MicroStrategy’s Financial Game

MicroStrategy has sold coins again—again, and again. A lot of people in my inbox have asked me what I think about this move. I’m confident that many people actually don’t understand what MicroStrategy is playing, so they’re either blindly optimistic or blindly pessimistic. So today, I’ll use an article’s length to make everyone fully understand the financial game MicroStrategy is playing.

Everyone knows MicroStrategy is a company that buys Bitcoin. Or you can temporarily ignore its other business. This is basically a fund wrapped in the form of a company—except this fund only hoards Bitcoin, and it has already accumulated more than 800,000 BTC. Given that, its stock ticker mstr should, in theory, have a market value roughly equal to the market value of the BTC it holds. But this game is not played that way. Because it’s like a big fund that allows many people to hold crypto assets without needing to enter the crypto space, providing convenience and lowering the learning curve. Also, because everyone trusts its management, it can issue debt financing to keep buying coins. So during Bitcoin’s rising phases—especially in periods when BTC is going up—its stock typically trades at a certain premium. And this premium is used cleverly, causing its BTC reserves to keep rolling forward until today. Let’s look at how it plays.

Since mstr’s market cap has a premium relative to the market value of the BTC it holds, it can issue more mstr and continue buying BTC. “Isn’t that the same thing?” you might ask. It dilutes the users’ ownership percentage of the stock, and the company ends up with more BTC reserves. No, it’s not the same. Because mstr stock trades at a premium, issuing the same amount of mstr can raise more funds—so it can buy even more BTC. That means the amount of BTC represented per share of mstr increases slightly. Do you get it? That’s where the game cracks open. Precisely for this reason, mstr tends to rise faster than BTC.

MicroStrategy then assumes that as long as it keeps increasing its BTC purchases, it can lift BTC, which in turn makes mstr’s stock rise faster and faster, and the premium higher and higher. But a higher premium means that if it keeps issuing, the number of BTC it can buy will become disproportionately more. That’s a left-foot-on-right-foot spiral to the sky.

But such a game inevitably has an endpoint. For example, when mstr’s market cap premium over the value of its own held BTC becomes too high—say 2x, 3x—it will reach a turning point. After all, people aren’t stupid. Everyone has risk awareness. Chasing high returns is one thing; clearly buying something that’s not worth it just to gamble on fools is another. There will be a critical value, and then it turns downward.

You think the game MicroStrategy is playing is only this one? No, it’s not that simple. At BTC’s high levels, it also issued strc preferred stock.

What does this preferred stock mean? The gist is that the bonds MicroStrategy issues are one thing—while strc is different from a bond. A bond has principal repaid at maturity; strc doesn’t. It doesn’t mature because in essence it’s equity: it just needs to pay dividends on schedule. But this “equity” has a face value that’s anchored to $100—so it’s somewhat like a bond. And in case of liquidation, the benefits are protected so that they’re paid to holders before ordinary mstr shareholders.

So what is the money used for? Still buying BTC.

There’s a dynamic adjustment mechanism here. If the face value is anchored to $100, why would it do that? You say “set it to 100, then it’s 100.” Actually, it’s adjusted together by the market and MicroStrategy. For example, if it offers an 8% annualized dividend, and many people buy it, pushing its denomination above $100, then it will lower the interest rate. At the same time, it will keep issuing strc and use the proceeds to buy more BTC—expanding the company’s asset reserves, and also increasing everyone’s confidence in holding this preferred stock to collect dividends.

But what if nobody buys it? Like recently: if this preferred stock falls below 90, it means people are worried about whether it can pay on time and whether its debt obligations are sound. Then it will keep raising the interest rate. It updates once a month. It’s already at 12% annualized. And considering the face value has fallen below 90, the effective annualized yield is actually over 13%.

By this point, you should have realized that during BTC’s rise, you don’t need to worry about these two games at all—and they spiral upward with mutual reinforcement, with the company valuation going up rapidly.

But what if BTC falls? Like now—BTC has been in a pullback for 10 months, with a 50% decline from its peak and it has broken below its cost line. Then people start to doubt its ability to service its obligations. And once people doubt it, does mstr go from a positive premium to a negative premium? Once it’s negative-premium, how can it issue mstr to buy more BTC? Doesn’t that just mean it’s buying less? So it won’t dare to add positions.

And if it doesn’t add, that means there’s one less major ongoing buyer in the market. Does BTC then lose strong support, and doesn’t everyone’s confidence fall further—making it harder to turn up in the long run? Wouldn’t its days get even harder?

Meanwhile, because of concerns about its ability to service obligations, does strc also break below 100, below 95, below 90? If it needs to raise the annualized interest rate to attract people to buy strc in order to keep issuing strc and buy BTC, then to pull the price back to 100—or even higher—doesn’t that also increase pressure from dividend payout expenses? And besides, it also doesn’t dare issue more new strc, because you didn’t pull it back to 100—issuing strc at that point would be issuing at a discount to itself. If it doesn’t issue new strc either, doesn’t that mean it has one less source of buying power for BTC?

After thinking it through, and considering that the adjustment cycle for BTC can’t be determined, it can only break its own promise of “not selling coins.” It starts selling part of its reserves to pay dividends. And the more it sells— even if only a little—people will think, “This is potential sell pressure from those more than 800,000 BTC.” Then everyone rushes to cut losses and sell ahead of it. Doesn’t that make its situation even worse?

That’s the current state. You might ask: how many coins has it sold? Even if this time is the most in history, over the past few days it has only sold a little over 3,000 BTC. That’s nowhere near its reserves of more than 800,000 BTC. It even can’t beat the sell pressure of miners over just a few days. Miners and hardware vendors sell coins every day like that—so why hasn’t there been much market impact? Because it previously built an image, and it had a huge publicly known reserve. That’s what caused the market’s own stampede.

After talking about its financial game, let’s talk about what impact this has. From my perspective, the many life-and-death tests BTC has faced historically are far more severe than this. This is, relatively speaking, child’s play.

#GUSD年化升至3.8%