Bitcoin Reserve Company: Why spend $2 to buy $1 of BTC?

What exactly is the goal of a Bitcoin treasury company? This article is based on an article written by Golden Finance and compiled and written by Foresight News. (Synopsis: The truth behind the corporate buying of bitcoin: the cash-out and stock trading game of internal executives? How should investors rationally analyze) (Background supplement: rich dad warns that "ETFs are just wallpaper scams": owning physical gold, silver and bitcoin is the truth of getting rich in troubled times) What are the goals of a Bitcoin treasury reserve company? It is to increase the ratio of bitcoin per share, which is the ratio between the total amount of bitcoin held by the company and the number of fully diluted shares of the company. Microstrategy companies are not trying to seize the moment and reap dollar gains through bitcoin trading, their only focus is to increase the proportion of bitcoin per share (BPS) by adding bitcoin to their balance sheet in a way that adds value. We call the size of its Bitcoin holdings "Net Asset Value (NAV)" and the ratio of its market capitalization to NAV is "Market Value Premium (mNAV)". If a company has a market cap of $10 billion and its Bitcoin holdings are worth $5 billion, then the company's premium market cap is $2. (Let's say the company has a stock supply of 100 million shares at $100 per share and a Bitcoin price of $100,000.) This means that the company holds 50,000 bitcoins, i.e. the number of bitcoins per 1,000 shares corresponds to 50,000/100,000 = 0.5 coins. The main way Bitcoin Reserve boosts its earnings per share (BPS) is through an "ATM" program: issuing new shares, selling them directly on the market, and using the proceeds to buy more Bitcoin. This is the first avenue that I call the reserve company can take advantage of. Part I: Stocks (ATMs) Going back to my example, this $10 billion company could issue $1 billion worth of new shares, sell it to the market, and then immediately use the resulting cash to buy $1 billion worth of Bitcoin. Assuming that the price of the stock and Bitcoin does not move (this is just to understand the math behind it), then the company's new market cap is $11 billion and the new net asset value is $6 billion. Its NAV premium is now 11/6 = 1.83, so it's down, but its bitcoin ratio per share is now 60,000/110,000 = 0.545, so it's up. Then we can define a "Bitcoin yield", which is the growth of earnings per share: 0.0545/0.5 = 1.09, i.e. a yield of 9%. The company bought more bitcoin in a "value-added" way: even when the number of shares was diluted, this dilution still appreciated in terms of earnings per share because the ratio increased. This operation is the most commonly used by Bitcoin treasury reserve companies and can only be carried out when the company is trading above its NAV, i.e. when the mNAV premium is above 1. The higher the mNAV premium, the more profitable this ATM operation will be, resulting in a higher "Bitcoin yield". Basically, the company's management is selling shares at a premium to short-term stock buyers, and the gains they receive will ultimately benefit long-term shareholders. (But obviously short-term buyers have the potential to become long-term holders, so if you think it's worth it in the long run, it's okay to rationally accept buying at a larger premium.) This "arbitrage" between a company's market capitalization and its balance sheet can theoretically also operate in reverse: if the company's share price is significantly discounted relative to its net asset value, then management can decide to sell bitcoin on its balance sheet to buy back shares, which also increases the number of bitcoins per share. In both cases, management is trading with short-term stock traders who either buy at a large premium or sell at a significant discount, and the proceeds of these operations are redistributed to long-term shareholders, and their book value per share increases, meaning that the theoretical "floor price" of Bitcoin-denominated shares is rising. In fact, by far the most attractive operation for the company is to sell the stock at a premium above the net asset value (mNAV), because selling when the mNAV depreciates is trickier: first, if the scale is large enough (which it does in terms of strategy), this could negatively affect the price of the underlying asset (Bitcoin), leading to a potential "death spiral" (i.e., a fall in both Bitcoin and stock prices). Second, it sends a negative message to the market, makes the company look weaker, and makes it smaller. Finally, such an operation may have tax implications, reducing its profitability. As a result, a Bitcoin reserve company will primarily focus on selling shares at a higher NAV per share to increase earnings per share and generate Bitcoin earnings. It is worth noting that given that shareholders are buying Bitcoin Reserve companies for their Bitcoin earnings, higher Bitcoin yields justify buying such companies at a higher NAVP, which will also allow the company to consistently generate higher Bitcoin earnings. Higher net asset value per share is both a cause and a consequence. "It doesn't sound sustainable, and it only works if there are more stupid people willing to buy at a premium!" That's right, that's largely true, which is why a Bitcoin Reserve Company that operates solely by selling shares (ATMs) is a crippled tool, and any aspiring Bitcoin Reserve Company should also use a second means to reap bitcoin gains: the use of debt on top of equity. Part II: Debt (Leverage) The way businesses use debt is very straightforward: if you believe that Bitcoin will grow at a certain compound annual growth rate (GAGR) (i.e. annualized return on investment), then you can issue a fixed income instrument with an interest rate below that compound annual growth rate and "take the difference" in the form of Bitcoin earnings. I won't go into detail about which debt instruments a company might use, but let's say it can borrow at an interest rate of 8% per annum and expect Bitcoin to grow at a CAGR of more than 20% per year. The company can then borrow dollars and use the proceeds to buy Bitcoin, resulting in a 12% spread (20%-8%), and then return earnings to shareholders through a higher EPS ratio. Obviously, I know that people are extremely afraid of leverage and tend to think that using any leverage in the cryptocurrency space will make you lose your money, but:1/ I have written an entire article (to be updated) about Microstrategy, showing that their use of leverage is very conservative and the possibility of blowing up positions is extremely low; 2/ Obviously, it is possible to outperform Bitcoin with moderate leverage, especially if you have the protection of debt maturity. A simple mental model can understand the type of leverage involved in a company like MicroStrategy, i.e. imagine a long-term Bitcoin multi-top position with 1.2x leverage, which will only be forcibly liquidated if the price of Bitcoin falls below the theoretical "closing price" for three consecutive years. If a company can permanently acquire more Bitcoin through a leverage, it will be able to have a reserve that outperforms Bitcoin, providing Bitcoin earnings to shareholders. Long-term shareholders can think of the Bitcoin-per-share value ratio as the theoretical floor of their stock price, and this floor will rise permanently in Bitcoin-denominated terms. Bitcoin Reserve is essentially a tool designed to outperform Bitcoin's performance. That's why some people are willing to hold shares in these companies for a long time at a price higher than book value, without becoming the big one. For example, in 202...