Saying (Micro) Strategy Is Just Bitcoin Is Like Saying Niagara Falls Is Just Water (Rating Upgrade)

Summary Rob Gronkowski, the retired football star with a goofy image, was described by a comedian as knowing better than to mess with bitcoin (except, maybe, to chew on it). Strategy understands and appreciates how valuable bitcoin can be as a permanent store of value. Speaking for myself, I see it as a 21st-century digital collectible. MSTR buys and holds bitcoin through what it calls “intelligent leverage.” I see that as roughly akin to the leverage that Warren Buffett used to become an investment legend. MSTR has dramatically outperformed bitcoin, the S&P 500, and several big-name stocks. Its ability to do that justifies MSTR trading at a premium to its bitcoin holdings. I’m bullish on MSTR based on intelligent leverage. I also like a convertible bond ETF and two preferred issues that relate to MSTR, but with different reward-risk profiles. “Me know that, not real money.” That, according to comedian Nikki Glaser, is how former professional football star Rob Gronkowski (Gronk) rebuked former teammate Tom Brady for the latter’s crypto misfortunes. She did that as part of her routine during a 5/5/24 Netflix comedy special “roasting” Brady. For those not in the know, Tom Brady played quarterback mostly for the National Football League’s New England Patriots. Many say he was the GOAT (Greatest of All Time). And a big part of that came from his intellectual approach to the game. Gronk was Brady’s highly cherished teammate. He cultivated a crude party animal image. So Glaser’s quip stung not just Brady, but crypto in general. The full quote is: Tom lost $30 million in crypto. Tom, how did you fall for that? Even Gronk was like, ‘Me know that not real money.’ … Gronk actually does bitcoin, which is where he just chews on a handful of nickels. Many people in real life feel that way about Bitcoin. So, I thought hard before I clicked “submit” a Strategy (NASDAQ: MSTR) article that was ultimately published on 12/20/24 . This company’s main endeavor is and since 2020 has been to buy, keep buying, and keep holding bitcoin. I agree with Gronk about that not being real money. But I saw something unique and interesting here. (See below.) So, I crossed my fingers and rated the stock “Hold.” At the time, MSTR (then known as “Micro Strategy” — it became just plain “Strategy” on 2/5/25 ) was not popular on Seeking Alpha . Of the previous 20 write-ups, 12 carried “Sell” or “Strong Sell” ratings. Four other analysts had “Hold” ratings. That means only four out of 20 reports carried bullish ratings. Since my prior report was published, MSTR turned in a decent performance. It’s up almost 14%. The S&P 500 is down about 4.5%. And more Seeking Alpha reports since 12/20/24 have come out with favorable ratings. Today, I join the bulls. I’ll be raising my rating to “Buy.” I’ll also issue “Buy” ratings for several securities related to MSTR. (These are NMAX, STRF, and STRK… see below.) Does this mean I think bitcoin is about to rally? Not necessarily. I’m really intrigued by MSTR’s use of “intelligent leverage.” But before getting to that, let’s first take a look at… Bitcoin’s Place in the World First, and to give Gronk his due, bitcoin truly is not money, or currency. An “Everyday Economics” booklet published by the Federal Reserve Bank of Dallas says: Money is anything that is widely accepted as a form of payment for goods and services or repayment of debts. In the limited economies of POW camps, cigarettes became money as soon as they became the accepted form of payment for rations that prisoners were exchanging. (Emphasis Supplied.) Bitcoin and cigarettes both qualified as “anything.” Cigarettes became “widely accepted” within the context of a particular society. Bitcoin, however, is not “widely accepted” for use in commerce. Many resent the role of central bankers in creating money and managing its supply. But that is not enough to turn privately created bitcoin into money. Maybe bitcoin will someday gain wide acceptance in commerce. But that’s not the case now. Consider, on the other hand, collectibles. Investopedia defines one as… An item worth far more than it was initially sold for because of its rarity and/or popularity. Stereotypically, these include “fine art, antiques, toys, coins, comic books, and stamps.” But the world evolves. Today, in the 21 st century, we also have digital collectibles . These… Represent a revolutionary way to think about ownership and value in a world increasingly dominated by digital experience…. At its core, a digital collectible refers to a unique digital asset that is verifiable in the blockchain. These collectibles are often tokenized, meaning they are represented as a token on a blockchain that certifies their authenticity and ownership. Back in 2017, New York University Stern School of Business Professor and Seeking Alpha contributor Aswath Damodaran published an interesting blog suggesting bitcoin, which can’t be valued but only priced, may be a digital collectible. Speaking for myself, I say bitcoin is, indeed, a collectible. It’s not aesthetic like a work of art, or even a digital art piece (an NFT, or non-fungible token ). Nor is it functional like a toy. It doesn’t have to be. (Owners of gold bars don’t typically display or caress them. They lock them in secure vaults. Even many artworks are stored away.) To me, collectibility is all about the desire to