If bitcoin is the future, what explains MicroStrategy’s need for speed?

Unlock the Editor’s Digest at no cost

Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.

One thing peculiar is afoot at MicroStrategy. 

The corporate has amassed over two per cent of all bitcoin in existence, funded by means of a mixture of shares and convertible bonds. This technique has turned a humdrum enterprise software program agency into one thing akin to a bitcoin ETF, albeit one buying and selling at a frothy premium to its internet asset worth. The inventory is up over 20 occasions because the pivot to bitcoin in August 2020.

But latest months have revealed some curious contradictions on this narrative. Whereas bitcoin has maintained its stratospheric altitude at round $100,000 per coin, MicroStrategy’s inventory has drifted decrease, shedding 40 per cent since peaking intraday on November 21 at $550, which implied on the time a market cap of $124bn. Even its inclusion in the Nasdaq 100 index failed to spice up the share value. Its premium to internet asset worth has in the meantime decreased from a excessive of three.8 occasions to 1.9 occasions. This decline within the share value is occurring whilst the corporate continues to amass extra bitcoin.

Extra telling nonetheless is the corporate’s frenetic execution of its $21bn “at-the-market” fairness providing, introduced with a lot fanfare on Hallowe’en. What was billed as a three-year marathon has been run on the tempo of a sprinter on amphetamines, with over two-thirds of the allocation exhausted in just two months. That is odd behaviour for a method ostensibly designed for disciplined, incremental shopping for. There was no buying on the dip. Whilst bitcoin’s value has held agency close to its peak, Michael Saylor, the corporate’s chair, has ramped up bitcoin purchases at breakneck pace.

In response to JPMorgan analysts, MicroStrategy accounted for an astonishing 28 per cent of capital inflows into the cryptocurrency market in 2024.

There’s additionally no time to waste. Final Friday the corporate announced plans to boost as much as $2bn in perpetual most well-liked inventory this quarter to purchase extra bitcoin, though the exact timing and phrases haven’t but been introduced. This comes simply over per week after MicroStrategy mentioned it was searching for shareholder approval to increase its share depend by over 3000 per cent from 330mn to 10.33bn. 

The timing smacks of opportunism, as if the corporate’s management recognises that the present NAV premium — the monetary equal of finding money growing on trees — may not be everlasting. There’s a touch of urgency (or desperation) within the air, an excessive haste to lock on this discrepancy between MicroStrategy’s inventory and the bitcoin value earlier than it’s arbitraged away.

Compounding the intrigue is the behaviour of MicroStrategy’s senior management. Saylor has publicly condemned diversification, urging buyers to pay attention their portfolios in bitcoin with virtually spiritual conviction. He has even instructed that individuals mortgage their homes to buy bitcoin! 

His lieutenants, nonetheless, appeared to have missed the sermon, cashing in huge chunks of their stock holdings for the very fiat foreign money their boss routinely derides. November saw a flurry of insider selling, as executives transformed their shares into good old school Yankee {dollars}. MicroStrategy shares could also be a bitcoin proxy and so ostensibly a unique store of value, however with insider gross sales totalling $570mn in 2024, administration will not be HODLing the inventory.

The paradoxes don’t cease there. In following its technique MicroStrategy seems structurally predisposed to purchasing bitcoin at ever-higher costs. Through the crypto winter of 2022-2023, when bitcoin wallowed within the teenagers and twenties, the corporate’s purchases slowed to a crawl as its inventory traded round NAV. But as bitcoin’s value soared, so too did MicroStrategy’s shopping for frenzy. The enterprise mannequin appears much less a guess on bitcoin’s inherent worth and extra a wager on the zeal it evokes. 

The premium to NAV holds so long as bitcoin retains ascending, and that premium is the glue that holds your complete technique collectively. By promoting inventory at 2-3 occasions NAV, MicroStrategy is in impact shopping for bitcoin at a considerable low cost. With out the NAV premium, the inventory value falls, and far of the $7.2bn of convertible bonds excellent risks being redeemed for cash at maturity, not transformed into new shares. At that time, issues get quite a bit stickier for MicroStrategy as a result of its software program enterprise loses money and it generates no money from bitcoin. (MicroStrategy trumpets a metric referred to as “BTC yield”, which suggests a return however actually measures the percentage increase in bitcoin per share from its challenge of inventory and purchases of bitcoin. There’s in reality no “yield” within the conventional sense of dividends or earnings streams.)

Perpetual appreciation is a demanding ask for any asset class, and the corporate appears to comprehend it. Saylor’s relentless proselytising for bitcoin — an odd selection for somebody accumulating the asset — suggests an acute consciousness of the stakes. It’s additionally no shock that he’s cultivating authorities help, meeting with President-elect Donald Trump’s son Eric (which preceded a pointy 13 per cent rise within the inventory on Friday) and advocating for a Strategic Bitcoin Reserve. It’s an ironic twist for a cryptocurrency lengthy touted as a bulwark towards authorities meddling. However when your playbook hinges on unrelenting enthusiasm, pragmatism trumps precept.

The query that lingers is whether or not MicroStrategy can preserve its premium valuation by means of sheer pressure of narrative very like the meme shares which have defied typical valuation metrics. The corporate has successfully turn into a publicly traded guess on bitcoin’s future, however one that also trades at a considerable mark-up to the underlying asset. This premium represents both the market’s religion in Saylor’s imaginative and prescient or a brief, psychology-driven inefficiency ready to be arbitraged away.

The entire affair looks like a high-stakes recreation of musical chairs, and because the tempo quickens, even the insiders appear to be hedging their bets. Whether or not MicroStrategy’s gambit will probably be remembered as a stroke of monetary genius or a cautionary story stays unresolved. For now, the music performs on, with the volume dialled up to 11, and the devoted — or the merely hopeful — keep dancing.

Additional studying:
— MicroStrategy’s secret sauce is volatility, not bitcoin (FTAV)
— Examining MicroStrategy’s record-shattering $21bn ATM (FTAV)