when the Bitcoin price drops by 21% (assuming stock price andThe beta between Bitcoin prices is 3.14 (this data is calculated based on historical data). At this time, the Bitcoin price is 79,730 US dollars. The micro-strategy stock price will fall to a death price, which will immediately trigger the conversion price of all convertible bonds. All rigid debt principal needs to be paid.

Even if β is adjusted to 2, the price of Bitcoin will only fall by 33%, roughly to US$67,619;

Don’t forget that in March this year, MicroStrategy’s stock price was still running at $200 (considering a stock split), and the Bitcoin price at that time was $70,078.

The micro strategy cannot stop because the subsequent trigger price exceeds $672.