The clone version of "MicroStrategy" is entering the market in bulk. Has the BTC "lying win strategy" been confirmed?

Author: flowie, ChainCatcher
Editor: Nianqing, ChainCatcher

Last week, after founder Michael Saylor announced that Microstrategy (NASDAQ:MSTR) aims to become the leading "Bitcoin bank," MSTR surged nearly 16% last Friday, breaking through $212 (temporarily retreating to $194), with its market capitalization skyrocketing to $43 billion, setting a new historical high.

Since Microstrategy launched its Bitcoin investment strategy in August 2020, MSTR has increased by over 1600%, outperforming BTC and major S&P 500 tech stocks like Nvidia.

This year, MSTR's outperformance over BTC has been even more pronounced. According to market data:

• Year-to-date, BTC has risen by 52%, while MSTR has increased by 180%.
• In the past 30 days, BTC has risen by about 7.41%, while MSTR has surged by 44%.

MicroStrategy's "laying down to earn" model has also attracted more imitators. The Japanese listed company Metaplanet has seen its stock price rise by 480% since it began its Bitcoin investment strategy in April. Recently, the German listed company Samara Asset Group announced it would issue €30 million in bonds, part of which will be used to purchase Bitcoin.

Why can a listed company "lay down to win" simply by holding a large amount of BTC? Are there risks associated with the MicroStrategy model?

Borrowing to Buy Bitcoin: MicroStrategy's "Laying Down to Earn" Model

MicroStrategy's original main business was enterprise-level AI software, contributing about $100 million in revenue each quarter. For a publicly traded company, this part of the business is quite mediocre.

It wasn't until August 2020, when MicroStrategy began its Bitcoin investment strategy and aggressively bought Bitcoin, that the company's stock price started its explosive rise. MicroStrategy's market capitalization grew from $600 million to over $40 billion.

As a result, many, especially in the crypto community, view MicroStrategy as merely a publicly traded company that continuously increases its Bitcoin holdings. Investing in MicroStrategy is indirectly equivalent to investing in BTC.

However, MicroStrategy co-founder Michael Saylor believes there is a misunderstanding about the company; most people actually don't know what they are doing.

Last week, in a conversation with Bernstein analysts, Michael Saylor revealed the underlying logic behind MicroStrategy's Bitcoin strategy. He clearly defined MicroStrategy's model and positioning, as well as why it can outperform BTC and beat major S&P 500 tech stocks like Nvidia.

In simple terms, MicroStrategy's Bitcoin investment strategy is not just about buying and hoarding Bitcoin, but about borrowing money to buy Bitcoin through bond issuance, creating a leverage effect.

Michael Saylor stated that MicroStrategy is currently borrowing money to buy Bitcoin at nearly zero interest (with the last two issuances at 0.625% interest), or issuing stocks at a 60% or 100% premium to buy back Bitcoin.

For example, in September this year, MicroStrategy completed a $1.01 billion convertible note issuance with a 0.625% coupon rate and a 40% conversion premium.

The cost of debt is relatively fixed, while the value of Bitcoin assets has increased. MicroStrategy has arbitraged between the legal capital market and the digital capital market by investing in digital capital with yields many times higher than capital costs. This is why MicroStrategy's performance has surpassed all 500 companies in the S&P index and has outperformed Bitcoin.

This arbitrage model has also led to net profit growth, enhancing stock value. According to MicroStrategy's Q2 financial report, the company has adopted a new accounting standard, using BTC yield to describe MSTR's investment value. This year, MicroStrategy's BTC yield has reached 17.8%, meaning that an investment of 1 BTC through MicroStrategy has effectively reached 1.178 BTC. This is also why MSTR's stock price increase has outperformed Bitcoin.

Michael Saylor stated that MicroStrategy has now developed into a Bitcoin securitization company.

In addition to MicroStrategy's stock providing 1.5 times the volatility exposure of Bitcoin, the company also has various derivatives, such as MSTX and MSTU, which can provide 3 times leverage, as well as MSTR options markets that can offer 10 or 20 times leverage.

MicroStrategy will also explore the fixed income market in the future, considering issuing preferred stock. To some extent, MicroStrategy is encroaching on the stock market, options market, convertible note market, and fixed income market.

An Upward Perpetual Motion Machine or a "Luna" in U.S. Stocks?

MicroStrategy's model seems quite simple. However, for a publicly traded company, holding BTC and clever mathematical calculations can lead to a faster stock price increase than selling software, data, AI, and other tech companies without needing to maintain a large team. Whether there are loopholes and risks behind this has become a focal point of debate in the crypto community.

Overseas KOL Glenn Hodl believes MicroStrategy has found a "perpetual motion machine" model for upward movement.

Glenn stated that even if Bitcoin prices no longer rise, MicroStrategy can leverage the market's differing valuation models for commodities and companies to create a sustainable "perpetual motion machine" that pushes its market value higher, ultimately making MicroStrategy the largest company by market capitalization in the world. Recommended reading: “How Microstrategy Became an Upward 'Perpetual Motion Machine'?”

