The MicroStrategy's Bitcoin Strategy Explained

On August 11, 2020, MicroStrategy (NASDAQ: MSTR), the largest independent publicly traded business intelligence company, made headlines by announcing the acquisition of 21,454 BTC at an aggregate price of $250 million. This bold move marked the company’s adoption of Bitcoin as its primary treasury reserve asset, signaling a significant shift in corporate capital allocation strategies.

The decision was part of a two-pronged approach: returning excess cash to shareholders via a $250 million modified Dutch auction and investing a similar amount in alternative assets to preserve and enhance value over time.

Michael Saylor, co-founder and current Executive Chairman of MicroStrategy (serving as CEO when the Bitcoin strategy started), is the visionary architect behind the company’s Bitcoin strategy. He described the company’s pivot to Bitcoin as a response to the evolving macroeconomic landscape.

Factors such as the global COVID-19 pandemic, unprecedented quantitative easing measures, and rising economic and political uncertainty highlighted the long-term risks of holding cash. Saylor championed Bitcoin as a superior store of value, citing its global acceptance, network dominance, and resilience as key attributes that made it “digital gold.”

This strategy was underpinned by Saylor’s belief in Bitcoin’s transformative potential, describing it as a critical asset for navigating the rapid digital transformation accelerated by the COVID-19 crisis. MicroStrategy’s first Bitcoin purchase was not only a financial decision but also a strategic move to align with the broader “Virtual Wave,” which Saylor saw as the next phase of technological advancement.

By integrating Bitcoin into its corporate treasury, MicroStrategy set a precedent for institutional adoption, sparking widespread discussion about the role of cryptocurrencies in modern financial management.

Michael Saylor: The Mastermind Behind The Bitcoin Strategy

Michael Saylor, co-founder of MicroStrategy, rose to prominence during the dot-com boom, becoming a billionaire before facing a major setback in 2000 when an accounting scandal cost him $6 billion in a single day. Despite the controversy, Saylor’s innovative mindset endured, leading him to Bitcoin years later.

In 2020, facing the erosion of MicroStrategy’s $500 million cash reserves due to inflation, Saylor identified Bitcoin as a revolutionary asset class—a scarce, decentralized solution to preserve wealth. Under his leadership, MicroStrategy became the first publicly traded company to adopt Bitcoin as its primary treasury reserve, investing $250 million initially and later amassing over 250,000 Bitcoin.

Saylor’s advocacy reframed Bitcoin as “digital gold,” championing it as the ultimate inflation hedge. His bold and uniquely novel strategy and articulate defense of the technology legitimized Bitcoin for traditional finance and spurred institutional adoption, cementing his legacy as a pivotal figure in the cryptocurrency space.

The Microstrategy's Bitcoin Strategy: In Short

MicroStrategy has developed a strategy that leverages Bitcoin in a unique way to appeal to different types of investors, particularly those in traditional financial markets. They securitize Bitcoin, creating a series of investment products that offer various levels of exposure to Bitcoin’s price movements and potential.

1. Securitization and High-Performance Bitcoin: MicroStrategy doesn’t just buy Bitcoin; it creates securities that offer more than the 1x exposure of holding raw Bitcoin. For example, they create products that offer 1.5x or even 3x exposure to Bitcoin. These higher-leverage products aim to offer enhanced returns for investors who want more performance than just holding raw Bitcoin, appealing to those who believe in Bitcoin’s long-term growth. The analogy used here compares it to putting kerosene, not crude oil, into an engine for high performance.

2. Leverage and Volatility: MicroStrategy’s approach is to embrace Bitcoin’s volatility rather than staying away from it. By using this volatility, they generate superior returns, with the company’s equity often outperforming Bitcoin’s price movements. They use Bitcoin as the engine that drives this high volatility, which can lead to greater returns. The company’s stock often has more volatility and higher returns compared to Bitcoin itself, thus attracting investors looking for high performance.

