The MSTR Bitcoin Play
You miss 100% of the shots you do not take. - Wayne Gretzky
MicroStrategy has become a major player in the Bitcoin space in recent years. While it initially gained recognition as a business intelligence software company, it has now transformed into one of the largest corporate holders of Bitcoin. Under the leadership of Michael Saylor, the company has been using its cash reserves to buy Bitcoin since 2020, and as Bitcoin’s value has surged, so has the value of its holdings.\
As a result, MicroStrategy's stock, MSTR, has become a way for investors to gain indirect exposure to Bitcoin. When Bitcoin's price rises, MSTR tends to follow, sometimes even outperforming Bitcoin itself due to the company's substantial Bitcoin reserves. This strong connection between MSTR and Bitcoin has made the stock an attractive yet volatile option for investors with a bullish outlook on crypto.\
One way MicroStrategy funds it's Bitcoin purchases is by offering convertible bonds. More specifically the company has issued convertible senior notes, which are essentially bonds that can be converted into stock at a later date. These bonds allow MicroStrategy to raise funds without immediately diluting shareholders, as the conversion to stock only happens in the future. A problem may only occur if the price of Bitcoin drops significantly and the company fails to service the bonds. The convertible nature of the bonds means that they offer bondholders the opportunity to convert them into stock instead of being repaid in cash. If too many bonds are converted at a single point in time this may massively dilute the shares of existing shareholders, as their ownership percentage is reduced.\
Perhabs the key factor in MicroStrategy’s ability to acquire such a massive Bitcoin stash is its At-the-Market (ATM) strategy. Through an ATM offering, MicroStrategy creates new shares and sells them directly into the open market. Rather than selling existing shares held by investors, the company issues fresh stock at market prices, allowing it to raise capital quickly and efficiently. The funds raised are used to buy more Bitcoin, which has steadily increased MicroStrategy’s holdings, exceeding 420,000 BTC as of January 2025.\
While issuing new shares causes dilution of existing shareholders' ownership, it allows MicroStrategy to take advantage of favorable market conditions and Bitcoin price surges without the complexity or costs associated with traditional public offerings. This strategy has given the company flexibility and speed in expanding its Bitcoin reserves, all while maintaining control over its capital structure.\
Although the ATM strategy does dilute the value of each share individually, Saylor still somehow manages to increase the amount of bitcoins per share. How is this even possible, when new shares are regularily created out of thin air? I will in the following demonstrate my efforts to make sense of this seemingly contradiction.\
As you probably know, when you buy a MSTR share you pay a premium, compared to buying raw bitcoin. That is, the bitcoin value backing your share is less than the price you paid for the share. The bitcoin value backing a single share is simply calculated by dividing all of MicroStrategies bitcoins by all of it's shares.\
This perfectly reflects MicroStrategy's mentality: it works as long as people believe in it, and people believe in it as long as Bitcoin remains stable. If Bitcoin experiences a prolonged decline, the system will become very shaky. However, how long MicroStrategy could withstand a Bitcoin downturn is difficult to predict.
The key to MicroStrategy’s success will ultimately depend on how long the market continues to trust the company's strategy and Bitcoin's long-term stability. If Bitcoin can maintain or grow its value, MicroStrategy could continue to build its Bitcoin holdings and see the Bitcoin value per share increase. But if the market turns, and Bitcoin experiences a sustained drop, the system may face serious challenges. As the premium reflects investor mood, it could fluctuate, which would directly impact the company’s ability to continue acquiring Bitcoin at favorable rates. As with any high-risk, high-reward strategy, the future is uncertain, but MicroStrategy’s approach remains a fascinating experiment in the world of corporate finance and cryptocurrency.
$$
\begin{equation}
\text{Backing bitcoin value per share} = \frac{\text{Number of MSTR shares}}{\text{Number of MSTR BTC}} \notag
\end{equation}
$$
The premium is what you pay extra for an MSTR share compared to directly buying bitcoin.
$$
\begin{equation}
Premium = \frac{\text{Market Price per Share}}{\text{BTC Value per Share}} - 1
\end{equation}
$$
A more commonly used metric than the premium is the multiple net asset value or mNAV for short. Which simply is the ratio of the current market price of a share and actual bitcoin value backing it.
$$
\begin{equation}
\text{mNAV} = \frac{\text{Market Price per Share}}{\text{BTC Value per Share}}
\end{equation}
$$
Depending on the stock and bitcoin price, the mNAV, in the past has ranged between 0.5 and 4.5. Meaning that you would have paid between $50$ to $450\ \%$ of the price for an MSTR share compared to directly purchasing bitcoin. As of January 2025 the mNAV is around 2.5. One major reason, that investors are willing to pay such a high premium is that saylor, in the past, has managed to continuously increase the ratio of bitcoin per share. That is what Microstrategy calls it's bitcoin yield. So how does it work?
