Topic: Do you understand why MicroStrategy's market cap is larger than BTC holdings? (Read 25 times)

First question is if Microstrategy has free money I don’t mean company money would he be borrowing money to buy bitcoin or leveraging, not withstanding the fact that companies like this go for borrowing to avoid some things like taxes. But regardless of his position I think the idea of buying MSTR instead of bitcoin directly is bad on numerous occasions.

MSTR is a centralized body no matter what they are holding you are simply buying shares like you do on centralized platforms like banks, for someone looking for decentralization it is definitely not the way to go. Further more I don’t think you will have total control of your holdings like you sell and add buys whenever you want.

Lastly should MSTR faces any issues it falls on you bent it bankruptcy or something like that

Well, they technically are still a software company, just that they have gotten very involved with Bitcoin that it now has a significant impact on MSTR shares valuation.

How do you mean "doesn't really produce much income, or hold assets that produce income?"

Market capitalization is mostly a reflection of market sentiments and isn't directly correlated with NAV.

There is no substitute to acquiring Bitcoin directly and having self custody. You were always meant to transact peer to peer without any centralized intermediary.

MicroStrategy (MSTR) and its Executive Chairman, Michael Saylor, have gained significant attention in the last few weeks alone, mainly due to the company's strategy for acquiring significant Bitcoins, which has ramped up the company share price exponentially. Whilst MicroStrategy initially was a software company, they have really become a Bitcoin acquiring company, with their company valued based on their cryptocurrency holdings.

For most traditional investors, the idea of a company which owns Bitcoin as an investment, and doesn't really produce much income, or hold assets that produce income, they would expect that the market capitalisation (value of all shares in circulation sold at current price), would be equal or close to the Net Asset Value (NAV), which is the value of all Bitcoin they hold.

However, currently the market capitalisation of MSTR is $90.645 billion USD, whilst they hold 386,700 BTC Bitcoins worth $35.735 billion USD.

For most traditional investors, this doesn't really make any sense. They ask the question:

"Why is the market capitalisation 2.53x the net asset value?"

I am making this post to help answer this question, as like you, I was initially quite confused.

The answer ultimately is: Leverage.

MicroStrategy is able to borrow money from investors at 0% fixed interest, by giving them convertible bonds, that let them trade the bonds for company shares later (typically 5 years) if the shares become more valuable (typically 30% higher). However, if the value of the MSTR share price does not rise by the 30-50% threshold needed for the bondholders to covert their bonds to shares, the bonds simply remain as debt and must be repaid in the full face value.

So what this means is:

1. If BTC Bitcoin's price rises, MicroStrategy's acquired Bitcoin from the borrowed money would rise in value, and therefore improve MicroStrategy's net asset value and investor sentiment, driving up the stock price. This would then exceed the conversion price of the convertible bonds. Bondholder can then convert their bonds to equity (shares), diluting existing shareholders, but reducing MicroStrategy's debt obligations. This could create a positive feedback loop to attract more investors and driving the stock price even higher.

2. If BTC Bitcoin price plummets, MicroStrategy's acquired Bitcoin from the borrowed money would drop, as well as other holdings, and therefore the net asset value would drop. However, MicroStrategy would still be on the hook to cover the bond repayment to the bondholder and need the cash available to make this repayment in full. As MicroStrategy's investment strategy is to be low on cash reserves, this would mean the company would be required to sell off Bitcoin to raise funds for the repayment. However, this could exacerbate Bitcoin's price decline, and hurt investor sentiment, causing Bitcoin to decline even further, making a negative feedback loop.

So effectively this just means that MicroStrategy uses financial instruments like convertible bonds with debt and equity, to acquire Bitcoin, which amplifies the impact of Bitcoin's price on it's stock - Leverage.

Whilst I am super bullish on Bitcoin, and I do believe that MicroStrategy buying Bitcoin is good for the cryptocurrency industry as a whole, it is not an investment option I will choose, and I will stick to acquiring real Bitcoin myself. The leverage does increase exposure so that Bitcoin price movements will lead to greater earnings, however it's still very centralised, and you are not a custodian of the cryptocurrency yourself. I would rather do this myself.

I am interested to hear your thoughts. If you are bullish on Bitcoin, would you rather buy MicroStrategy, or Bitcoin itself?

References:
1. https://www.microstrategy.com/press/microstrategy-completes-3-billion-offering-of-convertible-senior-notes-due-2029-at-0-coupon-and-55-conversion-premium_11-21-2024
2. https://www.microstrategy.com/press/microstrategy-announces-pricing-of-convertible-senior-notes-11-20-2024