3. Convertible Bonds: A major part of their strategy is issuing convertible bonds, which give investors the option to convert debt into equity if certain conditions are met. These bonds are often issued with a premium to the current stock price. If Bitcoin’s price continues to rise, these bonds convert to equity, giving bondholders an upside potential in the company’s stock performance. As Bitcoin appreciates, these bonds convert into equity, which aligns the bondholders’ interests with Bitcoin’s upward trajectory.

4. Over-Collateralization: MicroStrategy often over-collateralizes its debt with Bitcoin, creating security for bondholders while still allowing the company to benefit from Bitcoin’s upside. For example, their convertible bonds are backed by a large amount of Bitcoin (25 billion dollars of Bitcoin), ensuring the downside risk is mitigated. This over-collateralization ensures bondholders are protected while still benefiting from the potential upside of Bitcoin.

5. BTC Yield: MicroStrategy’s key metric is BTC Yield, which measures the rate of increase in Bitcoin per share. This is the main indicator of the company’s success in acquiring more Bitcoin in a way that benefits shareholders without diluting their holdings. Their focus is on acquiring Bitcoin in a creative manner that increases the amount of Bitcoin per share, ensuring long-term value creation for shareholders.

6. Long-Term Outlook: In terms of Bitcoin’s price potential, MicroStrategy’s founder, Michael Saylor, expects Bitcoin to grow significantly in the coming decades. He forecasts that Bitcoin’s market share in global assets could rise to 7%, and as Bitcoin’s adoption grows, its price could reach $13 million per coin by 2045. This long-term growth is based on Bitcoin’s potential to replace traditional stores of value, such as gold and real estate.

Ultimately, MicroStrategy’s strategy is focused on leveraging Bitcoin’s volatility and creating high-performance financial products that allow traditional investors to benefit from Bitcoin’s upside, without directly owning the raw asset itself. By doing so, they’ve built a model that not only increases Bitcoin holdings but also drives value creation through innovative financial products and leveraging.

Understanding MicroStrategy’s Bitcoin Holdings

MicroStrategy’s Bitcoin acquisition strategy has been a key component of its corporate identity and investment approach, marked by frequent and strategic purchases. The company’s buying pattern is characterized by regular acquisitions of Bitcoin, often in sizable amounts, with each purchase reflecting varying market conditions and price points.

Since its initial Bitcoin investment in 2020, MicroStrategy has continuously expanded its holdings, executing purchases at multiple price levels. The average purchase price per Bitcoin varies with each acquisition, showcasing the company’s dollar-cost averaging (DCA) approach.

For instance, in November 2024, the company acquired Bitcoin at an average price of $74,463 per coin, while earlier in 2024, the average purchase price ranged from $43,764 to $67,455, reflecting both market volatility and strategic timing. Historically, MicroStrategy’s largest purchases occurred during market corrections, such as in December 2020, when the company bought over 29,000 BTC at an average price of $21,925, setting the stage for significant capital appreciation as the market rebounded.

The total amount of Bitcoin acquired by MicroStrategy has grown substantially, with the company holding over 279,000 BTC by late 2024. These acquisitions have been made across various transactions, ranging from smaller amounts to large purchases in the thousands of BTC. For example, in September 2024, the company acquired 7,420 BTC for $458.2 million, while a significant purchase in March 2024 added 9,245 BTC at a cost of $623 million.

As of November 2024, the total cost of MicroStrategy’s Bitcoin holdings stands at approximately $11.billion, with the current value of their holdings surpassing $25.44 billion. This represents a gain of over 112% on their total investment, underscoring the substantial appreciation in value of their Bitcoin assets. The company’s purchases have often been timed to capitalize on Bitcoin price dips, leading to impressive returns as the market has rebounded.

MicroStrategy’s strategy of purchasing Bitcoin during price fluctuations has proven to be highly effective, with the company seeing substantial gains, particularly during market recoveries. In fact, the company’s holdings have consistently appreciated in value, with notable instances of large profits, such as a 314% gain on its December 2020 acquisition, which saw the value of its holdings grow from $650 million to over $2.69 billion.