Crypto KOL @CryptoPainter_X also believes that MicroStrategy's current model can indeed be described as an "infinite funding loophole." "If MSTR's market capitalization could increase by another 10 times, then theoretically, its stock price could be raised to infinity in sync with BTC's price… If its stock market value is high, every time it raises funds through stock expansion, it will gain a lot of money, achieving a true perpetual motion machine."

But can MicroStrategy really borrow infinitely to have unlimited ammunition to buy Bitcoin? Is there a risk of liquidation after Bitcoin's price drops?

Michael Saylor stated that MicroStrategy has no restrictions and can borrow infinitely, refinancing $100 billion, $200 billion, or even a trillion dollars is not a problem.

Regarding the potential cooling of the capital market in the future, does MicroStrategy have enough cash to pay interest and repay debts to prevent liquidation risk? Michael Saylor is also very optimistic.

On one hand, based on confidence in Bitcoin, Michael Saylor believes that the MicroStrategy model would only fail if Bitcoin's yield were permanently 0 and volatility also had to be 0.

On the other hand, MicroStrategy's current interest expenses are minimal, and the company can continuously deleverage by establishing permanent Bitcoin capital. Michael Saylor stated, "We are not doing something overnight; we are gradually deleveraging back and forth."

According to MicroStrategy's Q2 financial report, the company holds 226,500 BTC, valued at about $15 billion, while its debt is around $1.45 billion, resulting in a debt ratio of 10%.

Michael Saylor has also mentioned that MSTR's liquidation line is when BTC falls below $700. Currently, the probability of such a situation occurring is low.

Crypto analyst @Phyrex_Ni also believes that the borrowing ratio is relatively low, with not much financial leverage, so MSTR's BTC does not face liquidation risk. "Even if it falls below $700, MSTR has many ways to repay these loans without liquidating."

However, crypto KOL @lindazhengzheng is skeptical. She believes MicroStrategy is similar to the LUNA model and could fall into a death spiral. "If BTC's price experiences a significant drop, the value of its collateral for MSTR decreases. Then MSTR's stock price and bond prices will fall; in extreme cases, when old bonds mature, buyers may no longer purchase new bonds, leading to a lack of new liquidity; and the company may not have enough money to pay off old debts, causing further declines in stock price."

@CryptoPainter_X also believes that there is no true "spiral up" or "left foot stepping on the right foot" in this world. "If you Google the 'Enron' financial fraud incident, you'll find that a Ponzi scheme eventually comes to an end."

It is worth mentioning that MicroStrategy was also fined $8.5 million by the SEC in 2000 for financial fraud, causing its stock price to plummet by 62%, and Saylor personally lost $6 billion in wealth in a single day.

Moreover, even without liquidation risk, MicroStrategy has exposure to 1.5 times the volatility of Bitcoin. When BTC rises, MSTR rises more than BTC, but when BTC falls, MSTR also falls more. Holding MSTR still carries risks.

Clone "MicroStrategy" Enters in Bulk: What is the Impact?

MicroStrategy's strategy has no barriers to entry. Michael Saylor also stated that any publicly traded company can replicate this strategy—first buy Bitcoin, then issue stocks at a premium to Bitcoin, and finally issue bonds backed by Bitcoin.

Michael Saylor believes that "buying Bitcoin will ultimately become a fundamental strategy for all other companies."

In fact, this year, MicroStrategy's stock price surge has indeed caused publicly traded companies to FOMO into imitation. Japanese listed company Metaplanet, U.S. listed medical company Semler Scientific, and German listed company Samara Asset Group have all adopted the "MicroStrategy" Bitcoin investment model.

Additionally, according to Blockworks, the frequency of corporate Bitcoin purchases has significantly increased this year, reaching 32 times as of September 30, far exceeding last year's total of 9 times; MicroStrategy, Block, Metaplanet, Semler Scientific, OneMedNet, and the UK football club Real Bedford FC have collectively purchased nearly 50,000 BTC.

The bulk entry of clone "MicroStrategy" purchasing BTC is likely to boost BTC's price in the short term. Crypto KOL @lindazhengzheng believes that "if too many publicly traded companies use the Microstrategy model this time, it will bring the second wave of new highs for BTC sooner and higher, but it will also rise more sharply and fall more severely."

As mentioned earlier, the MicroStrategy model still carries risks, and dangers may also be accelerating on the way. Although the MicroStrategy model seems to have no barriers, the cost of BTC purchases for latecomer publicly traded companies is much higher than that of MicroStrategy, and they may also lack the risk management capabilities for this model.

@lindazhengzheng analyzed that the frightening scenario is a chain reaction of publicly traded companies collapsing, making it difficult for Bitcoin prices to sustain, leading to a Lehman moment of a bull-to-bear transition.