MSTR

The Only Stock

MSTR is the stock ticker for the company Microstrategy. It was a business to business software company, and while it still does that, its primary function now is to issue stock and use the proceeds to buy bitcoin. The buying pushes the price of bitcoin upward, which increases the value of the bitcoin already held in its treasury, which increases the stock price, which allows it to issue more stock and from the proceeds buy more bitcoin. Rinse and repeat. MSTR now has 450,000 bitcoins, valued at roughly $47 billion.

MSTR has also gotten into the business of issuing convertible debt. It borrows money at zero percent for bonds that can be converted into MSTR shares at a future date at a given strike price. It uses the proceeds from these debt issuances for, guess what, buying more bitcoin.

Some people think this is a ponzi scheme — how can you have a company that does nothing but buy bitcoin? Its software business, valued at maybe $1 billion, has now become a rounding error in its $98B market cap. Moreover, some wonder why anyone would buy MSTR, whose stock trades at roughly double its underlying assets, when you could buy the asset directly. In other words, when you buy $1000 worth of MSTR you are getting only about $500 worth of underlying bitcoin, and given that’s virtually all the company does, wouldn’t it make more sense just to buy bitcoin itself and reap the full $1000 worth for your money?

Maybe. But MSTR’s chairman Michael Saylor points out that MSTR provides a bitcoin “yield”, so to speak, made possible precisely because the shares trade for more than the underlying asset.

Let’s use arbitrary, but easy-to-understand numbers to illustrate. Let’s say MSTR has 100 shares outstanding, each of which trades for $1000. The market cap is $100K. On its balance sheet are 100 bitcoins at $500 per coin or $50K worth. MSTR is thus priced at 2x its net asset value (NAV).

Let’s say Saylor issues another 20 shares to the market, and selling those shares drops their price to $800. Now there are 120 shares outstanding at $800 each, so the market cap has dropped to $96K. But he raised $16K more on account of the sale (actually more because the selling started at $1000 and ended at $800, but let’s go with $800 per share for simplicity.) And with that $16K he buys 32 more bitcoins at $500 each. (His buying might push up the price a bit, but again, for simplicity let’s keep it at $500.)

Now his balance sheet has 132 bitcoins, at $500 each or $66K worth, and there are 120 shares outstanding instead of 100. Each shareholder has been diluted by 20 percent, but now instead of owning $500 worth of bitcoin per share ($50K worth divided by 100 shares) they own $66K-worth divided by 120 which is $550 per share. Or, in bitcoin terms, they used to own one bitcoin per share, but now they own 1.1 after dilution. In other words, while their shares of MSTR were diluted, their claim on the underlying asset (bitcoin) was accretive. It was accretive in bitcoin per share.

Now Saylor didn’t just do this (issue stock to buy more bitcoin) one time, he did it many times in 2024, and the “yield,” i.e., the amount of per-share accretion in bitcoin was 74.1 percent on the year. If you bought MSTR while it was trading above NAV at a ratio of 2:1 at the beginning of the year, you ended the year with almost as much BTC in the assets underlying your shares as you would have by buying the asset itself*.

But Saylor is not done. He will keep issuing shares and debt to buy more bitcoin in perpetuity, so long as his stock is trading above NAV. These trades will continue to be accretive in bitcoin terms such that in a year and a half or two years, buying MSTR will have given you more bitcoin per share than simply buying the underlying asset with the investment. And this accretion doesn’t stop, so long as the stock is trading above NAV, i.e., Saylor will always increase BTC/share because he is using the very premium above NAV that detractors cite as a reason to avoid it as the lever to concentrate BTC holdings on a per-share basis.

So that’s what he’s doing, though more aggressively of late, and here’s the chart for MSTR over the last five years (he started adding BTC to his balance sheet during the summer of 2020.)

It’s been the best performing equity in the world over that time, even better than NVDA. And it’s been the best performing debt too. That’s because foregoing interest payments has been well worth it to debt holders whose converts increase in value as the share price rises. With the stock at $396.50 per share on January 20, 2025, a call option at $600 for January 15 of 2027 trades at $16,460. These converts function as calls that increase in value as the stock increases in value, and the stock increases in value as bitcoin does. The convertible debt-buyers therefore get exposure to bitcoin’s upside, and if the strike price isn’t met, they get their money returned in cash, provided MSTR is solvent at the time of the convert. And with $47B in assets and only $7B in debt, insolvency seems unlikely at present.

Of course, MSTR plans to issue much more debt (at zero percent, though given how well it’s performed, perhaps at negative rates), but instead of using that debt to fund a risky new business line, they will buy bitcoin with it and put it right back on the balance sheet. So the debt will not rise without a concomitant asset appreciation (at least in BTC terms.) And as there is no cost of servicing the debt and no need to pay it back or convert it to shares for years, the underlying volatility of bitcoin (and MSTR) isn’t a problem in the short term.

One might wonder why anyone is buying zero coupon bonds instead of call-options, and the stock instead of the asset itself, but keep in mind there is a vast amount of capital in the financial system that is only allowed to buy stocks (often in tax-advantaged accounts) or only allowed to invest in debt. MSTR gives this capital exposure to bitcoin’s upside in the form it’s permitted to have.

