The Logic Behind MicroStrategy's Big Pump in Stock Price

MicroStrategy (MSTR)'s stock price skyrocketed from $69 at the beginning of the year to a high of $543 last week, with a rise that even outpaced Bitcoin. It is worth noting that even when Bitcoin pulled back due to certain events, MSTR's stock price continued to rise strongly. This prompts us to re-examine its investment logic: MSTR is not just riding the Bitcoin concept for hype, but has its own unique operating model and strategy.

MSTR's Core Strategy: Issuing Convertible Bonds to Purchase Bitcoin

MicroStrategy was originally a business intelligence software company, but this business has gradually declined. Today, the company's core strategy is to raise funds by issuing convertible bonds, purchase Bitcoin on a large scale, and incorporate it as an important component of the company's assets.

Introduction to Convertible Bonds

Convertible bonds are a special financing tool. Companies raise funds by issuing bonds, and investors can choose to redeem the principal and interest at maturity, or convert the bonds into company stock at an agreed price.

• If the stock price experiences a big pump, investors may choose to convert their shares, resulting in the dilution of the company's stock.
• If the stock price does not rise, investors may choose to withdraw their principal and interest, and the company must bear a certain cost of capital.

MSTR's operating logic

• Use the funds raised from issuing convertible bonds to purchase Bitcoin.
• In this way, the amount of Bitcoin held by MSTR continues to increase, while the Bitcoin value corresponding to each share is also rising.

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

In the first three quarters of 2024, MSTR increased its Bitcoin holdings from 189,000 to 252,000 through the issuance of convertible bonds (a growth of 33.3%), while the total number of shares was diluted by only 13.2%. The number of Bitcoins per 100 shares rose from 0.091 to 0.107, gradually increasing the equity in Bitcoin holdings.

Latest progress

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, each 100 shares of MSTR stock corresponds to a bitcoin value of nearly 0.12. From a bitcoin standard perspective, the "equity" of MSTR shareholders in bitcoins is continuously increasing.

The Essence of the MSTR Model

MSTR's operating model is similar to leveraging Wall Street for "mining":

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

This model has certain similarities with Ponzi schemes, which use newly raised funds to increase the equity of existing shareholders, maintaining operations through continuous fundraising.

sustainability of the model

This model may face the following challenges:

• Increased fundraising difficulty: If the stock price does not rise, subsequent convertible bond issuance may become difficult.
• Over-dilution: If the pace of share issuance exceeds the pace of Bitcoin accumulation, shareholders' equity may be reduced.
• Modeled after: If more companies adopt similar strategies, MSTR's uniqueness may be lost.

The Future Prospects and Risks of MSTR

In the long run, the accumulation of Bitcoin by large American capital may have strategic significance. Considering that the total supply of Bitcoin is only 21 million, the U.S. national strategic reserves could occupy a considerable proportion. For large capital, "hoarding coins" is not only an investment behavior but also a long-term strategic choice.

However, the investment risk of MSTR is currently high:

• If the price of Bitcoin retraces, MSTR's stock price may experience a greater decline due to leverage effects.
• Whether the future can maintain a high growth model depends on the company's fundraising ability and the market competition environment.

Investment Reflection

In 2020, when MSTR first made a large-scale purchase of Bitcoin, the price of Bitcoin rebounded from $3,000 to $5,000. At that time, many people thought the price was already high, but MSTR bought in large quantities at $10,000. As a result, Bitcoin rose all the way to $20,000, confirming MSTR's foresight.

This time, missing the investment opportunity in MSTR made us realize that the operational logic and strategic vision of American capital giants are worth learning. Although the MSTR model seems simple, it reflects a firm belief in the long-term value of Bitcoin. Missing investment opportunities is not scary; the key is to learn from them and enhance our investment awareness and judgment ability.