On the edge of the abyss. How Bitcoin saved MicroStrategy
According to Michael Saylor in an interview with DigitraCom in 2024, MicroStrategy's Bitcoin strategy began in 2020, at a time when the company He was between a rock and a hard place.
The company managed a treasury of $500 million in cash that yielded 0% interest, in the context of the COVID pandemic, which predicted great inflation. Their options were to find something that would generate interest on that reserve or return the money to the shareholders by buying back the shares. Doing the second would mean losing competitiveness in the labor market, losing employees and harming your business, even losing it. They also discussed this in their own talk “MicroStrategy: The Case for Bitcoin on Corporate Balance Sheets.” They evaluated different options in which to put the capital and Saylor proposed Bitcoin to the board of directors. With the help of several partners, they managed to launch the Bitcoin strategy, which they then shared openly, since it was something that no company of this type had done before. Saylor believes that The strategy had 4 stages: defensive, opportunistic, programmatic and strategic. Bitcoin began as a defensive asset for the company because it is considered a commodity on the US stock market. Regulations only allow a listed company to put 40% of its liquid balance in securities (shares of other companies), but there is no such limit for property and commodities. The second reason for putting your capital in Bitcoin was having understood that it would be the monetary network of the future and They would gain an advantage by entering before the other companies. The first purchase was with half the cash they had available: $250 million. They used the other half to offer shareholders the possibility of selling their shares to the company for a premium, so that those who were not comfortable with the direction the company was taking could leave on good terms.
The opportunistic strategy: infinite money glitch
While some investors sold their shares at the time, news of Bitcoin strategy attracted new investors and after the 20 days in which this buyback was in effect, the company ended up with an extra 175 million dollars, with which they bought more bitcoins. Towards the end of 2020 the price of Bitcoin was on the rise, which drove MSTR stock higher as well, giving the company more cash to continue making purchases, at the same time that the company Square began buying Bitcoin. MicroStrategy then had the idea of issuing a convertible bond to raise more capital. This bond paid a very low interest (0.75% annually for five years), so the company was able to finance itself at little cost, and since it was convertible, shareholders could keep it in the form of company shares instead of receiving the interest. In the period in which that bonus was paid, Bitcoin rose almost 50% annually, so MicroStrategy was able to pay that interest without major inconveniences. MicroStrategy executives understood that There is a market demanding volatility and MicroStrategy could offer it through convertible bonds. Therefore, it issued more bonds at 0 or almost 0% interest to buy more bitcoins, which were oversubscribed.
The programmatic strategy
During 2021 and 2022, MicroStrategy looked for a way to continue buying bitcoins during each quarter, using all possible means: using its cash flows from the software business, issuing more and different types of bonds, selling shares, and even taking out a loan from the Silvergate bank, collateralized with its bitcoin reserve. They created the subsidiary MacroStrategy to carry out these operations. This made MicroStrategy shares a leveraged Bitcoin position accessible to traditional financial markets before ETFs were approved. By purchasing a MicroStrategy share, an investor could not only have exposure to bitcoin in their portfolio, but leveraged exposure, obtaining a higher return than bitcoin.
By 2023 he had already repaid the loan, releasing that collateral of bitcoins, which began to appear in financial reports as unencumbered. MicroStrategy executives realized that their opportunity was to securitize bitcoin and thus be able to offer a product to several investor profiles at the same time. Investors who would like to put bitcoins in their portfolio, but cannot buy the asset directly or cannot buy an ETF, equities, or have to buy options, or debt. In this way, MicroStrategy's action works as a bridge between traditional finance and the cryptoeconomy.
The difference between MicroStrategy and ETFs
In early 2024, the first Bitcoin exchange-traded funds (ETFs) were approved. As their name suggests, these are investment funds that buy bitcoins, and that can be subscribed directly from the stock exchanges. Some might think this would replace MicroStrategy stock as an instrument to access Bitcoin from institutional finance, but this is not so.
