Another BTC ETF: Behind MicroStrategy's Continued Heavy Bitcoin Buying

Original: <<Why does the US listed company Micro Strategy continue to buy Bitcoin in large quantities?>> 》

Author: AKIRA.H, CoinPost

Compilation: Aya, Odaily Planet Daily

Listed companies holding the most bitcoins

As a pioneer in the business intelligence (BI) industry, MicroStrategy has delivered innovative products to thousands of companies. Driving its share price even higher in recent years has been a seemingly inconceivable investment strategy.

The company’s co-founder, Michael Saylor, purchased $250 million worth of bitcoin in August 2020 as part of a capital allocation strategy. The bold strategy is based on expectations of bitcoin’s potentially high returns and appeal as a hedge against inflation. As a result, MicroStrategy shares have roughly tripled compared to early 2020.

Confidence in the company’s Bitcoin investments continues to grow, with holdings of over 150,000 BTC as of July 2023, the largest holder among listed companies. Now, MicroStrategy’s stock (MSTR) has become a proxy investment vehicle for Bitcoin, attracting the attention of large institutional investors like BlackRock, Vanguard Group, Morgan Stanley, Fidelity, etc.

This article will discuss MicroStrategy’s bitcoin investment strategy, financial situation and Michael Saylor’s vision in detail, compiled by Odaily Planet Daily Aya.

Table of contents

• MicroStrategy Overview
• Change in MicroStrategy BTC holdings
• BTC purchase funds and their financial status *Michael Saylor’s vision
• Major shareholder of MicroStrategy

MicroStrategy Overview

Headquartered in Virginia, USA, MicroStrategy was founded in 1989 by MIT graduates Michael Thaler and Sanju Bansal.

After providing companies with a platform to efficiently analyze and visualize business data, the company achieved steady growth and was listed on NASDAQ in 1998 (symbol: MSTR).

A pioneer in business intelligence (BI), MicroStrategy provides enterprise-class analytics solutions and mobile software. These innovative products enable thousands of organizations around the world to gain insights for data-driven decision-making.

In the BI space, MicroStrategy’s main competitors include SAP AG Business Objects, IBM Cognos, and Oracle Corporation’s BI platforms.

In one trend to watch, in June 2023, MicroStrategy is partnering with Microsoft to expand its offerings and enhance artificial intelligence capabilities on Microsoft Azure. Through this collaboration, customers can realize comprehensive solutions for managing and analyzing data in the cloud, enabling faster and more accurate decision-making.

MicroStrategy’s revenue mainly comes from license fees and subscription fees for cloud services, and sales in the first quarter (January-March) of 2023 will be approximately 16.8 billion yen (121.9 million US dollars), a year-on-year increase of 2.2%. Sales and operating profit have remained stable over the past few years.

But when it comes to stock prices, it’s a different story. Since the beginning of 2020, MicroStrategy’s stock price has increased by about 3 times, mainly due to the company’s purchase of Bitcoin in August 2022 as a capital allocation strategy.

Since then, the company has continued to increase its bitcoin holdings, and as of July 2023, its holdings have exceeded 150,000 bitcoins, making it the largest holder among listed companies. MicroStrategy’s share price (MSTR) is closely correlated with Bitcoin price fluctuations.

When the price of Bitcoin falls by 60% in 2022, MSTR shares also fall by about 35%. However, heading into 2023, things have changed, with the share price rising from about 19,000 yen (about $145) at the beginning of the year to about 56,000 yen (about $400) as of July 11.

MSTR stock price (yellow), BTC price (candles), Nasdaq 100 (blue) Source; Trading View

When MicroStrategy first bought bitcoin, the price of bitcoin was around $11,700 and MSTR was trading around $144. However, as of July 2023, the Bitcoin price has nearly tripled to approximately $30,300, while MSTR’s share price has also increased by 2.7 times.

Over the past 5 years, MicroStrategy (MSTR) has far outperformed the S&P 500 Index, while also outperforming Meta and Amazon.

MicroStrategy Bitcoin Holdings Change

Source: Ecoinometrics

MicroStrategy has been an active bitcoin buyer since August 2020 and has purchased bitcoin more than 25 times over the past three years.

This pace of purchases continues until 2023, with an additional 1,045 BTC purchased on April 5 of the same year. Then, on June 28, they made a massive purchase of 12,333 bitcoins equivalent to 50 billion yen ($347 million).

Through these transactions, MicroStrategy’s bitcoin holdings totaled 152,333 BTC (about $4.6 billion), with a total investment of about 650 billion yen ($4516.98 million). To date, the company has paid an average of $29,668 for bitcoin.

Considering the current market price of Bitcoin is around $30,000 per coin, MicroStrategy’s unrealized gains and losses on its Bitcoin investment to date have turned slightly positive. This is a significant improvement from the impairment loss of approximately 27.1 billion yen ($197.6 million) recorded in the fourth quarter of 2022.

Microstrategy BTC Purchase History

BTC purchase funds and their financial status

MicroStrategy, through its wholly owned subsidiary MacroStrategy, directly and indirectly buys and holds Bitcoin. The bitcoin purchases were financed through working capital, borrowings, corporate bond issues, and new funds raised on the stock market, so-called “public offerings.”

Source: Buy Bitcoin Worldwide

In the first quarter of 2023, MicroStrategy is committed to improving its financial structure, including the full repayment of the Bitcoin secured loan. MicroStrategy’s long-term liabilities decreased from Rs 2,378 crore to Rs 2,175 crore.

