Shares of MicroStrategy, a business software company transformed into “the world’s first Bitcoin financial company,” have soared 450% in the past year, giving the Virginia company a market value of $80.9 billion. MicroStrategy’s rapid success is largely due to the rapid rise of Bitcoin. The company is the world’s largest corporate holder of Bitcoin, owning about 2% of the cryptocurrency on the market, worth about $40 billion. (U.S. spot ETFs, anonymous Bitcoin founder Satoshi Nakamoto and cryptocurrency exchange Binance are the only entities with more Bitcoin than MicroStrategy.)
Founded in 1989, MicroStrategy has been a software solutions company for most of its life. This is still how it generates revenue, but the business unit has been in steady decline since 2014, resulting in the company’s unusually low price-to-earnings ratio of -198.72 (as of December 26). Fortunately, MicroStrategy founder and chairman Michael Saylor found a solution to save the company. Thaler founded the company at age 24 after graduating from MIT and served as its chief executive until 2022 before taking on the role of executive chairman.
In August 2020, Thaler realized that the company’s prospects were poor and began to use the company’s cash reserves to purchase Bitcoin. He also began issuing convertible bonds — bonds that can later be converted into a predetermined number of shares at a set price — to raise cash to buy Bitcoin.
In an interview with CNBC on December 13, Saylor described MicroStrategy’s role as “inserting traditional capital markets that require bonds and stocks into the crypto economy.”
“We realized that our really great strategic franchise is that we can securitize Bitcoin. I can issue fixed income securities, bonds, fixed income preferred stocks or high volatility equities, which are products that the capital markets want. ,” Thaler explained on the Dec. 5 episode of the Prof G Pod with Scott Galloway.
How exactly does MicroStrategy’s Bitcoin business work?
Essentially, MicroStrategy is borrowing money through convertible bonds at low interest rates to buy Bitcoin. Since MicroStrategy is a significant buyer and the supply of Bitcoin is fixed, its move drives up the price of Bitcoin, thereby increasing the value of its Bitcoin holdings and the company’s stock price, further allowing the company to borrow at low interest rates More funding. Over the past five years, MicroStrategy has issued $7.27 billion worth of convertible debt, including $3 billion in shares last month at zero interest, with all the cash used to buy Bitcoin.
“In the Bitcoin bull market, it is the financial equivalent of a perpetual motion machine,” Citrini Research described MicroStrategy’s business model in a November 2021 blog post.
The underperforming software company has seen its market value rise 46% since Donald Trump was elected, fueling hopes that the incoming administration will implement crypto-friendly policies.
Thaler is betting big on Trump. MicroStrategy announced in its third-quarter earnings report in October that it plans to raise $42 billion in equity and debt over the next three years. MicroStrategy currently holds 423,650 Bitcoins, a third of which was acquired after Election Day.
However, even taking into account MicroStrategy’s success with its Bitcoin bets, its stock price may not be sustainable. The company’s market capitalization is currently twice the value of its Bitcoin holdings.
Thaler believes this valuation is justified by providing investors with leveraged exposure to Bitcoin. “We sell you the equivalent of 2x Bitcoin in equity and give you 2x the return by selling bonds that remove the risk at the bottom of the capital structure,” he said on the Scott Galloway Podcast.
However, as Sherwood News financial writer Jack Raines noted in his analysis of MicroStrategy, “leverage works both ways,” and he believes the company is not immune to the risk of a sharp decline in Bitcoin’s price.
Anyone who has followed Bitcoin knows that it is not always in a bull market. Since August 2010, Bitcoin has been declining in 74 of 173 months — down about half of the time. During a bear market cycle, MicroStrategy stock, which is highly correlated to the price of Bitcoin, may fall below the convertible bond conversion price (the price at which bond investors convert loans into stocks), which means that convertible bonds will not convert to equity investors. MicroStrategy is required to repay the loan by selling Bitcoin when it matures.
Raines warned: “The conversion price range for the aggregate $4.2 billion due between 2027 and 2032 is $143.25 to $232.72, with the latest conversion price of $672.40. Although MicroStrategy’s stock price is currently well above the latest conversion price All but $120, but just two months ago it was trading below $120 and didn’t break above $200 until the recent rally.
