The Investment Logic Behind MicroStrategy's Big Pump in Stock Price

MicroStrategy (MSTR) stock price has risen from $69 at the beginning of the year to a recent high of $543, significantly outpacing Bitcoin. It is noteworthy that even when Bitcoin experiences pullbacks due to certain events, MSTR continues to maintain a strong upward momentum. This phenomenon has prompted a reevaluation of its investment logic: MSTR is not merely leveraging the concept of Bitcoin, but has its unique operational strategy.

MSTR's core strategy: to purchase Bitcoin through convertible bonds.

MicroStrategy was originally a company focused on business intelligence reporting systems, but this field has gradually declined. Today, the company's core strategy is to raise funds by issuing convertible bonds, purchasing a large amount of Bitcoin, and incorporating it as an important component of the company's assets.

Introduction to Convertible Bonds

Convertible bonds are a special type of bond that allows investors to choose at maturity to receive the principal and interest or convert the bond into company stock at an agreed price.

• If the stock price rises significantly, investors may choose to convert their shares, resulting in the dilution of the company's stock.
• If the stock price performs poorly, investors may choose to withdraw their principal and interest, and the company will have to bear the corresponding capital costs.

The operation mode of MSTR

MSTR utilizes funds raised from issuing convertible bonds to purchase Bitcoin. In this way, the company continuously increases its Bitcoin holdings while also enhancing the Bitcoin value per share.

For example, based on data from early 2024, the amount of Bitcoin corresponding to every 100 shares of MSTR stock increased from 0.091 to 0.107, and by November 16, it had reached 0.12.

In the first three quarters of 2024, MSTR increased its Bitcoin holdings from 189,000 to 252,000 by issuing convertible bonds, a growth of 33.3%, while the total number of shares was only diluted by 13.2% during the same period. This means that the amount of Bitcoin corresponding to every 100 shares rose from 0.091 to 0.107, gradually increasing the equity of Bitcoin holdings.

Latest developments

On November 16, MSTR announced the acquisition of 51,780 bitcoins for $4.6 billion, bringing its total holdings to 331,200. At this rate, the bitcoin value per 100 shares is approaching 0.12. From a coin-based perspective, MSTR shareholders' bitcoin "equity" is continuously increasing.

The essence and risks of the MSTR model

The operational model of MSTR is essentially similar to using Wall Street's leverage to "mine":

• Continuously issue bonds to purchase Bitcoin, increasing the per-share Bitcoin holding by diluting shares.
• For investors, purchasing MSTR stock is equivalent to indirectly holding Bitcoin, while also enjoying leveraged gains from the rise in Bitcoin prices.

This model is somewhat similar to a Ponzi scheme, as it uses newly raised funds to increase the rights of existing shareholders while continuously raising funds.

Challenges that the model may face

• Increased fundraising difficulty: If the stock price cannot continue to rise, subsequent convertible bond issuance may become difficult.
• Excessive dilution: If the rate of share issuance exceeds the rate of Bitcoin accumulation, shareholder equity may shrink.
• Mode is being imitated: As more companies adopt similar strategies, the uniqueness of MSTR may weaken.

The long-term strategic significance and risks of MSTR

In the long run, large capital hoarding Bitcoin has strategic significance. Considering that the total supply of Bitcoin is only 21 million, the national strategic reserve of the United States may occupy a considerable portion of it. For large capital, "hoarding coins" is not just an investment behavior but also a long-term strategic choice.

However, the current risks of MSTR may outweigh the benefits:

• If the Bitcoin price retraces, MSTR's stock price may face a larger decline due to leverage effects.
• Whether it can maintain a high growth model in the future depends on the company's financing ability and the market competition environment.

Investor's Reflection

Looking back at when MSTR made its first large-scale purchase of Bitcoin in 2020, many investors believed that the price of Bitcoin was already too high. However, MSTR bought a large amount when the price of Bitcoin reached $10,000, and afterwards, the price of Bitcoin rose to $20,000. This event reminds us that the operational logic and profound understanding of the market by American capital magnates are worth learning from.

The model of MSTR is simple, but it reflects a strong belief in the long-term value of Bitcoin. For investors, missing certain opportunities is not scary; the key is to learn from them and continuously improve one's investment awareness and judgment.