Currently, MicroStrategy’s principal long-term liabilities are as follows:

Source: MicroStrategy

・Convertible bonds due 2025, rate: 0.75%: $650 million (October 2020) ・Convertible bonds due 2027, rate: 0%: $1.05 billion (February 2021)

A convertible corporate bond is a bond with the right to convert it into shares under certain conditions (conversion option). By issuing convertible corporate bonds, MicroStrategy can obtain capital without diluting equity and use the proceeds for bitcoin purchases.

MicroStrategy’s debt holdings have convertible bonds with low interest rates of 0% to 0.75% and are not at risk of being called for full prepayment as long as they are not delisted by Nasdaq or the New York Stock Exchange. excluded from risk.

・ 6.125% Guaranteed Junk Bond due 2028 (High Yield Bond): $500 million (June 2021)

As part of the guarantee for this loan, MicroStrategy has 14,890 bitcoins in deposit at the end of September 2022, with a liquidation line at the bitcoin price of about 500,000 yen ($3,561). There is still room for this liquidation line, MicroStrategy is not directly exposed to the risk of the Bitcoin market.

However, interest on the loans accrues twice a year, which could weigh on MicroStrategy’s results. As of September 2022, MicroStrategy has paid approximately 3 billion yen ($22 million) in bitcoin-related interest. That’s not a small amount compared to the company’s “cash and cash equivalents” balance ($94.3 million as of March 31, 2023).

Additionally, the secured loan fully repayable in the first quarter of 2023 is a secured loan agreed with Silvergate Bank in March 2022 and maturing in 2025. At the time, MicroStrategy borrowed $820 million against 19,466 bitcoins as collateral. MicroStrategy fully repaid this secured long-term loan with an early payment of approximately $161 million.

Additionally, during the first quarter of 2023, MicroStrategy sold its own stock on the open market for approximately $339 million in net proceeds. About $179.39 million of that was spent on Bitcoin.

On the other hand, MicroStrategy’s total assets reached $3,026.4 million in the first quarter of 2023, an increase from $2,410.27 million in the previous quarter. This increase was primarily due to a significant increase in digital assets (from $1,840.02 million to $2,039.2 million) and deferred tax assets (from $188.15 million to $651.51 million).

Michael Thaler’s Vision

MicroStrategy co-founder Michael Saylor is considered a leader in Bitcoin investment strategies. In August 2020, Saylor judged that Bitcoin is superior to other investments as an inflation-fighting investment and has the potential to deliver higher returns. As a result, he purchased about $250 million in bitcoin as part of a capital allocation strategy.

Saylor said at the time: "Investing in Bitcoin is part of a new capital allocation strategy designed to maximize long-term shareholder value; Bitcoin is an attractive investment asset and a reliable store of value with the potential for long-term appreciation ".

Even if the Bitcoin market enters a bear market after 2022, MicroStrategy still adheres to the strategy of expanding Bitcoin holdings, and their commitment has not wavered. Despite the criticism, Saylor made it clear: “We will continue to increase our Bitcoin holdings and have no intention of selling them.”

Additionally, on August 8, 2022, Saylor resigned as MicroStrategy’s Chief Executive Officer and became Executive Chairman. He said the decision will allow MicroStrategy to focus more on its bitcoin-related work.

And now, Saylor is expressing his bullish view, saying: “With regulatory clarity, it will become easier for institutional investors to participate. If we rebuild the business around Bitcoin, its advantages will be further enhanced.”

The U.S. Securities and Exchange Commission (SEC) considers most cryptocurrencies (tokens) to be unregistered securities, but in the case of Bitcoin, it relatively explicitly treats it as a commodity. Bitcoin’s market share has risen from 43% at the end of February 2023 to about 49.9% now, according to CoinMarketCap.

BTC Market Cap Market Share Source: CoinMarketCap

In recent years, MicroStrategy has been actively working on Bitcoin adoption, including developing new products related to Bitcoin’s layer-2 scaling solution, the so-called “Lightning Network.” The following are its main trends:

5/25/2021 Why the community is afraid of the “Bitcoin Mining Council” formed by North American mining companies (related article)

4/27/2022 MicroStrategy to Offer Bitcoin Invested Defined Contribution Pensions for Employees (Related Article)

30 Dec 2022 MicroStrategy to Provide Enterprise Solutions for Bitcoin Lightning Network (related article)

4/1/2023 MicroStrategy Allows Bitcoin Sending via Corporate Email (Related Article)

Major shareholder of MicroStrategy

The Bitcoin investment strategy adopted by MicroStrategy makes it a bridge between mainstream investment institutions and Bitcoin.

As an industry-leading business intelligence (BI) company, MicroStrategy’s major shareholders include well-known institutional investors such as BlackRock Group, the world’s largest asset management company, and Vanguard Group, the world’s second largest asset management company.

In January 2020, financial giant Morgan Stanley reportedly acquired an 11.9% stake in MicroStrategy. In addition, companies affiliated with Fidelity, which has more than $4.5 trillion in assets under management, have significantly increased their stake in MicroStrategy, according to reports for the first quarter of 2023. This makes the two companies among MicroStrategy’s top 10 shareholders.

BlackRock owns about 6 percent of MicroStrategy, which equates to more than $2.2 billion, according to a quarterly 13 F filing with the SEC. Separately, Fidelity increased its stake in MicroStrategy by 650,000 shares in the first quarter of 2023, for a 6.79% stake.

MicroStrategy Top 10 Shareholders Source: CNNMoney

This trend is not limited to the United States, but around the world. National Bank of Canada, Canada’s sixth-largest bank, bought more than $500,000 worth of MicroStrategy stock in the first quarter of 2023, increasing its stake by 8.8%.

For institutional investors, buying MicroStrategy stock (MSTR stock) is a very easy way to gain exposure to Bitcoin. Therefore, some people think that MSTR stock is actually playing the role of Bitcoin ETF.