own a scarce thing simply because it feels good to do so. Collecting is rooted in our innate desire to organize, categorize, and possess objects of significance. Psychologists suggest that collecting satisfies fundamental human needs, such as the quest for knowledge, the pursuit of mastery, and the expression of identity. I believe the inherent scarcity of bitcoin (there can’t be more than 21 million bitcoins in circulation) and acceptance on the part of many humans concerning the desirability of ownership qualify it as a collectible. That creates a base level of demand for bitcoin. That’s being enhanced by increasing willingness of more corporations to hold it (possibly as a hedge against inflation and currency risk) and the Trump administration's support. The latter is reflected in an Executive Order mandating the creation of a “Strategic Bitcoin Reserve and United States Digital Asset Stockpile.” Let’s say this is a 21st-century version of gold bars stored at Fort Knox . The prospect of bitcoin prices rising over the long term is one aspect of the investment case for MSTR. But there’s much more… Rather Than Being a Mere Play on Bitcoin, Strategy is Financial Engineering Done Right and Done Well Financial engineering is a more sophisticated version of finance. Besides financial theory, it draws on applied mathematics, statistics, computer science, and economic theory. Like many things, it can cause problems if misused. Case in point: Overly exotic derivatives that caused problems during the 2008 financial crisis. But used properly and prudently, it can help enterprises achieve better results than they otherwise could, and often with the same or even lesser risk. For a positive example, we need look no further than Warren Buffett’s investment activities at Berkshire Hathaway ( BRK.B ). These aren’t funded by his own money, or even by BRK.B’s treasury. It’s funded by the “float” earned by Berkshire’s huge insurance businesses. In other words, Buffett invested on margin. But it’s not as dangerous for him (i.e., for BRK.B) as it might be for you or me. By using funds from insurance companies he controlled, there was no risk of margin calls during down markets. Getting the benefits of margin without any of the downside has been a significant contributor to the returns that have made him legendary. MSTR invests in bitcoin using its own version of a leveraged strategy… It uses the phrase “intelligent leverage.” It mainly issues new equity and/or convertible debt to fund bitcoin purchases. It does so with a dose of inspiration from Douglas Adams’s The Hitchhiker’s Guide to the Galaxy . According to that work, the number 42 is the answer to “the ultimate question of life, the universe, and everything….” MSTR IR MSTR IR So MSTR initially launched a 21/21 Capital Raising Plan… $21 billion in new equity plus $21 billion in new convertible debt. (The total equals $42 billion!) Now, however, the company is amping it up… it’s now pursuing a 42/42 plan to raise $84 billion. New debt and new equity are coming on board gradually, as market conditions for debt, equity, and bitcoin suggest. Here’s the current progress of the 42/42 plan. MSTR IR Did MSTR really need to discuss Adams and 42? Of course not. (Management could have just as easily introduced a 25/25 plan and then raised it to 50/50.) The 42 thing is just a bit of entertaining whimsy. But I appreciate that. It sets the tone for something extremely important… Financial engineering can get quite complex. And this is definitely so for MSTR. MSTR works hard to heavily over-collateralize its new securities based on bitcoin. (This isn’t a formal mortgage-like encumbrance. But it’s substantively functionally equivalent to bitcoin being collateral.) And MSTR is careful to control dilution. Moreover, MSTR contrasts sharply, by 180 degrees, with the folks who designed the obscure and ultimately troublesome mid-2000s mortgage-backed securities. This company works hard to be highly transparent. It does so through its detailed and extensive 10K discussion. (See pages 7-10). Its quarterly earnings presentations, such as the most recent one , are very detailed. And management is very clear and comprehensive in its earnings calls, such as the latest one from 5/1/25 ). MSTR really and truly wants investors to understand what it’s doing. It also works to provide alternative (to MSTR common) vehicles investors can use to implement varying reward-risk parameters (see below). Space here doesn’t permit a comprehensive discussion of the details of MSTR’s capital structure activities. But if you click to download that latest earnings presentation , and/or if you’d like to peruse historical presentations , you’ll find MSTR to be very generous – and clear -- with information. In evaluating the performance of its intelligent leverage strategy, MSTR developed a metric it calls BTC Yield. This compares the change in bitcoin holdings to the change in the number of diluted shares. (Again, MSTR doesn’t just churn out equity, even equity attached to convertible debt, willy nilly. It’s very sensitive to dilution). Here, from the Appendix portion of MSTR’s latest presentation , are details of the number of coins owned and diluted shares. MSTR IR The current BTC Yield is in the lower-right corner. It’s presently 13.7%. Here is how MSTR calculates it. MSTR IR The 13.7% figure was achieved in the context of a 15% target. On the 5/1/25 earnings call , CEO Phong Le