From near bankruptcy to $89 billion, is MSTR a century-old scam or a pig on the wind?

If we were to summarize the craziest business story of 2024, then MicroStrategy (MSTR) must be on the list.

MSTR is a SaaS software company valued at $89 billion in the U.S. stock market, with a stock return of up to 2478% over the past five years, even surpassing Nvidia.

Since mid-2020, MSTR has spent $22 billion to purchase 386,700 bitcoins at an average price of $57,000. This position accounts for 1.8% of the total bitcoin supply. At a price of $97,000, this bitcoin is worth over $37 billion.

This means that the stock market values MSTR at twice its net asset value (NAV) of bitcoin. MSTR is the only publicly traded company in the U.S. that offers such products on a large scale.

However, five years ago, the company was barely hanging on the brink of bankruptcy.

Betting Big on Bitcoin, Achieving Legendary Status

MSTR was founded in 1989 by the well-known "gambler" in the crypto world, Michael Saylor, and is a B2B SaaS provider.

During the internet boom in 2000, MSTR's valuation reached $50 billion, but an accounting scandal erupted at the peak of the bubble, causing the company's stock to plummet from $333 to $0.42, wiping out Saylor's $6 billion fortune in a single day.

In the following twenty years, MSTR's market value fluctuated mostly between $1 billion and $2 billion.

Fast forward to 2019, MSTR's software business had annual sales of about $500 million, a profit of $75 million, and $500 million in cash on hand, but the company had not made much progress in competing with much larger software giants like Microsoft.

During the COVID-19 pandemic, the U.S. government stimulated the economy by printing about $6 trillion. With U.S. interest rates at 0%, the Federal Reserve and central banks around the world were cranking up the money printing machines, and Saylor was concerned this would lead to serious inflation issues, which would significantly devalue the cash on MSTR's balance sheet.

"We have $500 million in real assets, while the government is increasing the money supply by 20% each year," Saylor explained in the Iced Coffee Hour podcast in June this year.

With an annual increase of 15% in the money supply, (MSTR) loses $75 million in wealth capital value each year, while we gain $75 million... (MSTR) has 2,000 employees working hard, doing 100,000 things right over the course of a year, yet (revenue) remains stagnant.

If the inflation rate is 30% per year, you run hard but find you can't outrun (inflation). So, in other words, everything you do is worthless. Your time is worthless. Your life is worthlessSaylor did not truly reinvest cash back into the business, nor did he return funds to shareholders through dividends or stock buybacks, but instead turned his attention to Bitcoin.

In August 2020, Saylor began to buy Bitcoin in large quantities and announced that MSTR would become the first publicly traded company in the United States to make Bitcoin its primary financial asset.

The end result was that MSTR used $500 million in cash to purchase Bitcoin, while also issuing stock and convertible bonds, and then used the proceeds to buy more Bitcoin.

Saylor not only had confidence in Bitcoin but also saw business opportunities arising from the trading restrictions on Bitcoin:

• Investment Restrictions: Many investors interested in Bitcoin are unable to purchase Bitcoin on cryptocurrency exchanges and hold the asset themselves. Additionally, some cryptocurrency trading giants have left ordinary investors with significant losses (such as the now-defunct FTX).

• Regulatory Restrictions: Many funds (pension funds, institutional funds, retirement plans) do not allow direct investment in cryptocurrencies.

• Leverage: Some bold Bitcoin investors use leverage to invest in Bitcoin, but this type of leverage is also restricted, with higher collateral and capital costs required for available leverage, making it difficult for many to raise billions of dollars in debt to purchase Bitcoin.

The existence of MSTR addresses these issues: a U.S. stock that investors can buy on most trading platforms; not subject to similar cryptocurrency regulations; able to increase leverage through issuing long-term debt and purchasing Bitcoin, without the risk of margin calls.

Therefore, in the stricter regulatory environment for cryptocurrencies in 2020, investors looking to gain low-risk exposure to Bitcoin turned to buy MSTR stock, driving its stock price up nearly tenfold within six months: it was only $10 in August 2020 (with a market capitalization of $2 billion), but by February 2021, it had surpassed $100 (with a market capitalization of $20 billion).

