What is the goal of a Bitcoin treasury reserve company? To increase its Bitcoin per share ratio, which is the ratio between the total amount of Bitcoin held by the company and the number of fully diluted shares in the company. Microstrategy isn't trying to capitalize on Bitcoin trading to generate dollar returns; its sole focus is on increasing its Bitcoin per share (BPS) ratio by adding Bitcoin to its balance sheet in an accretive manner. We call the size of its Bitcoin holdings "net asset value (NAV)" and the ratio of its market capitalization to NAV "mNAV." If a company has a market capitalization of $10 billion and holds $5 billion in Bitcoin, its mNAV is 2. (Assume the company has a stock supply of 100 million shares at $100 per share, and the price of Bitcoin is $100,000. This means the company holds 50,000 Bitcoins, or 50,000 / 100,000 = 0.5 Bitcoins for every 1,000 shares.) The primary way Bitcoin Reserve can increase its earnings per share (BPS) is through an "ATM" (at-the-market) program: issuing new shares, selling them directly on the market, and using the proceeds to buy more Bitcoin. This is the first avenue I'm talking about that the Reserve can utilize. Returning to my example, the $10 billion company could issue $1 billion worth of new shares, sell them on the market, and then immediately use the cash to buy $1 billion worth of Bitcoin. Assuming the stock and Bitcoin prices remain unchanged (just to understand the math), the company's new market capitalization is $11 billion and its new net asset value is $6 billion. Its NAV premium is now 11/6 = 1.83, so it's decreased, but its Bitcoin per share ratio is now 60,000/110,000 = 0.545, so it's increased. We can then define a "Bitcoin yield," which is the increase in earnings per share: 0.0545/0.5 = 1.09, or a 9% yield. The company acquired more Bitcoin in a "accretive" manner: even though the number of shares was diluted, this dilution is still accretive to earnings per share because the ratio has increased. This operation, the most common method used by Bitcoin Treasury Reserve, can only be performed when the company is trading above its net asset value, meaning its mNAV premium is above 1. The higher the mNAV premium, the more profitable this ATM operation becomes, generating a higher "bitcoin yield." Essentially, company management is selling shares at a premium to short-term stock buyers, with the proceeds ultimately benefiting long-term shareholders. (But obviously, short-term buyers can become long-term shareholders, so it's rational to accept a larger premium if it's deemed worthwhile in the long run.) This "arbitrage" between a company's market capitalization and its balance sheet can theoretically work in reverse: if a company's stock price is trading at a significant discount to its net asset value, management could decide to sell bitcoin on its balance sheet to buy back shares, which would also increase the number of bitcoins per share. In both cases, management is engaging in transactions with short-term stock traders who are either buying at a significant premium or selling at a significant discount. The proceeds from these actions are redistributed to long-term shareholders, whose per-share book value increases, meaning that the theoretical "floor price" of their holdings denominated in Bitcoin increases. In practice, the most attractive move by far for the company is to sell shares at a premium to net asset value (mNAV), as selling at a depreciating mNAV is more problematic. First, if the scale is large enough (which it is in terms of strategy), this could negatively impact the price of the underlying asset (Bitcoin), leading to a potential "death spiral" (where both Bitcoin and stock prices decline). Second, it would send negative information to the market, making the company appear weaker and potentially reducing its size. Finally, such a move could have tax implications that could reduce its profitability. Therefore, a Bitcoin Reserve Company would primarily focus on selling shares at a higher NAV per share to increase earnings per share and generate Bitcoin revenue. It's important to note that, given that shareholders buy Bitcoin Reserve Companies for their Bitcoin revenue, higher Bitcoin revenue justifies purchasing such companies at a higher NAV per share, which in turn enables the company to consistently generate higher Bitcoin revenue. A higher NAV per share is both a cause and an effect. "That sounds unsustainable. It only works if there are even more foolish people willing to pay a premium!" Yes, that's largely true, which is why a Bitcoin Reserve Company operating solely through the sale of shares (ATM) is a flawed tool. Any aspiring Bitcoin Reserve Company should also utilize a second means of generating Bitcoin revenue: using debt in addition to equity. Part 2: Debt (Leverage) The way a business uses debt is pretty straightforward: if you believe Bitcoin will grow at a certain compound annual growth rate (GAGR) (i.e., annualized rate of return on investment), you can issue a fixed-income instrument with an interest rate lower than that CAGR and "capture the difference" in the form of Bitcoin gains. I won't go into detail about the debt instruments a company might use, but let's assume it can borrow at 8% per year and expects Bitcoin to compound annually at over 20%. The company could then borrow US dollars and use the proceeds to buy Bitcoin, earning a 12% interest margin (20% minus 8%), which it could then pass on to shareholders through a higher earnings per share ratio. Obviously, I know people are extremely afraid of leverage and tend to think that using any leverage in crypto will wipe out your money, but: 1/ I wrote an entire article (updated soon) about Microstrategy, showing that their use of leverage is very conservative and the probability of a margin call is extremely low; 2/ It's clearly possible to outperform Bitcoin with moderate use of leverage, especially when you have the protection of