Yon the summer of 2020, as the Covid-19 pandemic disrupted economies around the world, an obscure American software company decided to diversify. MicroStrategy, whose headquarters are located next to a shopping center and a subway station in Tysons Corner, Virginia, had decided that the stable “software as a service” business was not bold enough.
Instead, it would diversify by investing up to $250 million in alternative assets: “stocks, bonds, commodities like gold, digital assets like bitcoin or other types of assets.”
Less than five years later, the bitcoin rush has gone stratospheric. MicroStrategy’s stock price has risen twenty-fold, raising its market capitalization to nearly $75 billion and catapulting the stock into the Nasdaq 100 index of top technology stocks.
The bold bet of its co-founder and chairman, Michael Saylor, has made MicroStrategy a top pick among UK investors, as digital currencies and tokens were boosted by Donald Trump’s election victory, a despite concerns that a sharp reversal in cryptocurrency prices could threaten its survival. .
Saylor’s strategy evolved into the world’s first “bitcoin treasury company,” with MicroStrategy pursuing a seemingly relentless approach to buying bitcoin, financed by issuing billions of dollars in bonds and new shares. Fans of the company call this process a flywheel, in which issuing debt to buy bitcoins boosts MSTR’s stock, allowing it to issue more shares to raise funds to buy more bitcoins.
Saylor, who compared bitcoin to real estate in Manhattan in the year 1650, insists that the company will follow a long-term strategy of buying bitcoin, quarter by quarter.
Saylor, an aeronautical and astronautical engineering graduate whose dreams of becoming a pilot or astronaut were dashed by a medical condition, recently told Yahoo Finance that he expected to buy bitcoin always at the top of the market, predicting: “It’s going to appreciate against the dollar”. forever.”
Critics point out that Manhattan properties offer guaranteed rental income as well as prospects for asset value growth. Saylor, however, uses a measure called BTC Yield, which MicroStrategy calls a key performance indicator, which tracks changes in the relationship between your bitcoin holdings and the number of shares in the company.
While non-holders may look at the $100,000 price hit in December and think they’ve missed the bitcoin boat, Saylor argued: “You’re getting a 90% discount on a $1ma coin. “I’m sure I’ll buy bitcoin at $1 million, probably a billion dollars a day worth of bitcoin at $1 million a coin.”
Michael Lebowitz, portfolio manager at RIA Advisors, has claimed that MicroStrategy is “taking advantage of investors” and generating optimism in bitcoin to generate greater volatility in its shares.
“The valuation of MicroStrategy shares is at least double that of the bitcoins it owns. And, as a reminder, your software business is almost worthless. You could even argue that it has a negative value,” Lebowitz. wrote in December. “Consequently, investors who want to buy bitcoin should simply buy bitcoin or the numerous bitcoin ETFs available.”
In the third quarter of 2024, total revenue for MicroStrategy’s software business fell 10.3% year-over-year and the company’s net loss more than doubled to $340.2 million.
During November, MicroStrategy was the most-bought stock by clients of UK investment service Interactive Investor (ii), ahead of regular favorites such as Nvidia, Tesla and Lloyds Banking Group.
As of December 31, MicroStrategy had spent $27.9 billion acquiring a total of 446,400 bitcoins, at an average purchase price of approximately $62,428 each. Those bitcoins – equivalent to about 2% of the 21 million bitcoins that can never be produced – are now worth about $42 billion.
MicroStrategy has acquired 2,138 BTC for ~$209 million at ~$97,837 per bitcoin and has achieved a BTC return of 47.8% QTD and 74.1% YTD. As of 12/29/2024, we accumulated 446,400 $BTC acquired for ~$27.9 billion at ~$62,428 per bitcoin. $MSTR https://t.co/58aXM7g6u2
—Michael Saylor⚡️ (@saylor) December 30, 2024
“}}”>
MicroStrategy has acquired 2,138 BTC for ~$209 million at ~$97,837 per bitcoin and has achieved a BTC return of 47.8% QTD and 74.1% YTD. As of 12/29/2024, we accumulated 446,400 $BTC acquired for ~$27.9 billion at ~$62,428 per bitcoin. $MSTR https://t.co/58aXM7g6u2
—Michael Saylor⚡️ (@saylor) December 30, 2024
This strategy has driven MicroStrategy’s share price up almost 400% during 2024, a year in which the value of bitcoin more than doubled.
