When examining companies that hold Bitcoin as part of their treasury strategy, many turn to resources like bitcointreasuries.com, which lists various public and private entities with Bitcoin holdings. However, MicroStrategy (MSTR) stands out as a unique case among these Bitcoin-holding companies. While some corporations simply allocate a portion of their treasury to Bitcoin as a hedge or investment, MicroStrategy has transformed its entire business model and financial strategy around Bitcoin acquisition and holding.
MicroStrategy, a business intelligence firm founded in 1989 by Michael Saylor and Sanju Bansal, has evolved from a traditional software company into a pioneering force in corporate Bitcoin adoption. This transformation represents a unique intersection of enterprise software, financial strategy, and cryptocurrency investment. Unlike other companies that passively hold Bitcoin, MicroStrategy actively employs sophisticated financial engineering techniques to continually increase its Bitcoin holdings, making it more akin to a Bitcoin development company than a traditional corporation with Bitcoin reserves.
This paper will explore the intricacies of MicroStrategy's Bitcoin strategy, including its origins as a software company, the philosophy behind its pivot to Bitcoin, its innovative financial engineering approaches, and the metrics it uses to measure success. By understanding MicroStrategy's approach, we can gain insights into a new model of corporate treasury management in the age of cryptocurrency.
MicroStrategy, a business intelligence firm founded in 1989 by Michael Saylor and Sanju Bansal, has evolved from a traditional software company into a pioneering force in corporate Bitcoin adoption. This transformation represents a unique intersection of enterprise software, financial strategy, and cryptocurrency investment.
MicroStrategy began as a provider of business intelligence, mobile software, and cloud-based services. Its core products focused on data analytics, helping enterprises make data-driven decisions. The company's software solutions were designed to analyze internal and external data to support better business decision-making, a critical need in the increasingly data-rich business environment of the late 20th and early 21st centuries.
Before its pivot to Bitcoin, MicroStrategy operated a profitable software business model. The company generated revenue through:
Software licenses: One-time fees for the right to use MicroStrategy's software products.
Subscription services: Recurring revenue from cloud-based offerings.
Product support: Ongoing technical support and software updates.
Other services: Including consulting and education services.
This model provided MicroStrategy with a stable revenue stream and a strong market position in the business intelligence sector. The company's profitability was evident in its financial statements, with consistent positive cash flows from operations.
Michael Saylor, MicroStrategy's co-founder and executive chairman, began to view Bitcoin as a superior store of value compared to traditional assets like cash or bonds. This perspective was rooted in several key beliefs:
Inflation hedge: Bitcoin's fixed supply (capped at 21 million coins) was seen as a hedge against monetary inflation.
Digital gold: Saylor viewed Bitcoin as a digital equivalent to gold, but with superior portability and divisibility.
Network effects: The growing adoption and recognition of Bitcoin were expected to increase its value over time.
In August 2020, MicroStrategy announced its first significant Bitcoin purchase, marking the beginning of its "Bitcoin Strategy." This strategy involves:
Using excess cash reserves to purchase Bitcoin.
Raising capital through debt and equity offerings to fund additional Bitcoin acquisitions.
Holding Bitcoin as a primary treasury reserve asset.
This approach was based on the belief that Bitcoin would appreciate significantly over time, providing greater returns than traditional cash holdings or short-term investments.
While maintaining its software business, MicroStrategy has effectively transformed into what it calls the "world's first Bitcoin development company." This new identity encompasses:
Continued development and sale of enterprise analytics software.
Strategic accumulation of Bitcoin as a treasury reserve asset.
Advocacy for Bitcoin adoption in corporate treasury management.
Exploration of Bitcoin-related technologies and applications.
MicroStrategy's Bitcoin strategy involves sophisticated financial engineering:
Convertible note offerings: Issuing debt that can be converted into equity, allowing the company to borrow at lower interest rates.
Equity offerings: Selling additional shares to raise capital for Bitcoin purchases.
At-the-market (ATM) equity programs: Allowing the company to sell shares over time at prevailing market prices.
These methods enable MicroStrategy to leverage its balance sheet and market position to accumulate Bitcoin, creating a unique value proposition for investors seeking exposure to both enterprise software and Bitcoin.
MicroStrategy's recently announced "21/21 Plan" aims to raise $42 billion over three years:
$21 billion through equity offerings
$21 billion through fixed-income securities
This plan is designed to significantly increase MicroStrategy's Bitcoin holdings, potentially reaching nearly 3% of the total Bitcoin supply.
MicroStrategy has introduced the concept of "BTC Yield" as a key performance indicator for their Bitcoin strategy. This metric is crucial to understanding the company's approach to Bitcoin acquisition and shareholder value creation.
BTC Yield is defined as the period-to-period percentage change in the ratio of MicroStrategy's total Bitcoin holdings to its assumed diluted shares outstanding. The formula can be expressed as:
BTC Yield = [(BTC/Share_End) / (BTC/Share_Start) - 1] * 100
Where:
BTC/Share_End is the ratio of total Bitcoin holdings to assumed diluted shares at the end of the period
BTC/Share_Start is the same ratio at the start of the period
Total Bitcoin Holdings: The number of Bitcoins held by MicroStrategy at a given time.
Assumed Diluted Shares Outstanding: This includes:
Actual shares of common stock outstanding
Potential shares from conversion of all outstanding convertible notes
Shares from exercise of all outstanding stock option awards
Shares from settlement of all outstanding restricted stock units and performance stock units
MicroStrategy uses BTC Yield to:
Evaluate capital allocation decisions
Measure the achievement of their Bitcoin strategy
Demonstrate accretive Bitcoin acquisition to shareholders
The company aims to differentiate itself from institutional Bitcoin investment options that charge management fees by showing positive BTC Yield, indicating an increase in Bitcoin ownership per share over time.