debt maturity. A simple mental model to understand the type of leverage involved at a company like Microstrategy is to imagine a long-term Bitcoin long position with 1.2x leverage, which would only be forced to liquidate if the Bitcoin price remained below a theoretical "exit price" for three consecutive years. If a company could permanently acquire more Bitcoin through leverage, it would be able to maintain a reserve that outperformed Bitcoin, providing Bitcoin returns to shareholders. Long-term shareholders can view the Bitcoin value per share ratio as a theoretical floor for their stock price, which would permanently rise in Bitcoin terms. Bitcoin Reserve is essentially a vehicle designed to outperform Bitcoin. This is why some people are willing to hold these companies' shares for the long term at premiums to avoid being taken advantage of. For example, in 2024, MicroStrategy (MSTR) generated a 75% return in Bitcoin for its shareholders. This means that if your per-share price floor was 0.001 Bitcoin at the beginning of 2024, it would have been 0.00175 Bitcoin by the end of the year. If you had purchased MSTR at 1.75 times NAV at the beginning of 2024, you would have recouped the entire 75% premium you paid over NAV in just one year. Because the market anticipates the future Bitcoin returns a company can provide its shareholders, it makes perfect sense to buy its shares above book value. The idea of "exchanging $1 of Bitcoin for $3" is sheer nonsense. What is the growth path of a full-stack crypto reserve company? So, recalling the previous two sections, a "full-stack Bitcoin reserve company" should have two legs: equity and debt. Typically, they start with equity and use ATMs to kickstart the flywheel. By establishing a consistent track record of regular Bitcoin purchases, the company builds trust as a Bitcoin reserve company that strictly adheres to Michael Saylor's strategy, which in turn leads investors to assign a higher premium to it, allowing the company to earn a good return on its Bitcoin. Using ATMs helps the company scale, and once they reach a certain scale, they can begin issuing fixed income instruments, which demonstrates a higher net asset value that they can "leverage" again, allowing them to scale further and repeat the process as conditions allow. "How long will that last?" Well, as long as Bitcoin's compound annual growth rate is significantly higher than the interest payments on their debt, I imagine it will last a long time... Obviously, the main factor determining how fast a company like this can grow is how large a premium its market capitalization commands relative to its net asset value, and that's determined by the market, based on attention, how solid the company appears to be, how charismatic the CEO is, and so on. Another general rule is that mNAV (market net asset value) should decrease as a company scales, but that doesn't mean the premium ends at 1; it's entirely possible that the equilibrium mNAV in the medium/long term could be over 1.5. This doesn't mean buying a small company at a steep premium is a bad idea, as it could be justified if the company offers a sufficiently high yield on Bitcoin. As I've written before, every ATM operation reduces the mNAV premium, but that doesn't necessarily mean you'll underperform the underlying asset (Bitcoin) over the same period. Theoretically, a company's mNAV could drop from 5x to 2x, while both Bitcoin and the stock's price remain constant. What about altcoin Treasury Reserves? Now that I've covered the Bitcoin Treasury Reserve, what about other coin reserves? Well, they're based on the exact same model. But there are obviously significant differences, as using another coin as the underlying asset means using a much weaker asset with far less potential for "going up and not down." This means using a fixed income component is much riskier, and most companies probably won't choose that path. If your altcoin gradually declines back to zero over time (which is the case for most altcoins), then borrowing USD at 8% (or even 4%) per year to buy your altcoin is obviously a bad idea.
Perhaps the best framework to think about these treasury reserve companies is the one proposed by Guy Young (founder of Ethena) here:
Altcoin Reserve Companies are nothing more than a tool that allows the open market (and its sheer size) to gain access to altcoins in an imperfect way. This is beneficial for equity buyers, as even buying the underlying asset at a premium is better than not buying it at all (if they're bullish), and it's also beneficial for altcoins, as it introduces a new pool of capital compared to relying solely on crypto-native liquidity. However, altcoin reserve companies remain incomplete instruments compared to Bitcoin Reserve, as they lack the ability to leverage both equity and debt to generate Bitcoin/cryptocurrency returns. This means their market net asset value is more likely to trend toward 1, or even trade at a discount. This isn't the case with Bitcoin Reserve. As for Ethereum reserve companies, they could easily emulate Michael Saylor's strategy and utilize fixed-income instruments. This is a good idea if you believe Ethereum's long-term compound annual growth rate will be similar to Bitcoin's. However, if you're less confident in Ethereum's future, issuing debt to purchase Ethereum is much riskier. Summary: 1. A true "full-stack" treasury reserve system has two aspects. 1. Equity/ATMs convert mNAV premiums and are a key tool for companies to scale. 2. Debt monetizes the difference between Bitcoin's compound annual growth rate and borrowing costs. 2. An mNAV premium greater than 1 for quality stocks can be quite reasonable: If Bitcoin's yield (BPS growth) ≥ the premium paid, long-term holders will still profit. 3. Altcoin treasury reserves are single, i.e., incomplete tools: Without debt leverage, they should move closer to 1x mNAV (or lower) in the long run.
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