The point is, if you have the superior asset, it’s going up forever, Laura. Forever. — Michael Saylor

In addition to its impressive gains, the company’s Bitcoin holdings have been a cornerstone of its "open-source" strategy, with frequent updates and disclosures to shareholders and the public. The company’s decision to continue acquiring Bitcoin, despite price volatility, has demonstrated a commitment to the long-term potential of the asset, making it a key component of MicroStrategy’s financial and corporate strategy moving forward.

The Role of Convertible Bonds in Bitcoin Strategy

MicroStrategy’s use of convertible bonds as part of its Bitcoin strategy introduces a unique approach to leveraging Bitcoin’s high volatility while offering investors a safer, lower-risk alternative to directly investing in Bitcoin. These bonds are structured in a way that provides both principal protection and potential upside exposure to Bitcoin, essentially allowing investors to tap into the cryptocurrency’s growth without directly assuming its full downside risk. The company has leveraged its Bitcoin holdings to create these securities, positioning its treasury operation in a way that maximizes both the potential returns from Bitcoin’s price movements and the financial security offered by its capital structure.

Convertible bonds are a hybrid financial instrument, combining features of both equity and fixed-income securities. In the case of MicroStrategy, these bonds are issued with a strike price above the current stock price, meaning that if the stock or the value of Bitcoin rises, bondholders can convert their debt into stock, enjoying the upside. However, if the price does not reach the strike price, investors get their principal back, offering a degree of protection against downside risk. For example, a recent bond offering by MicroStrategy involved the sale of convertible bonds worth $1 billion, with a strike price around $185 per share, offering a potential 45% return within weeks as the bond’s value appreciated due to market conditions.

The key innovation in this strategy lies in how MicroStrategy structures the underlying collateral for these bonds. Instead of relying on traditional assets like treasury bills or cash reserves, the company uses Bitcoin to over-collateralize these bonds, making them four to ten times more secure than traditional fixed-income instruments. This high degree of over-collateralization is critical in ensuring the safety of bondholders, as it provides a buffer against the inherent volatility of Bitcoin. By positioning the bonds within a Bitcoin-heavy capital structure, MicroStrategy offers an investment product that offers substantial upside exposure to Bitcoin’s performance while mitigating some of its risk.

This strategy also creates a cycle of leverage that fuels both the stock and derivatives markets. MicroStrategy’s equity becomes more volatile—roughly 150% of Bitcoin’s volatility—due to the company’s significant Bitcoin holdings. This volatility amplifies the market dynamics surrounding its convertible bonds and derivative instruments. As the company issues more of these bonds, it taps into the market’s appetite for yield and high-risk, high-reward opportunities. The convertible bonds, in turn, help to maintain a high level of liquidity in MicroStrategy’s stock, contributing to its increased trading volume, which can sometimes surpass that of major companies like Apple or Amazon.

The broader impact of this strategy is that it creates a complex financial ecosystem where different financial instruments—ranging from options and convertible bonds to leveraged derivatives—interact in ways that magnify the effects of Bitcoin’s market fluctuations. By using its Bitcoin holdings to back these bonds, MicroStrategy not only secures its position in the Bitcoin market but also offers investors a way to participate in the cryptocurrency’s volatility without fully exposing themselves to its risks. This makes it a unique player in the intersection of traditional finance and digital assets, with its treasury strategy acting as a bridge between the two.

Leveraging Bitcoin: MicroStrategy’s Approach to Volatility

MicroStrategy’s approach to volatility and leverage in its Bitcoin strategy revolves around capitalizing on Bitcoin’s inherent price fluctuations to create value while maintaining downside protection. By holding 100% of its reserves in Bitcoin, the company positions itself uniquely in the market, using Bitcoin’s volatility as a core driver of its financial performance. This approach goes beyond traditional investments in stable, low-volatility assets like treasury bills, which typically offer security but lack the growth potential inherent in Bitcoin’s rapid price movements.