After the bankruptcy of FTX in November 2022, MSTR's stock price fell back to the teens. However, crucially, this incident did not force MSTR to liquidate its holdings of Bitcoin, and in the following year, its stock price recovered to around $60.

By 2024, with Trump returning to the White House, the Bitcoin market surged, and the price of Bitcoin once reached $99,000 per coin, setting a new historical record.

As of December 2, the price of Bitcoin remained around $95,000, with an increase of over 115% since the beginning of the year.

The Pig on the Bitcoin Bandwagon?

There is no doubt that the reversal of MSTR's fortunes entirely depends on the rise in Bitcoin prices.

Some have noted that MSTR issued long-term convertible bonds, with a four-year bond valued at approximately $1 billion, set to mature in 2028. If the price of Bitcoin significantly declines during this period, these bonds may not convert to equity, and MSTR will still need to repay this debt, potentially requiring the sale of some Bitcoin, which could negatively impact both Bitcoin prices and MSTR's stock priceHowever, in the history of Bitcoin, there has never been a case where the price at the end of a 4-year period was lower than at the beginning.

Analyst Marty Bent recently mentioned that the lowest 4-year compound annual growth rate (CAGR) for Bitcoin is 26%, while its 50th percentile 4-year CAGR is 91%. If this trend continues, it is a fairly safe bet for holders of MSTR stock and convertible bonds.

MSTR may also benefit from some technical changes in the financial markets, including the possibility of being included in the Nasdaq or S&P indices, which would lead to passive fund buying pressure to match index components.

From a macro perspective, the incoming Trump administration appears very positive towards Bitcoin and cryptocurrencies. Trump has mentioned the idea of a "strategic Bitcoin reserve," which Saylor believes could represent a multi-trillion-dollar opportunity, similar to the largest land purchase program in U.S. history.

The idea of a "strategic Bitcoin reserve" may already be reflected in pricing, as Bitcoin has risen about 40% since the election.

However, if Bitcoin can indeed be used as a store of value like gold, it won't be long before countries announce that they want to exchange a portion of their foreign exchange reserves for Bitcoin. But for those countries that follow the first one to do so, they may face higher costs, as they might need to buy after Bitcoin prices have risen, increasing their purchasing risk.

Is it full of Ponzi scheme colors?

As previously pointed out, the funds MSTR uses to purchase Bitcoin are no longer primarily from cash on the company's balance sheet, but rather from funds raised through the issuance of stocks and bonds.

It is reported that MSTR raised a total of $8 billion through the sale of convertible bonds, with the funds allocated for purchasing more Bitcoin. These notes will mature between 2025 and 2032, and if MSTR's stock price reaches an agreed level during that period, they can be converted into MSTR equity.

The $3 billion convertible bonds issued in November 2024 have a 0% interest rate, meaning that investors will not receive any interest income from MSTR during this period. Nevertheless, investors are still willing to purchase these bonds because they are interested in the right to convert these bonds into MSTR company stock in the future.

Most of the value of MSTR stock comes from the Bitcoin it holds, accounting for as much as 99%. Therefore, the company's stock price will fluctuate with the price of Bitcoin, and the volatility is very high. If the stock price does not reach the target level, the convertible bonds held by investors will not convert into the company's stock, and in the event of insolvency, these bondholders will have priority over common shareholders, having the right to be repaid from the company's assets first.

It is worth mentioning that Saylor has a significant cost advantage in the capital markets. This is because many investors, including fixed income traders, hedge funds, corporate bond arbitrageurs, and some high-risk, high-return options traders, are particularly interested in investment products related to Bitcoin. They want to invest in debt and equity products linked to Bitcoin price fluctuations, hoping to profit from the volatility of Bitcoin pricesMSTR is currently the only large publicly traded company in the market that provides large-scale investment avenues for such products.

The trading price of MSTR stock in the market is higher than the actual value of the Bitcoin held by the company. Some may think that MSTR stock is overvalued, but even if issuing new shares dilutes the value of existing shareholders' stakes, many investors are still willing to accept this situation.