The flywheel was expected to turn faster now that MicroStrategy was added to the Nasdaq 100, as exchange-traded funds that track the index must now automatically buy its shares. “It’s like bitcoin is joining the Nasdaq,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
But shareholders who bought in November may have seen their investment fall. MicroStrategy shares rose 58% in November, but fell more than 20% in December.
In October, MicroStrategy announced It planned to issue $21 billion in equity and $21 billion in fixed-income debt over the next three years to finance more bitcoin purchases.
after newsletter promotion
Shortly before Christmas, the company said it would ask shareholders for permission to issue billions more shares, increasing the number of its Class A common shares from 330 million shares to 10.33 billion.
MicroStrategy is attractive to investors who want exposure to bitcoin without owning the cryptocurrency itself. They can hold their shares through a savings account such as a Roth IRA in the US or an Isa in the UK.
“MicroStrategy has been a popular investment among investors with a high risk appetite for a couple of years,” said ii’s Lee Wild, describing it as “a proxy for bitcoin.” “Significant increases in the price of bitcoin, especially in February and November of this year, have sparked increased interest.”
A key part of MicroStrategy’s approach is to issue convertible bonds with low or no interest payments. They are structured so that investors can be reimbursed in the company’s shares if the price rises sharply when the bond matures, effectively giving bond investors exposure to bitcoin.
In December, the company sold $3 billion of convertible debt which matures in 2029. Those notes pay no interest, but could be converted into shares at a price of $672, 55% higher than MicroStrategy’s share price of $433 on the day the debt was sold.
RIA Advisors’ Lebowitz said holders of MicroStrategy’s convertible bonds would benefit if their stock price was higher than the conversion price when their debt matured. But if not, they only get their original money back, losing years of interest payments if they had lent the money elsewhere.
The worst-case scenario could be MicroStrategy selling bitcoin to pay off its $7.2 billion of convertible debt as it matures, which Lebowitz said would be “very problematic if the price is much lower” than when the crypto was purchased. .
He called MicroStrategy “essentially a leveraged bitcoin holding company.” “The problem with such a leveraged scheme is that the company is putting all its eggs in bitcoin,” he said. “A sharp decline in bitcoin will likely accompany the collapse of MicroStrategy. The other risk, although less likely under a Trump presidency than under a Biden one, is if the Securities and Exchange Commission (SEC) decides to investigate MicroStrategy for its ‘unique’ strategy.”
Saylor, before assuming his role as one of bitcoin’s most vocal evangelists, was famous for losing $6 billion of personal wealth in a single day in 2000, when MicroStrategy was forced to restate two years of revenue and its stock fell. quickly 62%. .
MicroStrategy is not the only company pursuing the goal of becoming a bitcoin treasury. Crypto miner RiotPlatforms announced earlier this month that it had acquired more than 5,000 bitcoins at an average price of $99,669 each, funded by a $525 million convertible bond, while Tesla owns 11,509 bitcoins. But Microsoft shareholders nay adding bitcoin to the company’s balance sheet this month.
Min Jung, a research analyst at Presto Research, warned that MicroStrategy would be vulnerable to a drop in the value of bitcoin. “For now, the favorable bitcoin price movement allows MicroStrategy to maintain a positive feedback loop: Rising MSTR stock prices allow for additional fundraising, which finances more bitcoin purchases, raising prices. bitcoin prices and stock values,” he said this month. “While effective during a bull market, the sustainability of this strategy largely depends on continued bitcoin price appreciation.”
While loyal bitcoin fans believe in holding on to their cryptocurrency during downturns, it’s not yet clear whether MicroStrategy investors will take the same approach.