MicroStrategy: Grayscale + Luna on steroids

Written by: 0xjs@黄金财经

Bitcoin breaks through $80,000! Bitcoin breaks through $90,000! Bitcoin breaks through $95,000! Bitcoin breaks through $99,000!

Obviously, Bitcoin is bound to break through the $100,000 mark soon.

Common sense tells us that the direct reason for the sharp rise in prices is that someone is buying a lot of real money, after all, "Money Talks".

In this round of crypto bull market, crypto tokens are severely divided, and the two sectors with the most outstanding performance are Bitcoin and Solana. Solana's rise is mainly driven by the influx of crypto players into Meme, while Bitcoin's rise is mainly driven by the purchase of funds from the US Bitcoin ETF and some listed companies, especially MicroStrategy. In this article, we mainly focus on MicroStrategy.

On November 21, Golden Finance reporter spent an evening browsing the documents submitted by MicroStrategy since 2021 on the official website of the US SEC, deeply dismantling MicroStrategy's behavior and source of funds for buying Bitcoin. The conclusion is that MicroStrategy is an enhanced version of "Grayscale + Luna".

First look at the overall situation of MicrosStrategy, then dismantle the source of funds for MicroStrategy to buy Bitcoin, and finally compare Grayscale and Luna. Below.

MicroStrategy is not afraid of bulls and bears: spending more than $16 billion to buy Bitcoin firmly

MicroStrategy has implemented the Bitcoin reserve strategy since September 2020. For four years, it has been crossing cycles and firmly implementing the Bitcoin reserve strategy without fear of bulls and bears, such as buying Bitcoin for more than $59,000 in April and November of the bull market in 2021.

MicroStrategy continues to buy BTC

Golden Finance reporters found that as of November 22, 2024, MicroStrategy has spent a total of US$16.58 billion to buy Bitcoin and currently holds 331,000 Bitcoins with a market value of nearly US$33 billion.

Since the successful issuance of Bitcoin ETF in January 2024, Bitcoin ETF has managed more than 1.24 million Bitcoins, and the assets under management have exceeded US$120 billion, with a total net capital inflow of approximately US$30.3 billion. Bitcoin ETF is an investment target for many investors, not from a single investor.

As far as the eye can see, MicroStrategy may be the single entity that spends the most on buying Bitcoin.

So the question is, where does MicroStrategy get so much money to buy Bitcoin?

Golden Finance reporter read the report submitted by MicroStrategy to the US SEC,Its funds mainly come from two sources: Convertible Senior Notes and At-the-Market Equity Offerings.

Among them, Convertible Senior Notes are for qualified institutional investors, and At-the-Market Equity Offerings are directly for the secondary market.

Convertible Senior Notes: $7.26 billion Qualified Institutional Investors

Below are the notes issued by MicroStrategy since 2020. Except for the $500 million senior secured bonds issued in June 2021, the rest are Convertible Senior Notes.

Among them, The $3 billion convertible bond cash newly issued by MicroStrategy on November 21, 2024 can be used at any time to buy Bitcoin. Maybe in the next one or two days, when MicroStrategy uses the $3 billion to buy Bitcoin, it will be when Bitcoin breaks $100,000.

Understand what Convertible Senior Notes are, and you will find that it is really a good financial tool.

The so-called Convertible Senior Notes is a special debt security that contains options that can convert the notes into a predetermined number of issuer shares. If the stock price rises, it can be converted into stock. If the stock price is low, the principal and interest will be paid according to the debt. Moreover, the senior convertible note takes precedence over all other debt securities issued by the same organization and can be compensated first. Therefore, it is a bond with high returns on the top and a bottom line.

Importantly, convertible senior bonds are generally accompanied by mandatory redemption clauses. After the prohibited redemption period stipulated in the terms has passed or when the early redemption clause is triggered, the issuer can initiate mandatory redemption. Before the specified redemption date, investors need to convert convertible bonds into company stocks, otherwise the issuer has the right to force the redemption of convertible bonds at the price of the face value of the bonds plus accrued interest. And In most cases, investors will actively convert into stocks.