Why? Because they expect MSTR to use the funds raised to buy more Bitcoin. If MSTR buys more Bitcoin, then the total supply of Bitcoin is fixed, and an increase in demand could drive up the price of Bitcoin. In this way, the Bitcoin held by MSTR becomes more valuable, and the overall value of the company increases.

In short, MSTR raises funds through issuing stocks and bonds to purchase Bitcoin, driving up the price of Bitcoin, which in turn boosts the company's stock price, ultimately attracting more investors. Through this self-reinforcing cycle, MSTR has formed a model similar to a "perpetual motion machine."

Therefore, some believe that MSTR's capital raising and share dilution strategy is akin to a Ponzi scheme, using the funds from new investors to pay returns to early investors, rather than generating profits through legitimate business activities or investments.

Roche, founder of Discipline Funds, previously discussed the relationship between MSTR and Bitcoin on his website, pointing out that the company's approach is extremely clever but also extremely risky. In some ways, it looks very much like a Ponzi scheme.

Roche said, If it were him, he would definitely want to pack up and leave, declare victory, and then go buy... whatever he wants.

With the surge in Bitcoin, this script is about to enter a crazy mode.

MSTR recently announced a plan to issue $21 billion in bonds and $21 billion in stock—totaling $42 billion to purchase Bitcoin.

In the Q3 2024 earnings call, the company's current CEO Phong Le stated that "42" pays homage to the science fiction novel "The Hitchhiker's Guide to the Galaxy," in which a supercomputer is designed to find the ultimate answer to life, the universe, and everything, and after a long calculation, it gives the answer "42." "21" refers to the total supply limit of Bitcoin, which is 21 million.

How high can MSTR fly?

According to calculations, this $8 billion convertible bond indicates that MSTR is betting that its stock price will maintain a premium relative to Bitcoin and that Bitcoin will rise by at least 40-50%.Otherwise, MSTR may have to sell some Bitcoin, which could trigger a downward spiral. However, this situation may require Bitcoin to fall to the level of $20,000-$30,000 and remain there for years.

Since interest rates are controllable, MSTR may choose to roll over old debt with new debt. MSTR has a strong brand in the crypto space, sufficient to support its transformation of software business into a crypto platform over the next decade and create valuable operational businesses in this field.

Of course, after experiencing this unprecedented surge, whether cryptocurrencies will continue to rise or enter a long correction period may still be too early to tell. As a company dependent on Bitcoin, MSTR will inevitably be significantly impacted in the latter scenario.

Recently, economist and market strategist Peter Schiff, who has always been skeptical of cryptocurrencies, stated that shorting MSTR stock is a good idea, predicting that the company may not be able to service its debt due to falling Bitcoin prices, ultimately leading to bankruptcy.

In a recent program, Schiff stated:

The problem is, MicroStrategy has committed to repay so many people so much money, and if the price of Bitcoin falls, it won't be able to do that because it has no money, as it has wasted its money on Bitcoin.

In the short term, many are betting that the premium of MSTR's stock price relative to its underlying Bitcoin will decline. As of now, approximately 15-20% of MSTR's outstanding shares are shorted.

Additionally, MSTR plans to issue an additional $21 billion in convertible bonds. If this plan is completed, the company will hold $30 billion of the entire U.S. convertible bond market (approximately 4% share). Is this too much? Or too little? How much demand is there for this Bitcoin-linked convertible debt product?

If demand is not strong, Saylor will lose his capital cost advantage, and the price of Bitcoin may need to double (to $200,000) to justify the existing valuation. If it reaches this point, then why not just own Bitcoin directly?

Crypto analyst Willy Woo previously warned that SEC regulatory intervention in MSTR's equity issuance, custody risks, and competitive risks could all be detrimental to MSTR.

The worst-case scenario, according to legendary investor Geo Chen's summary:

As the crypto market cycle matures and price bubbles form, MSTR's Bitcoin investments and high leverage strategy may lead to the disappearance of stock price premiums, forcing the company to sell Bitcoin to repay debts when prices fall, which could trigger market panic and sell-offs, especially if the convertible bonds fail to convert into stock.

This high-leverage operation and the market's reaction to MSTR stock could trap the company in a value trap and may even trigger a winter in the cryptocurrency market.