The company’s strategy hinges on Bitcoin’s volatility not as a risk, but as an asset with immense potential for value creation. This is similar to the concept of high-risk, high-reward investments, where the volatility of an asset can result in substantial upside when properly managed. For MicroStrategy, Bitcoin’s volatility translates into significant leverage, allowing the company to trade and raise capital with much more dynamic returns compared to other forms of fixed-income instruments or traditional equities.

Bitcoin’s extreme liquidity is another key factor in MicroStrategy’s strategy. The cryptocurrency allows the company to tap into global financial markets with ease, executing transactions and raising capital in ways that would be difficult with traditional assets like gold or real estate, which are much less liquid. In essence, Bitcoin enables the company to borrow or lend at much higher levels of leverage with lower collateral, driving the liquidity needed for creating value in the company’s stock and financial instruments.

The company’s ability to use Bitcoin’s volatility effectively is also what fuels its exceptional trading volumes. In some days, MicroStrategy has traded more equity than companies like Apple or Amazon, with some of the highest levels of liquidity in the market. This high liquidity is a direct result of Bitcoin’s volatile nature, allowing MicroStrategy to participate in the market in a way that traditional stocks cannot, ultimately leading to higher liquidity, more trading, and greater options value.

What sets MicroStrategy apart is its focus on embracing volatility rather than avoiding it. The company views Bitcoin’s volatility as a powerful “engine” driving its growth, similar to how a jet engine powers a plane despite producing heat and noise. While some investors might shy away from assets that swing wildly in price, MicroStrategy embraces these fluctuations as a source of energy that propels the company forward, driving both performance and market valuation.

This understanding of volatility as an engine of value is central to MicroStrategy’s long-term vision. With Bitcoin appreciating at an average rate of 29% annually over the past two decades, the company expects this growth to continue, ensuring the overall value of its holdings appreciates as well. By holding only Bitcoin, the company not only captures the full upside potential of the asset but also aligns itself with the future growth of the cryptocurrency space. Thus, MicroStrategy’s strategy is not merely about managing risk but about leveraging Bitcoin’s volatility to fuel long-term value creation.

MicroStrategy’s Securitization of Bitcoin

MicroStrategy’s approach to Bitcoin goes beyond merely holding the cryptocurrency; it involves the securitization of Bitcoin to appeal to a broader range of institutional investors and capital markets participants. The company has positioned itself as not just a Bitcoin holder but as a Bitcoin “treasury” company, using its substantial Bitcoin reserves—currently valued at over $25 billion—to create innovative financial products. This strategic move allows MicroStrategy to offer Bitcoin exposure in forms that cater to varying risk profiles and investor appetites.

One key aspect of MicroStrategy’s strategy is its ability to create high-performance financial instruments backed by Bitcoin. Traditional financial investors may be inclined to invest in Bitcoin through products like spot ETFs, such as iBit or FBTC, which simply provide exposure to the raw Bitcoin asset. These ETFs, though, can be likened to owning a “barrel of Bitcoin wrapped in a financial wrapper.” While this offers direct exposure to Bitcoin, it does not leverage its full potential for performance.

In contrast, MicroStrategy’s securitization process can be compared to refining raw materials into high-octane fuel. Just as raw crude oil needs to be refined into gasoline or kerosene to power cars or jet engines, raw Bitcoin, in MicroStrategy’s case, is refined into high-performance securities designed to operate at a higher level in the capital markets. The company uses leverage to enhance its Bitcoin exposure—often leveraging its Bitcoin holdings by approximately 1.5x. This means that for every 1% gain in Bitcoin, MicroStrategy’s securities can generate 1.5% or more in returns, which appeals to investors seeking enhanced performance and volatility.

