The founder of MicroStrategy, Michael Saylor, has chosen a bold approach towards buying Bitcoin, with some viewers considering it a brilliant foresight or a risky bet.
People who hold this viewpoint caution that MicroStrategy’s heavy investment in a fluctuating asset such as Bitcoin is risky. A dramatic decrease in Bitcoin’s value might put strain on the company’s finances, increase financial stress, and possibly make it difficult for the company to fulfill its debt obligations or secure further funding.
Regardless of the potential dangers, Saylor stands firm. The American businessman declares that he sees no compelling reason to dispose of his successful venture.
In simple terms, MicroStrategy currently possesses the most significant amount of Bitcoin among all corporations globally, with a staggering 447,470 Bitcoins as per current records. This substantial investment significantly increases the importance of MicroStrategy within the Bitcoin market and the overall Bitcoin community.
Funding MicroStrategy’s BTC purchases
In essence, while MicroStrategy is officially known as a business intelligence software company, its significant investments in Bitcoin make it operate more like a Bitcoin holding or treasury company.
Saylor’s Bitcoin shopping spree commenced with a corporate cash purchase worth $250 million in August 2020. Later, he opted for debt issuance as another method, starting with convertible notes – a type of debt that can be transformed into stock shares. These notes, typically having low interest rates, helped him raise an additional $650 million in December 2020, and subsequent issues brought in even more billions.
Back in June 2021, MicroStrategy sold a whopping $500 million worth of senior secured bonds. These bonds came with higher-than-usual interest rates and were guaranteed by the company’s assets.
More recently, on December 24, 2024, MicroStrategy suggested an expansion of its common stock from 330 million to a whopping 10.33 billion shares, and its preferred stock from 5 million to a massive 1.005 billion shares. This proposal offers the company the ability to acquire capital gradually, as needed, instead of releasing all new shares at once in one go.
This action adheres to our 21/21 Strategy, which is geared towards raising approximately $42 billion over the next three years. Half of this amount will be secured through stock sales, while the other half will come from bond issuances. The funds will primarily be used for purchasing more Bitcoins and also venturing into projects like creating a cryptocurrency bank or introducing Bitcoin-related financial services.
A heedless Ponzi scheme?
As per David Krause, a retired professor of finance from Marquette University, Saylor’s approach is considered “misaligned” or “not suitable.
It’s important to note that a significant decrease in the value of Bitcoin could have serious consequences for MicroStrategy (MSTR). This could result in diminished shareholder equity, difficulties with debt repayments, and even potential financial hardship or bankruptcy. Such conditions might prompt a mass sale of MSTR shares.
In his written statement to CryptoMoon, Krause, who has spent most of his career studying, teaching, and practicing corporate finance and investments, with over a decade served as a chief financial officer, emphasized that treasury assets should be composed exclusively of easily liquidated and low-risk financial instruments like money market securities.
Mastercard’s Bitcoin holdings have generally been valued higher than their actual worth (Net Asset Value or NAV) in the open market. By January 9th, these Bitcoin assets represented about half (51%) of Mastercard’s total market value, as reported by BitcoinTreasuries.net.
If MSTR’s stock price exceeds its Bitcoin net asset value, the company might opt to obtain additional capital via borrowing or issuing new shares, with the aim of purchasing more Bitcoin. However, Kruger cautioned that this approach could lead to shareholder dilution.
This method essentially sets up a cycle. When the firm’s Bitcoin assets enhance its market standing and share value, it can issue more debt and buy even more Bitcoins.
Some social media analysts have likened this looping strategy to a Ponzi scheme.
According to financial analyst Jacob King, the system relies on Bitcoin’s continuous increase in value. If Bitcoin plateaus or experiences a fall (which may occur), the mechanism falls apart. He considers this arrangement unsustainable and likens it to a Ponzi scheme.
In their interaction with CryptoMoon, MicroStrategy did not address the criticisms raised. However, in a recent media interview, Saylor likened their strategy to the methods used in Manhattan real estate dealings.
