‘Selling $1 bills for $3’: Why bond buyers and equity investors can’t get enough of bitcoin-obsessed MicroStrategy

• Cryptocurrency maven Michael Saylor turned a decades-old software firm into a bitcoin behemoth.
• MicroStrategy has more than doubled the returns of bitcoin and even Nvidia.
• Here’s why both equity and bond investors are obsessed with Saylor’s stock.

One of the market’s hottest stocks is a 35-year-old software company valued at $91 billion, even though its core business generated just $116 million in revenue last quarter.

Many who’ve invested in this firm may not know about its business intelligence product. All they know is that it’s a bitcoin company, run by one of the asset’s most vocal evangelists.

MicroStrategy (MSTR) is exceptional, in every sense. Its 584% return in the last year is more than double that of Nvidia and far exceeds the underlying bitcoin it’s hoarding. Even more fascinating is that executive chairman Michael Saylor is betting everything, from his reputation to his firm’s very existence, on a strategy that observers say has never been attempted before.

Saylor’s aim seems simple: Buy as much bitcoin as possible, before it rises, from $100,000 to $13 million. MicroStrategy made history in 2020 by becoming the first public company to buy bitcoin, and while other companies have started to follow, none are doing so as aggressively.

In the years since, Saylor has sailed further into uncharted territory. After first attracting interest from those who wanted exposure to crypto through stocks, before bitcoin funds were approved, MicroStrategy has since pivoted to issuing interest-free bonds offering hedged bitcoin exposure.

“It is completely new and novel because MicroStrategy is putting bitcoin into these traditional finance wrappers of — well, it’s a convertible bond, but it’s backed by bitcoin; well, it’s shares of an equity, but it’s backed by bitcoin,” said Tim Kotzman, the host of the Bitcoin Treasuries Podcast focused on bitcoin and MicroStrategy, in a recent interview with Business Insider.

Judging by MicroStrategy’s performance, Saylor’s efforts are paying off. Though shares are well off their all-time high set in late November, bitcoin itself just topped the six-figure milestone for the first time. His success is so stunning that it has even caught the attention of crypto skeptics.

MicroStrategy didn’t respond to a request for comment for this story.

Inside MicroStrategy’s innovative strategy

Since MicroStrategy’s software business is basically an afterthought, it can’t be valued based on traditional financial metrics like price-to-earnings or price-to-sales.

Instead, investors have developed new ways to value the company, namely bitcoin per share and mNAV, or the multiple that investors are putting on the net asset value of its bitcoin.

Those metrics are rather straightforward. Bitcoin per share, and bitcoin value per share, reflect how many bitcoin investors are getting when they buy a share of MicroStrategy. The company owns 402,100 bitcoin, or 1.9% of the crypto’s supply limit of 21 million. So with a stock price of around $390, each MicroStrategy share gives investors exposure to 0.0017 bitcoin. That much bitcoin is worth $170, which is the bitcoin value per share. Therefore, the stock’s mNAV is 2.3x.

It may seem strange that investors are paying nearly $400 for what’s effectively $170 of bitcoin.

There are several reasons, including that MicroStrategy’s bitcoin count is steadily rising. One way to think of the stock’s mNAV is that investors are paying a premium because they think Saylor will eventually more than double his company’s bitcoin stockpile.

Another is that MicroStrategy is essentially “a leveraged vehicle for holding bitcoin in the guise of a software company,” as Interactive Brokers’ Steve Sosnick put it in a message to BI. The veteran strategy chief noted that Saylor’s company is borrowing money to buy bitcoin, and that leverage means it rises or falls more than the price of bitcoin itself, making it a supercharged bet on bitcoin.

Others echoed this view, including Matthew Sigel, the head of VanEck’s digital assets research.

“MicroStrategy is literally borrowing USD to buy BTC, so it is a leveraged play,” Sigel wrote in an email. “The stock is likely to outperform in up markets and underperform in down markets, until enough other companies duplicate the playbook and bitcoin is more widely adopted.”

‘Accretive dilution’: A brilliant loophole, or bound to blow up?

But perhaps the best explanation is MicroStrategy’s highly profitable decision to issue bonds.

Return-hungry fixed-income investors are snapping up the company’s convertible debt, even though it pays no interest, since it’s like buying a low-risk option on bitcoin via MicroStrategy shares that they otherwise couldn’t access.

If MicroStrategy’s stock, a proxy for bitcoin, is higher in four or five years, these investors could score a huge return by buying those shares at preset prices. Otherwise, bondholders can require the company to pay them back in full, per its terms. They’ll lose out only if the company goes under, in addition to the opportunity cost of what they could have done with the money.

For MicroStrategy, this is a no-brainer. The company is essentially raising money by issuing shares for more than double what its bitcoin is worth, based on its mNAV. That allows Saylor to add even more bitcoin to its stockpile.

Investors normally hate when companies aggressively issue new shares because it dilutes their current stake. But what MicroStrategy is doing has been described as “accretive dilution,” since issuing shares helps the company buy more bitcoin, thereby increasing its bitcoin per share.

“When they’re selling the shares for 1.5x or 2x or 2.5x or 3x the net asset value of the bitcoin that the company holds, they’re basically selling $1 bills for $3,” Kotzman explained. “They’re taking that $3 and turning around and buying bitcoin for $1. So it’s immediately accretive to every single shareholder and every single shareholder of MicroStrategy.”

If bitcoin plunges, MicroStrategy shares will as well, though the company can simply buy more. The stock is one of the most volatile in markets, but Saylor and company want it that way since more volatility attracts even more interest from traders.

“The whole, ‘Sell the sizzle, not the steak’ — well, the sizzle is the volatility; the volatility is vitality; volatility is the product,” Kotzman said. “The volatility is what’s attracting the traders and the arbitragers. And the reason that they can sell additional shares at the market is because it’s so immediately accretive.”

All of this might sound too good to be true. But there’s no guarantee that MicroStrategy will succeed, or that bitcoin will keep rising. In fact, Citron Research, which is bullish on bitcoin, announced recently that it’s shorting MicroStrategy.

In any case, investors should know that they’re signing themselves up for a wildly volatile ride.

“If you’re freaking out and you’re not sleeping well because of the volatility of MicroStrategy, maybe you need to own more bitcoin and have that as your base, and then build from there,” Kotzman said.

That’s essentially what Saylor is doing. Kotzman, who owns bitcoin and MicroStrategy shares, is confident that the company’s bet — and, by extension, his own — will pay off in the long term.