From CoinShares Research Blog by Alexandre Schmidt

Authors: Alexandre Schmidt, CFA; Satish Patel, CFA

In August 2020, a relatively small and unknown business intelligence company made a bold move and decided to pump its entire treasury reserves into bitcoin. Four years and more than 250,000 bitcoin later, MicroStrategy has become the world’s largest single corporate holder of bitcoin with its market capitalisation rising 50 times, surpassing US$50 billion in October 2024. More impressively, MicroStrategy has been able to command an equity premium of nearly 200% over its bitcoin holdings (a new record), which, at current prices, has a market value of just under US$18 billion and a cost base of US$9.9 billion (average US$39,394 per bitcoin).

As a result of this strategy, MicroStrategy has effectively become a bitcoin holding company with its legacy software business as a side gig. However, the latter was crucial in allowing Michael Saylor, MicroStrategy’s CEO, to issue low cost debt and carry on with his bitcoin purchasing strategy. Using convertibles, MicroStrategy has amassed over US$4.2 billion with a weighted average coupon rate of 0.81%. In addition, MicroStrategy is able to generate cash out of its legacy software business to assist in servicing its debt, although recently its cash generating power has been dwindling. We have summarised MicroStrategy’s bitcoin investment case below:

More recently, in August 2024, MicroStrategy completed a 10-for-1 stock split, which reduced its share price from the thousands of dollars to the hundreds, meaning that it was accessible to a broader, more retail focused investor base. In their latest earnings report, released in October, the company announced its “21/21 Plan,” committing US$42 billion in capital over the next three years to purchase bitcoin, using an equal blend of debt and equity financing. This strategy aims to leverage their growing share premium to expand their bitcoin holdings.

While ambitious, this plan largely depends on a number of factors. First, MicroStrategy needs financing conditions to remain favourable, and necessitates demand for their convertible notes, which allow the company to acquire bitcoin without diluting shareholders and at a lower cost of capital. It is important to note that, in 2021, MicroStrategy was able to raise debt capital at zero-coupon convertibles, but coupon rates have been going up with new issues.

Second, MicroStrategy is tied to its bitcoin holdings. There is a significant risk that, if MicroStrategy chooses to dispose of some of its bitcoin, its market valuation premium may crumble, dismantling an essential pillar of its investment case. Bitcoin disposals may also trigger tax events, which can be significant, given the US$7.7 billion capital appreciation of its bitcoin holdings since the beginning of its bitcoin purchases. In addition, in the future the company may be liable to be taxed on the unrealised gains related to its bitcoin holdings.

Finally, MicroStrategy’s bitcoin business may have outgrown its software business, meaning that cash flows from the legacy operations may not suffice to service coupons, although the company may be able to address this by finding alternative uses for its mammoth bitcoin balance, and ‘putting it to work’, in the form of lending it or using derivatives on their holdings, to generate income and provide a future source of debt payment support.