The focus of MicroStrategy is to start a positive flywheel cycle, making BTC and MicroStrategy’s market capitalization the perpetual motion machine of pump. Delving into the details can further explore the subtleties of this model.
Written by WOO
Background: Pump has surged nearly 500% this year, outperforming Bitcoin
As we all know, the boss of MicroStrategy, Michael Saylor, is a fervent believer in BTC, constantly Coin Hoarding regardless of bull or bear markets. With Trump’s election victory, BTC pumped and approached the $100,000 mark, while MicroStrategy, holding 386,000 BTC, also saw its stock price steadily climbing, with a rise of about 500% since the beginning of this year, surpassing BTC’s 121% rise.
How does the strategy of MicroStrategy work? Can MicroStrategy still rise? Is it a leveraged version of BTC or this round of LUNA? Let WOO X Research take a look with you!
What strategy does MicroStrategy use to buy BTC?
Currently, most people’s impression of MicroStrategy is mostly limited to buying BTC, in fact, MicroStrategy is a technology company founded as early as 1989, mainly providing data analysis solutions to help enterprises with data analysis and decision-making.
In August 2020, CEO Michael Saylor saw the value of BTC and believed it to be a scarce digital asset with long-term appreciation potential, able to combat Inflation and preserve value. He converted the company’s $250 million reserve into BTC, marking the beginning of MicroStrategy’s crazy Coin Hoarding.
As of November 2024, MicroStrategy holds approximately 386,700 BTC, accounting for 1.8% of the total global BTC supply.
How did they do it?
- MicroStrategy issuance debt purchases BTC:
The company raises funds through the issuance of bonds (such as convertible bonds) and then uses these funds to purchase BTC.
This is the starting point of the strategy, using leverage to increase Holdings in Bitcoin.
- Bitcoin price pump, MicroStrategy Market Cap rise:
As the price of Bitcoin rises, the asset value of MicroStrategy (which holds a large amount of BTC) also rises, driving the company’s stock market capitalization to rise.
- Market Cap rise, increase the weight of stocks in the index:
Market Caprise increases the weight of MicroStrategy’s stocks in financial indexes (such as S&P 500, NASDAQ, etc.).
More index funds need to allocate to MicroStrategy stocks to further boost the stock price.
- MicroStrategy issuance stock purchase BTC:
After the Market Caprise, MicroStrategy used the demand for its stocks in the market to issue new shares at a premium, sell them, and buy BTC.
- BTC price pump, further pushing the Market Cap:
The newly purchased BTC, as the price pumps, further increases the company’s asset value and market capitalization.
Market Caprise once again enhances the attractiveness of stocks in the market.
- MicroStrategy re-issuance of stocks, repeating the cycle:
MicroStrategy leverages the rise in stock market capitalization to repeatedly conduct new rounds of stock issuance and BTC purchases, forming a ‘flywheel effect’.
The focus of MicroStrategy is to start a positive flywheel cycle, making BTC and MicroStrategy’s market capitalization the perpetual motion machine of pump. Delving into the details can further explore the subtleties of this model.
Currently, MicroStrategy has five convertible bonds in the market, with a principal value of $4.25 billion, due between 2027 and 2032. These are medium to long-term bonds, and most of them are zero-coupon bonds, which means that the principal does not need to be repaid before maturity, reducing MicroStrategy’s default risk.
In terms of stock issuance, since the launch of the Bitcoin strategy, MicroStrategy has announced five stock issuances, raising a total of $44 billion.
Source: Bloomberg
Will MicroStrategy be liquidated when the currency price falls?
On November 21, the well-known shorting institution Citron stated: ‘Although Citron is still optimistic about BTC, we have hedged through shorting MSTR positions. We have great respect for Saylor, but even he must know that MSTR is overheated.’
So, is the concern about Xiangyuan reasonable?
The design pattern of the asset flywheel inevitably reminds people of Luna/UST, which relies on the two assets to push the price up rapidly. It also inevitably raises concerns: if the price of one of the assets falls, will it cause a chain reaction of liquidation and stampede?
But the trap mode of MicroStrategy is very different from Luna.
Low debt ratio: Currently, the Market Cap of MicroStrategy is about 750 billion US dollars, with bonds at 42.5 billion, and the overall debt ratio is low in the company’s financial structure, with maturity dates between 2027 and 2032.
No dumpingBTC willingness: Well-known KOL @TheFlowHorse recently stated that if Michael Saylor sells BTC, it would be the best trade ever. Michael Saylor responded that he will not sell BTC.
This commitment also ensures that MicroStrategy’s ‘premium issuance stock’ strategy can continue.
Premium returns to 2021 levels: From the chart below, we can see that even during the 2022 Bear Market, MicroStrategy has maintained a premium state and has not fallen below.
The current rapid rise of the green line indicates the market’s confidence in the MicroStrategy BTC strategy is being rebuilt, returning to the level of the bull market in 2021.
Source: CryptoQuant
If Bitcoin big dump, MicroStrategy is forced to dumping, the probability of triggering a chain stampede of stocks and coins is very low, and the leverage is not as exaggerated as imagined.
Conclusion: MicroStrategy’s success case has sparked a BTC buying frenzy among Web 2.0 companies.
The success of MicroStrategy’s BTC strategic reserve strategy has also attracted imitation from other companies, including:
RUMBLE: The video sharing platform announced the purchase of up to 20 million US dollars worth of Bitcoin as reserves
Interactive Strength: Fitness equipment company, announced the purchase of 5 million dollars worth of Bitcoin as reserves
Hoth Therapeutics: Biopharmaceutical company announced the purchase of $1 million worth of Bitcoin as a reserve
Other examples are too numerous to list, with an increasing number of companies (small-cap stocks) wanting to imitate the successful BTC reserve model of micro-strategy. However, most of them are short-term gimmicks. Firstly, the success of the strategy is partly built on capital intensiveness. Secondly, if small companies use this strategy, they are more likely to face investor skepticism and regulatory scrutiny.
But in any case, Bitcoin will be the biggest winner.