Let's assume Saylor has just created $k$ new share. How does that help to increase the bitcoin value per share? Well, of course Saylor will use the fresh money to buy more bitcoin. We denote the previous number of shares by $m$. So in order to increase the bitcoin ratio per share we require:
$$
\begin{equation}
\frac{\text{BTC holdings} + k \cdot \text{Price per Share}}{m + k} > \frac{\text{BTC holdings}}{m}
\end{equation}
$$
So essentially, we’re saying that the Bitcoin value per share must increase. Let’s see what that means in terms of the price per share:
$$
\begin{align}
\left( \text{BTC holdings} + k \cdot \text{Price per Share} \right) \cdot m &> \left( \text{BTC holdings} \right) \cdot (m + k) \notag \\\
m \cdot \text{BTC holdings} + m \cdot k \cdot \text{Price per Share} &> m \cdot \text{BTC holdings} + k \cdot \text{BTC holdings} \notag \\\
\text{Price per Share} &> \frac{\text{BTC holdings}}{m}
\end{align}
$$
Of course the ratio of BTC holdings and m is just the BTC value per Share. So, if we substitude eq. 2 into this we find:
$$
\begin{align}
\text{mNAV} \cdot \text{BTC value per Share} &> \text{BTC value per Share} \notag \\\
\text{mNAV} > 1
\end{align}
$$
Or equivalently:
$$
\begin{align}
\text{Premium} > 0
\end{align}
$$
It makes sense when you see it. As long as investors are willing to pay a premium the bitcoin value per share will increase. So when premium equals zero, Saylor will exactly buy the amount of bitcoin that he needs to back the shares he just created (at the same rate as before). When he has a premium he can buy some more coins and thus improve the rate for each shareholder. Some argue that the ration may increase but tends to 1 as it's upper bound, as written here on: Seeking Alpha
That would mean, that ultimatelly the bitcoin value of one share converges against the price payed for the share but can never exceed it. As we will shortly see this is simply not true. Beginning with eq. 3 we can define an iterative rule to describe the progression of the ratio:
$$
\begin{align}
R_{n+1} =& \frac{\text{BTC holdings} + k \cdot \text{Price per Share}}{m + k} \notag \\\
=& \frac{m \cdot R_n + k \cdot \text{mNAV} \cdot R_n}{m + k} \notag \\\
=& \frac{m + k \cdot \text{mNAV}}{m + k} \cdot R_n
\end{align}
$$
From which immediatelly follows:
$$
\begin{equation}
R_{n+t} = \left(\frac{m + k \cdot \text{mNAV}}{m + k}\right)^t \cdot R_n
\end{equation}
$$
So assuming we bought a share today with an mNAV of 2.5, how long will it take until that share has aggregated the bitcoin fraction to equal it's expense?
The average number BTC purchased is: 7840 and the average time span between purchases is 11.5 days.