He explained that, much like developers in Manhattan, they tend to increase their borrowing when property values rise, in order to construct more real estate. This pattern has been recurring over the past 350 years in New York City, giving rise to its skyline. Essentially, he referred to this as an economic strategy.
In a recent publication, Kruger, known for his critical stance towards MicroStrategy’s emphasis on Bitcoin, stated that according to the formal definition set by the U.S. Securities and Exchange Commission, MicroStrategy’s Bitcoin strategy does not qualify as a Ponzi scheme.
A regulatory agency explains that a Ponzi scheme is a type of deceptive investment strategy where promised earnings are paid out to earlier investors using funds from more recent ones, not through any legitimate or sustainable income.
Gracy Chen, CEO of crypto exchange Bitget, agreed with Kruger’s analysis.
Unlike a Ponzi scheme, which relies on new investor money to pay returns to earlier investors, MicroStrategy’s approach depends on market-driven appreciation of Bitcoin’s value.”
Chen explained to CryptoMoon that this approach resembles Charles de Gaulle’s challenge to the Bretton Woods system, where he converted dollars into gold. In essence, it involves taking advantage of what seem to be vulnerabilities within contemporary monetary theories in order to profit from asset growth.
The undeniable success of Saylor’s Bitcoin blueprint
By January 8th’s market close, MicroStrategy shares were trading at approximately $331.70. This represents a staggering 2,200% increase from when the company first bought Bitcoin on August 11, 2020, where it closed at $14.44 that day. In contrast, Bitcoin’s price grew by around 735% over the same timeframe.
From my perspective as an analyst, it’s clear that regardless of personal opinions about Saylor, his strategies have indisputably bolstered MicroStrategy’s cryptocurrency holdings and overall stock performance. This significant growth has ultimately secured MicroStrategy a coveted place within the Nasdaq-100 index in December.
As I delve into the intricacies of Bitcoin investment, I ponder over the possible dilution of shareholder equity. However, proponents in this field emphasize that Bitcoin’s substantial long-term growth potential could counterbalance these risks. Furthermore, MicroStrategy’s unique convertible debt structure, as highlighted by Chen, might serve as a protective barrier during turbulent times.
Chen noted that a long-lasting downturn in the market might lead to cash flow issues for the company and increased vulnerability regarding debt handling. Yet, the company’s convertible debt—which isn’t backed by any assets—provides a degree of protection against immediate compulsory liquidation events.
The company’s approach of raising capital through equity offerings, even during bear markets, further mitigates the risk of selling its Bitcoin holdings.”
The Bitcoin exit strategy
In a nutshell, MicroStrategy’s mission is simple: Keep buying Bitcoin.
This asset functions as a long-term investment for strategic purposes, offering protection against economic instability, and boosting shareholder worth. It’s also useful in obtaining loans or raising funds for potential business ventures without the need to sell its Bitcoins.
According to Alexander Panasenko, the head of product management at VixiChain, there’s a possibility to earn profits from the vast reservoir of Bitcoin. This is because when you possess a large quantity of this inflation-resistant asset that retains value, you can generate income merely by holding it, or by lending and borrowing it.
Despite some critics raising concerns about the lack of a defined exit plan for Saylor, Bitcoin maximists argue that such a strategy is unnecessary because they view Bitcoin as the ultimate means to leave behind conventional financial structures.
As an analyst, I find that stock dilution is a pressing issue we’re currently grappling with. However, MicroStrategy’s strategy of investing in Bitcoin has primarily proven advantageous for them and the wider Bitcoin community. This approach has served as a catalyst, sparking similar moves globally.
So, as MicroStrategy keeps fueling discussions on the future impact of digital assets within our economy, with an increasing number of businesses adopting these assets and revealing innovative ways to leverage them, it’s indeed a positive development,” Panasenko expressed.
If digital asset-related proposals don’t work out successfully, it can cast doubt on the entire sector and potentially set us back.
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2025-01-09 15:10