Profits of over $15 billion in two years - Understanding MicroStrategy's big strategy

Author: Mindao, Source: Author's Twitter @mindaoyang

Today, let's talk about MicroStrategy's big strategy.

MicroStrategy really made the biggest golden egg in the cryptocurrency circle in this cycle. In less than two years, the nominal profit exceeded 15 billion US dollars.

It is not just a triple arbitrage of stocks, bonds, and currencies. The key is to turn the MSTR stock into a real Bitcoin in traditional finance (recently, the trading volume of MSTR has exceeded the total of Bitcoin ETFs). It can be said to be a masterpiece of "borrowing the false to cultivate the true".

Michael Saylor is neither a blue-blood from Wall Street nor an OG in the cryptocurrency circle. He really beat the master with random punches.

Here I will briefly talk about several key parts of his transaction structure design:

Stock/Coin Relationship

There are two key flywheels for the two. One is the issuance of stocks at a premium, buying Bitcoin, driving Bitcoin up, and increasing its net assets per share and earnings, which is a linear leverage;

The second flywheel is financing to buy coins, which accelerates the growth rate of profits, expands the valuation multiples (p/b, p/e become larger), and the stock price jumps from linear to index leverage. The market value and stock price increase exceed the price increase of Bitcoin itself.

Stock/Debt Relationship

MSTR's market value has risen, driving it to enter more indexes, more trading derivatives have come out, and trading volume has increased, reducing the financing costs of stocks and bonds. The structure of debt and stock can further reduce the overall debt ratio.

Micro Strategy's convertible bonds are also a very sophisticated design (full of Buffett's wisdom).

Convertible bonds are basically medium- and long-term bonds (5 years, at least across 1 currency circle cycle), most of which are zero interest, and no principal is repaid during the period. Ensure that there is no partial repayment and interest payment pressure during the period, and further reduce the risk of debt default caused by the spiral of currency price decline.

What's more powerful is that, unlike traditional convertible bonds, the option of conversion to stock and cash repayment lies with MicroStrategy rather than the convertible bond holder, which fundamentally avoids the problem of default caused by the inability to repay the convertible bonds when they expire (in the worst case, all of them are directly converted to stock). This financing premium ability is extraordinary.

Although it is generally believed that issuing bonds increases the debt ratio, increases the risk premium, and is unfavorable to stock prices, this type of convertible bond is essentially a "bond-equity" tool with the initiative completely in MicroStrategy. It is very friendly to stock prices/shareholders.

Currency/Debt Relationship

Debts are denominated in US dollars. From the perspective of currency standard, the purchasing power is infinitely approaching zero, and the initiative of the convertibility conditions lies with MicroStrategy. Borrowing a "debt" with infinitely approaching zero purchasing power to buy Bitcoin with infinite purchasing power, especially the structure with zero default risk, is a game that will not lose in the long run.

I have been in the cryptocurrency circle and traditional finance for many years, but I have never seen such an expert who can play the triple arbitrage of stocks/bonds/coins to such an extreme.

Many people speculate whether the end of MicroStrategy will be the stock version of Luna. I think there is no comparison between the two in terms of overall risk structure, let alone the so-called death spiral.

As for when the flywheel stops turning and when the music stops, the key lies in how long the high premium of stocks and single-share net coins can be maintained.

If the market trend breaks expectations, the supply of Bitcoin derivatives increases, and the stock/coin premium of MicroStrategy is reduced to less than 1.2, this kind of financing will be difficult to sustain. But MicroStrategy will still be the big winner.

MicroStrategy's structural construction of long-term winning is comparable to Buffett's Berkshire Hathaway in the traditional financial world.  

From the perspective of premium level, it feels easier for MSTR to reach 1 trillion than Ethereum to reach 1 trillion.