This leverage plays a crucial role in appealing to both Bitcoin maximalists and more conservative investors. For those who believe in Bitcoin’s long-term growth but want to amplify their returns, MicroStrategy offers securities that provide more than just a 1:1 correlation to Bitcoin’s price movement. These investors are looking for more than simple Bitcoin exposure—they want the potential for higher returns through increased leverage. The company’s strategy is designed to generate 70-90% volatility, depending on the market conditions, aligning with investors who are willing to accept higher volatility for higher potential returns.

In addition to its standard offerings, MicroStrategy also provides derivative products like MSTU and MSTX, which are designed to deliver 2x the performance of its stock, offering investors even more leverage and performance potential. These derivatives allow investors to tap into the higher risk, higher reward characteristics of Bitcoin while benefiting from MicroStrategy’s Bitcoin-backed business model.

Ultimately, the company’s ability to securitize Bitcoin into high-performance instruments allows it to cater to a range of investors. Some seek the security of holding raw Bitcoin, while others want a more refined, higher-octane exposure to Bitcoin’s potential. MicroStrategy effectively operates in the middle of these two demands, offering products that balance security with enhanced performance, providing investors with tailored exposure to the world’s leading cryptocurrency.

Bitcoin Derivatives: Unlocking High-Performance Investment

MicroStrategy’s use of derivatives, specifically the MSTU and MSTX products, takes the concept of leveraging Bitcoin exposure to a new level. These derivatives are designed to give investors a more aggressive exposure to Bitcoin’s performance by leveraging the company’s stock, which itself is heavily tied to Bitcoin’s price movements.

The MSTU and MSTX are two unique ETFs (Exchange-Traded Funds) that essentially double the performance of MicroStrategy’s stock, which in turn means they are designed to deliver 2x the performance of the company’s equity. Since MicroStrategy’s stock is closely correlated with Bitcoin’s price, these products, by extension, offer 3x the performance of Bitcoin. This is achieved through a combination of direct Bitcoin exposure and leverage applied to the company’s stock, amplifying the volatility and the potential returns.

These ETFs are not for the faint of heart, as they target investors looking for high-performance, high-volatility exposure to Bitcoin. MicroStrategy recognizes that within the capital markets, there are two primary types of investors: those who want straightforward exposure to Bitcoin, and those who seek to maximize that exposure with higher leverage. MSTU and MSTX cater to the latter group, providing a more aggressive way to participate in Bitcoin’s upside while also amplifying the downside risks.

The success of these products speaks volumes about the demand for leveraged Bitcoin exposure. In a very short period, MSTU and MSTX collectively raised over $1 billion in capital, signaling a strong appetite for 3x Bitcoin exposure in the market. This kind of leverage appeals to those investors who don’t want to settle for the typical 1x performance of Bitcoin. Instead, they are looking to go beyond the first gear and into third gear, much like the analogy of flying a jet with kerosene instead of using wood as fuel. In this context, investors are looking to “fly fast” and capture more dramatic returns, much like how high-performance fuels allow high-speed jets to reach their destinations quickly.

Also, these leveraged products enable traders to engage with Bitcoin’s volatility in ways that aren’t possible through standard products. While some investors are content with moderate exposure to Bitcoin’s movements, others are looking to maximize that exposure with products like MSTU and MSTX, which combine MicroStrategy’s equity with Bitcoin’s inherent volatility.

MicroStrategy’s approach also taps into the broader ecosystem of Bitcoin-related financial instruments, creating a highly liquid and high-volatility environment where investors can seek leveraged exposure. With billions of dollars in open interest in MicroStrategy options and the company’s ability to provide high-liquidity products, MSTU and MSTX serve as tools for those who want to capitalize on the potential rewards and risks of Bitcoin’s market dynamics. These derivatives are part of a broader strategy that allows MicroStrategy to be at the forefront of both the Bitcoin market and the financial market’s desire for high-leverage, high-volatility products.