As of August 1, 2024, MicroStrategy reported:
Year-to-date BTC Yield of 12.2%
A target to achieve an annual BTC Yield of 4-8% from 2025-2027
This means that shareholders could potentially see their Bitcoin holdings (owned via MSTR stock) grow by 4-8% annually over the next three years, purely through the company's financial engineering and Bitcoin acquisition strategy.
Accretion Focus: By emphasizing BTC Yield, MicroStrategy is committing to increasing shareholder value in Bitcoin terms, aligning with the concept of "getting on the Bitcoin standard."
Response to Dilution Concerns: The BTC Yield metric addresses criticisms about share dilution by demonstrating that the Bitcoin holdings per share are increasing despite the issuance of new shares.
Differentiation from ETFs: Unlike Bitcoin ETFs where a share always represents the same amount of Bitcoin, MSTR shares aim to represent an increasing amount of Bitcoin over time.
Strategic Guidance: The BTC Yield targets provide shareholders with clear expectations for the company's Bitcoin acquisition strategy performance.
It's important to note that while BTC Yield is a useful metric for understanding MicroStrategy's Bitcoin strategy, it should not be confused with traditional financial yield metrics. It does not represent income generated from Bitcoin holdings but rather the accretive nature of the company's Bitcoin acquisition strategy to shareholder value.
The regulatory landscape for cryptocurrencies remains uncertain, with potential changes in tax treatment, reporting requirements, or even outright restrictions posing risks to MicroStrategy's strategy.
Bitcoin's price volatility presents both opportunities and risks. While it offers the potential for significant appreciation, it also exposes the company to substantial downside risk.
MicroStrategy's Bitcoin holdings significantly impact its balance sheet:
Asset valuation: Bitcoin is treated as an intangible asset, subject to impairment losses but not to appreciation in book value.
Debt levels: The company has taken on significant debt to fund Bitcoin purchases, increasing financial leverage.
The equity offerings used to fund Bitcoin purchases result in dilution for existing shareholders. The company argues that the potential appreciation of Bitcoin will offset this dilution over time, as reflected in the BTC Yield metric.
MicroStrategy's transformation from a traditional software company to a Bitcoin-focused entity represents a unique experiment in corporate treasury management and cryptocurrency adoption. By leveraging its software business and financial engineering capabilities, MicroStrategy has created a novel investment vehicle that provides exposure to both enterprise software and Bitcoin.
The introduction of the BTC Yield metric demonstrates the company's commitment to its Bitcoin strategy and provides a new way for investors to evaluate the effectiveness of this approach. While innovative, this strategy carries significant risks and has fundamentally altered the company's risk profile.
As MicroStrategy continues to execute its ambitious plans, it will likely remain a focal point in discussions about corporate Bitcoin adoption, treasury management strategies, and the evolving relationship between traditional finance and the cryptocurrency ecosystem. Investors and observers must carefully consider the interplay between MicroStrategy's software business, its Bitcoin holdings, and the broader cryptocurrency market when evaluating the company's prospects.
A financial statement that provides a snapshot of a company's financial position at a specific point in time. It lists the company's assets, liabilities, and shareholders' equity, adhering to the equation: Assets = Liabilities + Shareholders' Equity.
A key performance indicator introduced by MicroStrategy to measure the effectiveness of its Bitcoin acquisition strategy. It represents the percentage change in the ratio of the company's Bitcoin holdings to its assumed diluted shares outstanding over a specific period.
A form of short-term debt that converts into equity, typically in conjunction with a future financing round. MicroStrategy has used convertible notes as part of its strategy to finance Bitcoin purchases.
The decrease in existing shareholders' ownership percentage of a company as a result of the company issuing new shares. MicroStrategy's strategy involves dilution, which it aims to offset through Bitcoin appreciation.
Stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a measure of a company's overall financial performance and is used as an alternative to net income in some circumstances.
A permanent reduction in the value of an asset. In the context of MicroStrategy's Bitcoin holdings, impairment occurs when the market value of Bitcoin falls below its carrying value on the company's balance sheet.
The use of borrowed capital to increase the potential return of an investment. MicroStrategy has used leverage by issuing debt to purchase Bitcoin.
The degree to which an asset can be quickly bought or sold in the market without affecting its price. Cash is the most liquid asset, while large holdings of Bitcoin may be relatively illiquid.
The total value of a company's outstanding shares of stock. It is calculated by multiplying the total number of outstanding shares by the current market price per share.
The value delivered to shareholders due to management's ability to increase sales, earnings, and free cash flow, which leads to an increase in dividends and capital gains for shareholders. MicroStrategy aims to increase shareholder value through its Bitcoin strategy.
The management of an enterprise's holdings, with the ultimate goal of managing the firm's liquidity and mitigating its operational, financial, and reputational risk. MicroStrategy's Bitcoin strategy represents an unconventional approach to treasury management.
This glossary provides additional context for some of the financial terms used in the analysis, helping readers better understand the complexities of MicroStrategy's business model and Bitcoin strategy.
Citations: [1] https://seekingalpha.com/article/4710454-all-about-that-yield-microstrategy-biggest-earnings-call-yet [2] https://www.microstrategy.com/press/microstrategy-announces-second-quarter-2024-financial-results-now-holds-226-500-btc_08-01-2024 [3] https://erickimphotography.com/blog/2024/11/03/search-microstrategy-mstr-btc-bitcoin-yield-concept/
