Recently, the price of Bitcoin has fluctuated violently near the US$100,000 mark, especially after it surged to US$104,000 last week and then crashed to US$90,500, which many people considered Emotions peak and chips are loose. Some institutional investors who have made huge profits have begun to choose to gradually exit. For example, Meitu has liquidated all its crypto assets. The market is worried that this wave of profit-taking may accelerate.

At a time when market sentiment is generally bearish, MicroStrategy bucked the trend and announced on Monday that it had purchased another $2.1 billion worth of Bitcoin. Although this radical strategy gave the market a shot in the arm, it also triggered controversy about the sustainability of its investment strategy. The market is worried that if the price of Bitcoin continues to fall sharply, MicroStrategy may be in trouble, which will trigger a black swan event that will affect the entire encryption market.

MicroStrategy: Bitcoin holding giant and market radical promoter

As a global holder of Bitcoin As the largest listed company, MicroStrategy's strategy has always attracted much attention. Data shows that the current circulation of Bitcoin is increasingly concentrated in the hands of a few large institutions. The top five Bitcoin holding entities other than Satoshi Nakamoto control a total of 9.9% of the circulating supply. Among them, Coinbase holds 1.12 million BTC, worth more than 112 billion US dollars; Binance holds 687,000 BTC, worth nearly 68.9 billion US dollars; BlackRock, Microstrategy and Bitfinex also ranked third to fifth respectively. In addition to Satoshi Nakamoto, the top ten holding entities currently control approximately 14.82% of the total Bitcoin circulation. The positions held by these institutions directly affect market trends.

Compared with other institutions, MicroStrategy's investment strategy is particularly aggressive. If the rise of Bitcoin in the US$40K-70K range is driven by ETFs, then the rise in the US$70K-100K range is inseparable from the push of MicroStrategy. MicroStrategy is known as the "perpetual financing machine" and its position-adding strategy played a key role in the rise in Bitcoin prices.

MicroStrategy's goal is to use prudent leverage to acquire as much BTC as possible, increase stock prices, and outperform Bitcoin itself. As of 2024 1On February 8, MicroStrategy held a total of 423,650 Bitcoins, with a cumulative investment of approximately US$25.6 billion, and an average cost of US$60,324. Since the beginning of this year, its quarterly BTC return has reached 43.2%, and its year-to-date return is 68.7%. At the same time, MicroStrategy's stock price far outperformed Bitcoin, rising 613% during the year, making it the most powerful "Bitcoin shadow stock."

MicroStrategy stock price

MicroStrategy Bitcoin holdings

MicroStrategy’s unlimited funding model

MicroStrategy (MSTR) is a software company listed on the US stock market. It will be All in BTC starting in 2020. Initially, Bitcoin was purchased through its own cash flow. Later, it was mainly raised funds through the issuance of convertible senior notes and continued to purchase Bitcoin on a large scale. These notes typically have fixed maturities and lower interest rates, and as the price of Bitcoin rises, the value of MSTR’s Bitcoin assets increases, thereby pushing up its stock price, creating a positive feedback loop. Through constant debt issuance and Bitcoin purchases, MSTR has established a self-reinforcing capital chain.

MSTR's financing model has the characteristics of low risk and high return. The convertible note is essentially equivalent to a contract superimposed with a free call option. For creditors, this is a sure-profit business: if Bitcoin falls and MSTR has money, creditors can get their cash back; if Bitcoin falls and MSTR has no money, creditors can still have a final guarantee, that is, Exchange it into stocks and realize the capital back; if Bitcoin rises, MSTR will rise, and the stock exchange can be executed, and the creditors can get more stock returns. In the worst-case scenario, if MSTRs fail, they are "senior" to common shares, giving holders priority in the event of bankruptcy or liquidation.

MSTR’s strategy has been a huge success. Since the company fully invested in Bitcoin, its stock price has skyrocketed, with an annualized return of 80%. The stock has risen more than 2,600% since August 2020, with a current market value of nearly $93 billion, far outperforming Bitcoin itself and all other major U.S. stocks. .

With outstanding performance, MSTR is on a path of unremittingly attracting global capital and investing in Bitcoin. On October 30, in the third announcement At the same time as the quarterly report, MSTR announced a “21/21 Plan” to raise $42 billion over the next three years through $21 billion in equity and $21 billion in notes to purchase more Bitcoin so far in November. Through this model approximately US$13.5 billion in BTC holdings accounted for 32% of the total funds in the "21/21 Plan", showing the market's strong confidence in MSTR.

Will MicroStrategy become a black swan?

In recent years, the crypto market has experienced many fluctuations and violent crashes, especially the bankruptcy of Luna and FTX, making investors particularly sensitive to the risks of similar companies.

MSTR's current market value is US$93 billion, which is approximately 2.2 times its Bitcoin holdings (Q3 main business revenue is only US$116.1 million). When Bitcoin rises, its stock price soars, and its financing capabilities are strong. A positive cycle is formed, but once the Bitcoin price enters a shock stage or declines, it will continue to erode the market’s confidence in the subsequent BTC price development, thus affecting the stock price, which will translate into Questions about MSTR's financing ability. Under the resonance of the two, MSTR's positive premium will quickly converge. This valuation difference is also the reason why funds such as Citron are shorting MSTR stocks.

As we all know, leverage is a double-edged sword. If BTC If the price falls, the worst outcome for MSTR may be to have to sell off its Bitcoin holdings to pay off its debt, triggering a "vicious death spiral." Thankfully, MSTR's debt is unsecured and does not directly rely on its Bitcoin. Bitcoin holdings. Although the company has issued notes backed by Bitcoin, these notes have been fully repaid as of the third quarter of 2024. Additionally, its earliest debt maturity date is 2027. In September, there is no major debt repayment pressure in the short term. In terms of annual interest repayment, MSTR's current total debt is approximately US$7.3 billion, on average. The interest rate is only 0.476%, the annual interest expense is approximately US$34.6 million, and the cost is relatively controllable.

In other words, MSTR borrows OTC leverage and does not have a liquidation mechanism. Theoretically, even if MSTR's share price is hit to zero, it still does not need to be forced to sell these Bitcoins. However, for MSTR CEO Michael Saylor, the company’s long-term value is much higher than the value of its BTC holdings. After multiple rounds of additional issuances, its equity ratio is currently not high. Assuming that the company faces bankruptcy and liquidation, he will not be able to obtain many BTC, which forces him to assume the responsibility of market value management. When the price-to-earnings ratio of MSTR is undervalued due to panic, it is a cost-effective operation to sell BTC in exchange for funds and repurchase MSTR from the market.

Whether MSTR is the guardian of Bitcoin or a risk maker, in the final analysis, it still depends on the performance of Bitcoin. At present, it does not seem to face major direct risks , its financing is also progressing smoothly. However, the price cycle of Bitcoin has always been consistent with its four-year halving cycle. According to historical rules, 2025 will also be a very exciting year, but there is a greater possibility of a bear market after that, and the MSTR risk level will change by then. high.

Summary

With the current Bitcoin price facing a correction, MicroStrategy’s position-adding strategy While it has injected confidence into the market, it has also raised deep questions about its sustainability. Although MicroStrategy's current risks appear to be controllable, the future trend of Bitcoin prices will determine whether it will be a Bitcoin guardian or a risk maker. For investors, timely assessment of possible risks, especially when Bitcoin enters an adjustment cycle, and good risk management have become crucial issues.

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