The MicroStrategy Inc Problem
MicroStrategy: From Software Company to Bitcoin Gamble – A Deep Dive into the High-Stakes Strategy That's Bound to Blow Up
Introduction:
Hello and welcome back to Celeritas Capital. I do apologize for the lack of content I have no excuses for you. That being said I do plan on writing a lot more in 2025 and I thought what better topic to kick the year off than something that was all the talk last year. Although I do think I have a interesting article about MicroStrategy for you all. But before we start I must give credit where it is due this post is inspired by a YouTube video by Mark Meldrum he posts great videos on finance and I highly recommended you check out his channel. The math and examples you will see in this post are drawn from his video the rest of the post is my work. I hope you enjoy this article and as always please feel free to leave a comment with your thoughts.
I am sure that the majority of you have heard of MicroStrategy but for those unaware MicroStrategy MSTR 0.00%↑ turned heads on Wall Street in 2024, with its stock skyrocketing 334% over the last year. Once an average software company in Virginia, it has ditched its original focus to chase the hype of digital currency especially Bitcoin. Under the leadership of founder Michael Saylor (who had a civil injunctive action from the SEC in the year 2000), the company has gone all-in on Bitcoin, doubling down on a high-risk gamble that has overshadowed its actual business by orders of magnitude. While MSTR 0.00%↑ may be listed as a software company it is best to think of them more as a Bitcoin holding vehicle. In fact MSTR 0.00%↑ doesn’t make any money from selling software quite the opposite the company loses hundreds of millions of dollars a quarter on their software business.
Some of you might be thinking well why would anyone buy shares of a company whos entire existence revolves around being a Bitcoin holding vehicle? Especially when Bitcoin Exchange Traded Funds(ETFs) exist, well Bitcoin ETFs are rather new with the first batch only starting trading on January 10th 2024. While MSTR 0.00%↑ has been buying and holding Bitcoin since August 2020. The idea at least according to MSTR 0.00%↑ and their management was to open up the crypto market to institutional investors who couldn’t directly buy Bitcoin themselves due regulations. It also gave the opportunity to retail investors to get exposure to Bitcoin if they didn’t have the technical knowledge to buy it themselves. In the past few years MSTR 0.00%↑ has become one of the main crypto stocks that is watched by the market. Now for the juicy part, MSTR 0.00%↑ is a huge scheme that requires new investors to make the old ones whole. Let me explain.
The Problem:
In MSTR 0.00%↑’s last quarterly earnings report they had some very creative graphs. The first I’d like to show you is something MSTR 0.00%↑ calls “Intelligent Leverage” but I’d like to make the argument that this isn’t actually leverage.
Above is the first graph we will be looking at the so called “Impact of Intelligent Leverage” when you look at it from a surface level it does look like MSTR 0.00%↑ has increased their Bitcoin per share. After all they increased their Bitcoin holdings by 33.3% and share count only by 13.2%. If you had bought a share of MSTR 0.00%↑ on 12/31/2023 and one on 9/30/2024 since the asset count aka the Bitcoin count is growing faster than the share count the asset value per share is increasing and it should be.???? Let me pull back the curtain for you.
This simple example will show you how this so called leverage is achieved on the backs of newer investors. Imagine a company that has 10 units of some crypto currency valued at one dollar per unit of crypto. In the first table you can see these 10 units listed under assets. (Figure 2) This company also has 1000 shares valued at 50¢ and the company of course wants to increase its asset count. “Lets buy 10 more” the CEO says. Then he remembers his company doesn’t actually make money they do the opposite they lose a lot of it. No matter, the cunning CEO thinks as he hatches a simple yet brilliant plan. “We are going to raise $10 in convertible debt” exclaims the CEO. As you will remember this companies shares are valued at 50¢ a share meaning that $10 will be 20 shares. After a successful convertible debt sale the company uses its newly found $10 to buy 10 more of the aforementioned crypto currency. This is shown is the second table directly below the first. (Figure 2) After this purchase the asset value increases by 100% and the share count increased by 2%. Originally when the company had the 10 units each share of the original 1000, represented 1% ownership of 1 unit. After the purchase of the next 10 units each shares ownership went up to 1.9% of 1 unit. Which is a 90% improvement in asset value per share via the use of convertible debt.
What is the issue I’m sure some of you are thinking. Well it all goes back to the convertible debt as you can see in Figure 2 I sort gave it away. The 20 shares of convertible debt brought in the $10 needed to buy the other 10 units meaning each share has 50% interest in each unit. However when that convertible debt joins the rest it gets the same interest as the rest of the shares 1.9% a 48.1% drop in interest per unit. These new investors do help out the existing investors by getting their interest per unit slashed as illustrated below. (Figure 2)
How do you fix this problem, well according to MSTR 0.00%↑ you just raise more money. As long as MSTR 0.00%↑ can keep raising money they can keep improving the asset value per share but the people who are paying for it are the most recent investors in the door. This is also a vicious cycle wherein you have to keep increasing the amount of money you raise in MSTR 0.00%↑’s case that is debt and equity sold to the investing public.