* there are other good reasons to buy the underlying asset instead of a stock, such as avoiding counterparty risk, but that’s beyond the scope of this post.

. . .

Okay, that’s all well and good, but what happens going forward? Surely other companies can copy him and erode the value proposition, and in any event, there has to be a catch. You can’t just keep issuing shares and debt to buy bitcoin and make everyone rich! What’s the catch?

I’ll get to the catch which I think is real, but first let’s consider other companies copying MSTR. Saylor actually drew up the blueprint for his strategy and invited every other company to copy him years ago. He offered to walk them through step by step because any copycats will only increase the value of the coins already on his balance sheet. He actually made a presentation for Microsoft (MSFT), the third biggest company in the world by market cap, and they passed. After all, they are Micro Soft and what Saylor’s doing is Macro, and he’s going Hard.

Even if huge companies like Apple (AAPL) and MSFT were to stack their balance sheets with bitcoin, they will never catch Saylor. For once AAPL is in (and they need shareholder permission to do this), it will be a massive gold rush among thousands of companies, driving up the price. And this would be in addition to the US possibly establishing a bitcoin Strategic National Reserve, as well as other countries, pension funds, large ETFs, hedge funds, etc.

MSTR is the bitcoin company. But what does that mean, and why is that good? After all, Apple sells millions of expensive, high-margin devices every quarter, why would you buy MSTR instead of Apple? Because Apple does all this work to sell devices and earn a profit from those sales, the revenues from which accrue to its balance sheet. In other words, everything Apple does is ultimately for the purpose of generating operating profits for its shareholders, and those profits show up as dollars in its corporate treasury in which the shareholders have a stake.

But if those dollar profts are ever-diminishing in bitcoin terms, that means so long as people pay for AAPL devices in dollars rather than bitcoin, its balance sheet is ever-diminishing relative to MSTR’s, so long as over time bitcoin appreciates as it has since its inception 16 years ago.

Of course, AAPL is a $3.6 trillion company, with a $65 billion balance sheet (actually not that much bigger than MSTR’s) but massive projected forward earnings. AAPL’s market cap (nearly 38x earnings) is a reflection of those forward earnings which will eventually accrue to it. But again, if it can’t catch MSTR in bitcoin, and those forward earnings merely accrue to the balance sheet, why would anyone buy AAPL at more than 36x the price?

In short, AAPL has to run a gigantic operation, with all its moving parts, just to get dollars, while MSTR prints dollars with stock and bond issuances and uses it to buy something better than dollars, and AAPL will never catch it despite being 36 times more expensive.

To grasp this disparity fully, imagine every company including AAPL stored its profits in gold. And further imagine there is a fixed supply of gold on planet earth, but that it’s difficult and expensive to find/extract. AAPL aims to earn existing gold from its customers, while MSTR has created an alchemy technology that turns lead into gold and already owns an inexhaustible amount of lead. Moreover, with each alchemic conversion, MSTR depletes the earth’s finite supply.

Would you rather invest in the company that needs to go through product cycle after product cycle, investing and innovating in an attempt to convince customers to part with their gold in exchange for its products or one that can just “print” gold via its machine directly?

At this rate MSTR will eventually have a market cap close to AAPL’s unless AAPL were to innovate to such an extent that its revenues beat the rate at which bitcoin is appreciating in dollars, a dubious proposition at its size and given bitcoin’s 100-percent YOY average appreciation over the last eight years. And yet its market cap is but 1/36th of AAPL’s.

. . .

Okay, I said there was a catch, but it’s not what most people think. It’s not a ponzi scheme because the bitcoin on the balance sheet is real, and the company is getting richer with each purchase. The catch is that once everyone realizes what’s really going on, not just procedurally, but how the entire financial system — $100 trillion of stocks and $300 trillion of bonds, not to mention some of the value of other assets like real estate and art used for wealth storage — gets sucked into this black hole, its reaction is hard to predict.

MSTR isn’t coming for the art or real estate (yet), though BTC surely is, but it’s serving as a massive funnel for debt and equity investors to get exposure to the asset through its instruments. In short, we are approaching a singularity of sorts, and the laws of physics, (and probably those of finance too), break down as you approach the event horizon. That’s why I’m not sure how this ends.

. . .

I’ll end this piece with a prediction: MSTR continues its strategy of issuing stock and debt to buy bitcoin, people catch on, and its shares soar 20 or 30x from here. Even then it would still be smaller than AAPL, and by then, everyone including AAPL will be forced to buy bitcoin for its balance sheets and perhaps even accept it for its products. MSTR won’t be able to acquire much more bitcoin at that point — it’ll be trading at more (perhaps much more) than $1M per share, as everyone will be bidding on it, and it’ll turn into a kind of bitcoin bank with a multi-trillion dollar (in bitcoin) treasury.

. . .

Full disclosure: I am long MSTR, perhaps irresponsibly so.

This IS financial advice — to claim otherwise after my prediction would be absurd. But that doesn’t mean it’s GOOD financial advice, so please do your own research and scrutinize rigorously the claims made above.

Finally, whatever happens with MSTR, you should expect extreme volatility in the near term as it’s essentially levered bitcoin, i.e., even more volatile than the underlying asset. If you don’t have the stomach for large drawdowns, you should probably avoid.