Strategic Use of Debt to Amplify Bitcoin Exposure

MicroStrategy uses debt strategically to leverage its Bitcoin holdings and enhance its ability to acquire more Bitcoin without directly diluting shareholders. The company issues bonds and other debt instruments with varying terms, typically struck at a premium to the current market price of its stock. As long as Bitcoin continues to appreciate, the bonds, which are issued with a specific strike price, tend to “equitize” (convert into equity), effectively turning debt into stock. The main benefit of this strategy is that as long as Bitcoin’s value increases, these bonds are more likely to convert into equity, thus increasing the company’s Bitcoin reserves without the need for traditional repayment.

MicroStrategy’s debt strategy is not focused on paying off the bonds but on managing the refinancing process and ensuring the bonds are equitized when the strike price is reached. If Bitcoin’s value appreciates significantly, these bonds convert into equity, increasing Bitcoin per share (BTC yield) for shareholders. The company aims to replace maturing bonds with new, longer-duration debt instruments, potentially at higher levels of leverage to continue expanding its Bitcoin holdings.

The key goal is to increase Bitcoin per share in an accretive manner. MicroStrategy avoids diluting its shares by acquiring Bitcoin in a way that maximizes the company’s Bitcoin reserves relative to its share count. This metric, BTC yield, is critical for assessing the effectiveness of MicroStrategy’s Bitcoin acquisition strategy, ensuring that shareholders benefit from increasing Bitcoin reserves per share.

MicroStrategy’s approach resembles that of a leveraged real estate company: borrowing money at low rates to invest in appreciating assets—in this case, Bitcoin. As long as Bitcoin continues to increase in value, the company’s use of debt serves to amplify returns without the risk of losing equity, effectively turning debt into a powerful tool for growth. This strategy contrasts with traditional risk-averse methods that would avoid leverage or debt, focusing instead on the core belief in Bitcoin’s long-term value appreciation.

BTC Yield: Measuring Performance and Growth

The BTC Yield is a simple metric used by MicroStrategy to measure how effectively it is increasing its Bitcoin holdings without diluting its shareholders. Here’s how it works:

• BTC Yield is calculated by dividing the company’s total Bitcoin holdings by the total number of its shares (including any diluted shares from convertible bonds or options).

• The result shows how much more Bitcoin is available per share over time.

• The goal is to increase Bitcoin holdings per share, or in other words, to grow the Bitcoin reserves in a way that benefits shareholders by increasing their ownership of Bitcoin without diminishing its value.

MicroStrategy uses this metric to ensure that every acquisition of Bitcoin is accretive — meaning it adds value to shareholders. If they acquire Bitcoin in a way that dilutes the share count too much or isn’t financially smart, it can lower the Bitcoin yield. But if they acquire Bitcoin efficiently, the yield increases, and shareholders are better off.

In simpler terms, the BTC Yield measures how well MicroStrategy is managing its Bitcoin acquisition strategy to grow the value of Bitcoin per share for investors over time. The goal is to continually increase this yield, making each share more valuable in terms of Bitcoin without causing dilution.

The Future of Bitcoin and MicroStrategy’s Long-Term Vision

MicroStrategy’s journey as a pioneer in Bitcoin adoption continues to inspire a bold vision for the future. With more than 1% of all Bitcoin that will ever exist already under its stewardship, the company has set its sights even higher. The ambitious $42 billion “21/21 Plan” reflects MicroStrategy’s unwavering commitment to leverage Bitcoin’s transformative potential. By raising $21 billion through equity and another $21 billion via fixed-income securities over three years, the company aims to fuel substantial Bitcoin acquisitions while targeting an annual BTC Yield of 6%-10% between 2025 and 2027.

This strategy not only cements MicroStrategy as the leader in corporate Bitcoin adoption but also underscores its innovative approach to treasury management. By combining disciplined leverage with a long-term view of Bitcoin’s growth, the company is setting a new standard for value creation. As MicroStrategy expands its holdings, it strengthens its role as a cornerstone of the Bitcoin economy, offering shareholders a future powered by digital capital transformation. With each strategic move, MicroStrategy continues to write the playbook for corporate Bitcoin integration, exemplifying the boundless possibilities of embracing digital assets at scale.

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