MicroStrategyInvestment fundsCorporate structureGoing concernActive control over capital structureNo management feeTrust companyLimited control over capital structureManagement fee greater than zeroAbility to develop softwareAbility to innovate to create added valueNoneAbility to generate income in its operationsReinvest the cash flow of the software businessNoneAbility to leverage capital marketsDebt – Guaranteed or unsecured, Bonds convertible or structured, Net worth, preferred sharesNone MicroStrategy, “Q2 2024 Earnings Presentation” page. 21 As MicroStrategy executives explain, their position as an operating company allows them a leverage that investment funds do not have. In simple terms: investment funds follow the price of bitcoin 1:1. If a fund has USD 1,000,000 from investors, a share is USD 1 and the price of bitcoin is USD 100,000, the fund buys 10 bitcoins. If bitcoin rises to USD 110,000, each share of the fund will rise to USD 1.1 and the total fund will be USD 1,100,000. If 1 investor decides to withdraw from the fund and redeems 100,000 shares (worth USD 110,000), the total shares become USD 900,000 and the fund must sell 1 BTC to pay them, leaving a total of 9. That is, the fund It only acts as an intermediary in the purchase, sale and custody of bitcoins for participants. Instead, MicroStrategy buys more bitcoins without the need for new investors to come in (or at least not directly). MicroStrategy calls this “BTC Yield”:
BTC Yield is a key performance indicator (“KPI”) that represents the period-to-period percentage change in the ratio between our bitcoin holdings and our assumed diluted outstanding Shares. MicroStrategy, MicroStrategy, “Q3 2024 Earnings Presentation.” Page 43
The company projects to have a BTC return between 6% and 10% over the next 3 years. That is, the number of bitcoins increases 6-10% in relation to the number of shares in circulation. However, the latest press release showed that it reached 38.7% quarter-on-quarter and 63.3% year-on-year. In addition to this, he announced plan 42, to raise USD 42,000,000,000 with which to buy more bitcoins from 2025 to 2027.
DateBTCUSDBTC PriceTotal BitcoinsTotal in dollars11/25/202455,500$5.4 MM $ 97,297.30386,700$21.91 MM11/18/202451,780$4.6 MM $ 88,837.39331,200$16.51 MM11/11/202427,200$2.0 MM $ 73,529.41279,420$11.91 MM9/20/20247,420$458.2 M $ 61,752.02252,220$9.91 MM9/13/202418,300$1.11 MM $60,655.74244,800$9.45 MM01/08/2024169$11.4 M $ 67,455.62226,500$8.34 MM6/20/202411,931$786.0 M $ 65,878.80226,331$8.33 MM4/1/2024 – 5/1/2024164$7.8 M $ 47,560.98214,400$7,538 MM19/03/20249,245$623.0 M $ 67,387.78214,246$7.53 MM11/03/202412,000$821.7 M $68,475.00205,000$6.91 MM26/02/20243,000$155.0 M $51,666.67193,000$6.09 MM06/02/2024850$37.2 M $43,764.71190,000$5.93 MM27/12/202314,620$615.7 M $ 42,113.54189,150$5.90 MM30/11/202316,130$593.3 M $ 36,782.39174,530$5.28 MM01/11/2023155$5.3 M $ 34,193.55158,400$4.69 MM09/24/20235,445$147.3 M $ 27,052.34158,245$4.68 MM01/07/2023 – 07/31/2023467$14.4 M $ 30,835.12152,800$4.53 MM04/29/2023 – 06/27/202312,333$347 M $28,135.90152,333$4,517 MM05/04/20231,045$29.30 M $28,038.28140,000$4,170 MM27/03/20236,455$150.00 M $ 23,237.80138,955$4,140 MM24/12/2022810$13.65 M $ 16,851.85132,500$4,027 MM22/12/2022-704$11.8 M $ -16,761.36131,690$4,012 MM01/11/2021 – 12/21/202222,395$42.8 M $17,870.56132,395$4,024 MM9/20/2022301$6 M $19,933.55130,000$3,981 MM6/28/2022480$10 M $ 20,833.33129,699$3,975 MM02/15/2022 – 04/05/202224,167$190 M $ 45,596.35129,218$3,965 MM01/01/2022 – 01/31/2022660$25 M $ 37,878.79125,051$3,775 MM30/12/20211,914$94.2 M $ 49,216.30124,391$3,750 MM29/11/2021 – 08/12/20211,434$82.4 M $ 57,461.65122,478$3,655 MM28/11/20217,002$414 M $ 59,125.96121,044$3,573 MM13/09/20218,957$419 M $ 46,779.06114,042$3,159 MM21/06/202113.005$249 M $19,146.48105.085$2,740 MM18/05/2021229$10 M $43,668.1292.079$2,251 MM13/05/2021271$15 M $ 55,350.5591,850$2,241 MM05/04/2021253$15 M $ 59,288,5491,579$2,226 MM12/03/2021262$15 M $ 57,251,9191,326$2,211 MM05/03/2021205$10 M $48,780,4991,064$2,196 MM01/03/2021328$15 M $45,731,7190,859$2,186 MM24/02/202119,452$1,026 MM$ 52,745.2290.531$2,171 MM02/02/2021295$10 M $33,898.3171,079$1,145 MM22/01/2021314$10 M $31,847.1370.784$1,135 MM21/12/202029,646$650 M $21,925.3970.470$1,125 MM12/04/20202,574$50 M $19,425.0240,824$475 M14/09/202016,796$175 M $ 10,419.1538,250$425 M11/08/202021,454$250 M $11,652.8421,454$250 MMicroStrategy Bitcoin purchase history from 08/11/2020 to 11/25/2024. Source: Bitcoin Treasuries.
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