For example Figure 3 is from MSTR 0.00%↑’s latest quarterly earnings presentation. Now it is important to note that these numbers are far from final. Think of it as MSTR 0.00%↑’s preferred way to raise capital over the next 3 years. As Figure 3 shows MSTR 0.00%↑ plans on raising an equal amount of equity and debt between 2025-2027. For a total of $42 billion dollars in capital raised. (Figure 3) They plan to start by raising $5 billion in fixed income and $5 billion in equity this year. With an increase in $2 billion raised from fixed income and from equity per year. (Figure 3)
If we take a trip back to 12/31/2023 we can see MSTR 0.00%↑ had a Bitcoin count of 189,150 and a share count at the same time of 207,690,000 meaning each share has a 0.91% interest in a Bitcoin. You can see this math below on Figure 4 under the total Bitcoin graph in blue. Now lets see how many shares of MSTR 0.00%↑ you could buy instead of buying a Bitcoin back during 12/31/2023. On December 31st 2023 Bitcoin was trading for 42,265.19 and MSTR 0.00%↑ was trading for $63.19 when adjusted for the 10/1 spilt MSTR 0.00%↑ had. So on December 31st 2023 you could have bought 668.88 shares of MSTR 0.00%↑ for the same price you could have bought one Bitcoin which would have been 42,265.19. If you chose to buy the Bitcoin you would have 100% ownership of said Bitcoin however if you went with the shares of MSTR 0.00%↑ you would instead only have ownership of 61% of a Bitcoin. This math is also shown below in Figure 4 above the total Bitcoin chart in blue. Now lets look at the new Bitcoin holdings and new share count. On 9/30/2024 MSTR 0.00%↑ had a total of 252,220 Bitcoins and a share count of 235,110,000 with some quick math we can calculate that each share now has .107% Bitcoin per share. This represents an increase in 17.76% increase in Bitcoin per share for existing share holders. Don’t forget that this is all being funded by the latest group of investors. The next set of numbers I will be using for the price of Bitcoin and MSTR 0.00%↑ are out of date however that really doesn’t matter as this is an example. We have Bitcoin priced at 90,852.88 and MSTR 0.00%↑ shares priced at $340.65. Again we are faced with a choice do we buy a single Bitcoin or the same dollar amount in MSTR 0.00%↑ shares? Well the one Bitcoin would cost you 90,852.88 and you’d have 100% ownership of the Bitcoin or for the same amount of money you could buy 266.704 shares of MSTR 0.00%↑ with each share representing .107% of a Bitcoin you’d own nearly 29% of a Bitcoin! What a deal truly intelligent leverage.
I hope you can see the issue with MSTR 0.00%↑’s business plan if you can even call it that. Not only is it just better to buy Bitcoin yourself if you wish to gain exposure to it. Or buy a Bitcoin ETF. MicroStrategy’s entire system is based on screwing over the last man in to help make existing investors happy. In my view MSTR 0.00%↑ isn’t really a business at least not in the traditional sense its more of a nonstop capital raise party where returns are heavily dependent on attracting new investors. With the capital raises needing to increase in size exponentially as time goes on. Even in a perfect world one day MSTR 0.00%↑ will run out of human beings on this earth who want to invest with them there is only 8 billion people on earth. I don’t know about you but this is starting to sound an awful lot like a certain P word named after a man who went by Charles. Of course I’m not implying that MSTR 0.00%↑ is one of these famous inventions by Mr. Charles P. I am simply pointing out some similarities is all. There is a lot more I could say about MicroStrategy like how they seem to be targeting retail traders for their capital raises or how the equity raises are likely just a buffer for the MSTR 0.00%↑ bond holders or maybe even how Saylor is one of the weirder tech CEO’s. But I think that is enough MicroStrategy for today, if you found this post interesting and you want more coverage on MSTR 0.00%↑ let me know in the comments.
Actionable Insights:
What are some trades you can put on in relation to MSTR 0.00%↑? Let’s start with a basic trade you can put on if you believe MSTR 0.00%↑ is overvalued relative to its Bitcoin exposure or due to its fundamentals. You could put on a simple pair trade, long Bitcoin and short MicroStrategy. I won’t recommend putting on this trade yet MSTR 0.00%↑ needs to lose some of its hype for this trade to work in my view. However when the time comes I will be putting this trade on and will be sure to update the Substack. Since MSTR 0.00%↑ is such a volatile stock another simple but profitable trade is setting up a long straddle. A long straddle is an option strategy where you purchase a call and put on the same underlying asset with the same strike price and same expiration. Long straddles benefit from high volatile which as Figure 5 shows MSTR 0.00%↑ is no stranger to high volatile. Long straddles are rather pricey and require decent price movement. That being said I don’t think its a terrible trade for MSTR 0.00%↑.
Conclusion:
There is a few things I would like to close with first if you’ve made money trading MSTR 0.00%↑ good trading. I don’t have anything against trading trash or shady stocks in fact it can be quite profitable. The reason I wrote this article was to inform people who are less familiar with MSTR 0.00%↑ and what they are really about. If you are new to investing it is easy to get sucked into the cult of MSTR 0.00%↑ with the tales of intelligent leverage and the like. Also I’m not a Bitcoin or crypto bear or something like that it’s not a huge part of my portfolio but I do have some exposure to the industry. Finally this post was a little different from my usual ones but I hope you learned something or found it enjoyable to read. If you have any questions about my logic or the post in general feel free to leave a comment or send me a direct message. I am happy to hear what others think even if they disagree with my conclusion. With that all being said happy 2025 lets run it this year!
DISCLAIMER: We are not Financial Advisors, and all information presented is for educational purposes ONLY. Financial markets can be highly volatile, so good risk management is a must.
It’s fascinating how MicroStrategy has essentially become a Bitcoin holding vehicle, especially with the creative “intelligent leverage” strategy they’ve been using. While it may look like a solid move on the surface, it really highlights the risks involved, especially for new investors. The cycle of raising more capital to keep boosting asset values per share is definitely a red flag. You’re right—at its core, this seems more like a scheme that relies on bringing in fresh money to sustain the value. It’ll be interesting to see how long they can keep this going.
I don’t see this as the same issue as you do. I don’t think anyone is under the impression that MSTR is a legitimate company (I hope) most people are just there to go from rags to riches and get out. Is ‘Blackjack’ a problem?