Take the 2025 Convertible Notes that MicroStrategy has redeemed as an example. The maturity date of the 2025 Convertible Notes is December 15, 2025. However, MicroStrategy issued an announcement on June 13, 2024, requiring the holders of the 2025 Convertible Notes to choose to convert the notes at the applicable conversion rate of 2.5126 shares of MicroStrategy Class A common stock for every $1,000 of principal (reflecting a conversion price of $397.99 per share) before 5:00 p.m. New York time on July 11, 2024. Otherwise, MicroStrategy will force the redemption of all outstanding notes on July 15, with the redemption price equal to the principal + accrued unpaid interest.

MicroStrategy's stock price on that day was around $1,300 (MicroStrategy completed a 1:10 stock split on August 8, and the price of $1,300 was the price before the split). Obviously, creditors will choose to convert debt into stock. Creditors complete arbitrage after getting the stock.

It can be said that the most important motivation behind convertible bonds is that the issuer allows investors to actively choose to convert debt into stock, so that the issuer does not have to take out cash to repay the debt.

At-the-Market Equity Offerings: Nearly $10 billion in the secondary market

The following is MicroStrategy's market stock issuance data since 2020. In the past four years, MicroStrategy has raised a total of $9.8235 billion directly in the secondary market by issuing new shares, and all of these funds have been used by MicroStrategy to buy Bitcoin.

The so-called ATM Equity Offering refers to the subsequent stock issuance of a listed company after its IPO in order to raise funds. In an ATM issuance, a listed company sells newly issued shares to the secondary trading market gradually over a period of time at the then current market price through a designated broker. The broker sells the issuing company's shares on the open market to obtain cash proceeds, and then delivers the proceeds to the issuing company.

Let's take MicroStrategy's ATM Equity Offering as an example. On August 1, 2024, MicroStrategy signed a sales agreement (the "August 2023 Sales Agreement") with TD Securities (USA), The Benchmark Company, BTIG, Canaccord Genuity, Maxim Group and SG Americas Securities brokers. Pursuant to the agreement, MicroStrategy may issue and sell its Class A common stock through sales agents from time to time, with a total offering price of up to US$2 billion. According to the 8-K document submitted by MicroStrategy to the US SEC on November 11, 2024, MicroStrategy issued a total of 7,854,647 new shares, received a total of US$2.03 billion, and purchased all 27,200 bitcoins.

On October 30, 2024, MicroStrategy released the 21/21 plan, saying that it would raise $42 billion in capital in the next year, including $21 billion in equity and $21 billion in fixed-income securities, to invest in Bitcoin. MicroStrategy disclosed on the same day that MicroStrategy and TD Securities (USA), Barclays Capital, The Benchmark Company, BTIG, LLC, Canaccord Genuity, Cantor Fitzgerald & Co., Maxim Group, Mizuho Securities USA, and SG Americas Securities reached a sales agreement to issue $21 billion of MicroStrategy shares at market price. The 8-K document submitted by MicroStrategy to the SEC on November 18, 2024 showed that MicroStrategy sold 13.594 million shares between November 11 and 17, earning approximately $4.6 billion and buying all 51,780 bitcoins.

According to MicroStrategy's plan, brokers still have about $15.3 billion of MicroStrategy's newly issued shares to sell.

Why MicroStrategy is an enhanced version of "Grayscale+Luna"

Now that you are familiar with MicroStrategy's "convertible bonds" and "market-priced stock issuance" gold fingers, think back again, they are very similar to Grayscale and Luna in the last bull market, and they are enhanced versions.

Grayscale Vs. Convertible Bonds:

Reviewing Grayscale's operating mechanism before it was converted into an ETF, Grayscale trust shares were only issued to qualified investors. Investors used over-the-counter cash to purchase GBTC shares (the underlying of Grayscale Trust must be the corresponding Bitcoin assets) or physical Bitcoin in exchange for GBTC shares, and the arbitrage was completed in public trading after 6 months of lock-up. At the same time, GBTC shares are isolated from the underlying Bitcoin assets, and investors cannot redeem them.