| Date | BTC Purchased | Amount | Total Bitcoin | Total Dollars |
|---|---|---|---|---|
| 1/13/2025 | 2,530 | $243M | 450,000 | $27.533B |
| 1/6/2025 | 1,070 | $0.10B | 447,470 | $27.29B |
| 12/30/2024 | 2,138 | $0.521B | 446,400 | $27.19B |
| 12/23/2024 | 5,262 | $0.561B | 444,262 | $26.671B |
| 12/16/2024 | 15,350 | $1.5B | 439,000 | $26.11B |
| 12/9/2024 | 21,550 | $2.1B | 423,650 | $24.61B |
| 12/2/2024 | 15,400 | $1.5B | 402,100 | $23.41B |
| 11/25/2024 | 55,500 | $5.4B | 386,700 | $21.91B |
| 11/18/2024 | 51,780 | $4.6B | 331,200 | $16.51B |
| 11/11/2024 | 27,200 | $2.0B | 279,420 | $11.91B |
| 9/20/2024 | 7,420 | $458.2M | 252,220 | $9.91B |
| 9/13/2024 | 18,300 | $1.11B | 244,800 | $9.45B |
| 8/1/2024 | 169 | $11.4M | 226,500 | $8.34B |
| 6/20/2024 | 11,931 | $786.0M | 226,331 | $8.33B |
| 4/1/2024 - 5/1/2024 | 164 | $7.8M | 214,400 | $7.538B |
| 03/19/2024 | 9,245 | $623.0M | 214,246 | $7.53B |
| 03/11/2024 | 12,000 | $821.7M | 205,000 | $6.91B |
| 02/26/2024 | 3,000 | $155.0M | 193,000 | $6.09B |
| 02/06/2024 | 850 | $37.2M | 190,000 | $5.93B |
| 12/27/2023 | 14,620 | $615.7M | 189,150 | $5.90B |
| 11/30/2023 | 16,130 | $593.3M | 174,530 | $5.28B |
| 11/01/2023 | 155 | $5.3M | 158,400 | $4.69B |
| 09/24/2023 | 5,445 | $147.3M | 158,245 | $4.68B |
| 07/01/2023 - 7/31/2023 | 467 | $14.4M | 152,800 | $4.53B |
| 04/29/2023 - 6/27/2023 | 12,333 | $347M | 152,333 | $4.517B |
| 04/05/2023 | 1,045 | $29.30M | 140,000 | $4.170B |
| 03/27/2023 | 6,455 | $150.00M | 138,955 | $4.140B |
| 12/24/2022 | 810 | $13.65M | 132,500 | $4.027B |
| 12/22/2022 | -704 | $11.8M | 131,690 | $4.012B |
| 11/01/2021 - 12/21/2022 | 2,395 | $42.8M | 132,395 | $4.024B |
| 9/20/2022 | 301 | $6M | 130,000 | $3.981B |
| 6/28/2022 | 480 | $10M | 129,699 | $3.975B |
| 2/15/2022 - 4/5/2022 | 4,167 | $190M | 129,218 | $3.965B |
| 1/1/2022 - 1/31/2022 | 660 | $25M | 125,051 | $3.775B |
| 12/30/2021 | 1,914 | $94.2M | 124,391 | $3.750B |
| 11/29/21 - 12/8/2021 | 1,434 | $82.4M | 122,478 | $3.655B |
| 11/28/21 | 7,002 | $414M | 121,044 | $3.573B |
| 9/13/21 | 8,957 | $419M | 114,042 | $3.159B |
| 6/21/21 | 13,005 | $249M | 105,085 | $2.740B |
| 5/18/21 | 229 | $10M | 92,079 | $2.251B |
| 5/13/21 | 271 | $15M | 91,850 | $2.241B |
| 4/5/21 | 253 | $15M | 91,579 | $2.226B |
| 3/12/21 | 262 | $15M | 91,326 | $2.211B |
| 3/5/21 | 205 | $10M | 91,064 | $2.196B |
| 3/1/21 | 328 | $15M | 90,859 | $2.186B |
| 2/24/21 | 19,452 | $1.026B | 90,531 | $2.171B |
| 2/2/21 | 295 | $10M | 71,079 | $1.145B |
| 1/22/21 | 314 | $10M | 70,784 | $1.135B |
| 12/21/20 | 29,646 | $650M | 70,470 | $1.125B |
| 12/4/20 | 2,574 | $50M | 40,824 | $475M |
| 9/14/20 | 16,796 | $175M | 38,250 | $425M |
| 8/11/20 | 21,454 | $250M | 21,454 | $250M |
The key to MicroStrategy’s success will ultimately depend on how long the market continues to trust the company's strategy and Bitcoin's long-term stability. If Bitcoin can maintain or grow its value, MicroStrategy could continue to build its Bitcoin holdings and see the Bitcoin value per share increase. But if the market turns, and Bitcoin experiences a sustained drop, the system may face serious challenges. As the premium reflects investor mood, it could fluctuate, which would directly impact the company’s ability to continue acquiring Bitcoin at favorable rates. As with any high-risk, high-reward strategy, the future is uncertain, but MicroStrategy’s approach remains a fascinating experiment in the world of corporate finance and cryptocurrency.