MicroStrategy's Convertible Senior Notes are also aimed at qualified investors. Investors use over-the-counter cash to buy convertible bonds, and when they are forced to redeem, they are converted into MicroStrategy shares to complete arbitrage. Convertible Senior Notes are also isolated from MicroStrategy's Bitcoin.

In the Bitcoin bull market in 2020 and 2021, GBTC's premium attracted a large amount of arbitrage funds, and GBTC once accumulated more than 650,000 Bitcoins, which was called a "clear bull market" by many industry insiders at the time.

In this round of bull market, MicroStrategy has attracted more than $7 billion in qualified institutional investor funds through convertible bonds, and MicroStrategy's 21/21 plan is also preparing to issue more bonds.

The difference is that MicroStrategy's convertible bonds have a long maturity date, with the nearest maturity date being in 2027, which is enough to survive the new cycle. If necessary, MicroStrategy can completely force the redemption of convertible bonds, allowing investors to convert convertible bonds into newly issued MicroStrategy shares at almost zero cost, without MicroStrategy really having to pay back the money. Even if it is not redeemed until the maturity date, MicroStrategy can issue new convertible bonds to replace old convertible bonds, just as MicroStrategy redeemed 2028 Secured Notes with cash from 2028 Convertible Notes issued on September 20, 2024. Obviously, MicroStrategy's convertible bonds are more robust.

Luna Vs. Market-Priced Stock Issuance:

In the Luna case, burning $1 of LUNA can mint $1 of algorithmic stablecoin UST. As long as the price of LUNA rises, more UST can be minted. With more UST, more Bitcoin can be purchased as reserves to stabilize 1UST=1USDT. Luna is directly available to ordinary investors without permission.

MicroStrategy's market-priced stock offering is very similar to this, and is also directly available to ordinary investors in the secondary market. The higher MicroStrategy's stock price, the more dollars it can get through market-priced stock offerings, and more dollars can buy more Bitcoin. "Left foot on right foot" all the way up. After the Bitcoin ETF established a bull market in January 2024, MicroStrategy's net asset premium (market price per share/corresponding Bitcoin value-1) climbed all the way to 2.7. Currently, MicroStrategy holds a total of 331,200 Bitcoins, worth approximately US$32.84 billion, and MicroStrategy's total market value once exceeded US$100 billion.

Luna and UST can be minted in both directions. If UST is decoupled, arbitrageurs can buy UST at a discount and mint LUNA at 1UST=1USDT, forming a "death loop" and causing LUNA to collapse. In fact, if the Luna Foundation LFG bought more Bitcoin earlier in the rising cycle (it only bought $1.5 billion in Bitcoin), and if UST to LUNA could be temporarily minted in one direction, Luna would probably not collapse.

MicroStrategy goes a step further. MicroStrategy's market-priced stock issuance is one-way, will not fall into a death spiral, and is almost 0 cost. MicroStrategy is obviously safer than Luna. Even during the bear market in 2022, MicroStrategy's net asset premium is at least 60%.

As long as someone is willing to buy MicroStrategy shares issued at market prices, the more Bitcoin MicroStrategy buys during its high NAV premium, the thicker MicroStrategy's safety cushion. Used to the extreme, MicroStrategy's market value is exactly equal to its Bitcoin market value, and there is no risk.

In summary, can we say that MicroStrategy is an enhanced version of "Grayscale+Luna"?

Conclusion: Triple Maximalism

At the Bitcoin Conference held in Nashville at the end of July 2024, MicroStrategy CEO Michael Saylor delivered a keynote speech on "Bitcoin Revolution".

After four years of practice, he proposed a methodology for individuals, companies, institutions and countries to deal with the Bitcoin Revolution. He proposed a triple maximalism strategy. For the company, it is to buy Bitcoin through three channels - cash flow, issuing stocks when the stock price is overvalued, and issuing debt when interest rates are low.

He said so and did so.

MicroStrategy has hoarded 331,200 Bitcoins.