announced that MSTR is raising the 2025 BTC Yield target to 15%-25%. The Performance of MSTR’s Intelligent Leverage Program The magnitude of the BTC Yield tells us management is achieving its goals. But let’s also evaluate things in terms that are more familiar to those of us in the investment world… comparative performance. MSTR helps us do this… MSTR IR MSTR IR MSTR IR That’s impressive stuff! But is it a bubble? We’ve seen those before. Who doesn’t know of the infamous 17 th- century Tulip Bulb bubble ! More recently, we’ve experienced the turn of the century dot-com stock bubble and the mid-2000s housing bubble. Relatively strong performance for MSTR would not be appealing if the price progress was driven by empty air or hopium . Since the company is in the business of buying and holding bitcoin, it seems reasonable to expect some sort of understandable relationship between the monetary value of MSTR’s bitcoin holdings and its (fully diluted) market capitalization. So I calculated that. Here’s what I have as of 4/27/25. Analyst compilation based on data from MSTR earnings deck and Yahoo! Finance (There’s no magic to any of this. I got everything from MSTR’s BTC-Yield slide reproduced above – the one that details coin ownership and convertibles-based dilution – and market prices from Yahoo! Finance.) We see here that MSTR trades at a hefty premium to the value of its bitcoin holdings. In a perfectly static world, I’d take this as a signal to “Sell,” or possibly even short the stock. But the world is not static. As with high P/Es on some of today’s more popular stocks, like Palantir ( PLTR ) or Tesla ( TSLA ), it’s legitimate to associate premium valuation with future growth prospects. MSTR’s premium-to-bitcoin reflects investors’ willingness to pay up to participate in the company’s intelligent leverage protocol. As shown by the relative performance slides above, investors who have thus far done this have been well rewarded. We also see that in the percentage changes of items in the above market cap to bitcoin table. Analyst compilation based on data from MSTR earnings deck and Yahoo! Finance Here, also, are management’s views on the premium MSTR stock commands. MSTR IR I agree with these points. And note especially the remarks on BMAX, STRK (conversationally nicknamed “strike”), and STRF (strife). I alluded to those above when I referred to other related securities with different reward-risk characteristics. Let’s now look at those… Other Securities in the MSTR Ecosystem – BMAX, STRK, and STRF BMAX - Convertible Bonds This is the REX Bitcoin Corporate Treasury Convertible Bond ETF (NASDAQ: BMX) . It’s not issued by MSTR. It’s a REX Shares product. As its name suggests, it emphasizes convertible bonds. Most are issued by MSTR. But some are issued by other companies that pursue bitcoin strategies similar to those used by MSTR. This is not an income vehicle. Some bonds have zero coupons. Others have minimal coupons. The key feature is convertibility into common stock. I’ve long liked convertible bonds. But trading characteristics are not amenable to the needs of individual investors. Unless you trade into the millions, you could face hostile bid-ask spreads. Hence, the merits for individuals of convertible bond ETFs. (They are not the most popular things around, but this vehicle is made to order for MSTR-type convertibles. It’s a great way for individuals to participate.) Conversion prices are fixed by contract. They’re set at a level high enough that the bondholder won’t choose to convert on day one. But if the stock rises, it will eventually rise to a level where it becomes worthwhile to convert. Because the conversion feature has no value on day one, the upside here is not as strong as it would be with stock ownership. On the other hand, there’s a lot of downside protection. Most of these bonds earn minimal interest. Ultimately, though, if bitcoin and the stocks disappoint and fall, the bondholder can look forward to getting 100 cents on the dollar at maturity. (As noted above, there’s a lot of collateral-like backing behind these securities.) These are short- and intermediate-term bonds. Here, from page 11 of the latest 10-Q, are details of the MSTR debt outstanding as of 3/31/25. page 11 of MSTR's latest 10-Q Notice that the longest-dated maturity is only about nine years out. BMAX doesn’t own it right now. The longest dated maturity in its current portfolio is 6/1/31. That’s for a convertible issued by Mara Holdings ( MARA ). But BMAX may eventually own the MSTR ’34 issues. Essentially, BMAX is like MSTR, but a bit lower on the reward-risk scale. STRK and STRF – Preferred Shares These are preferred shares. Like bonds, they rank higher than equity in the capital structure. (That only comes into play in times of severe financial distress.) The main characteristic is that these are for income-oriented investors. But unlike bonds, they don’t mature. (That said, individual preferred issues may come with provisions that let issuers “call” them — force redemption — under certain conditions.) Both STRK and STRF are lower on the reward-risk scale than MSTR and BMAX. MicroStrategy Incorporated SER A PFD STK (NASDAQ: STRF) is a preferred issue that, in terms of capital structure hierarchy, ranks below the bonds issued by MSTR. But it’s higher than STRK and MSTR equity. Its dividend is fixed at 10% of the $100 face value. In other words, each share pays a $10 annual dividend (divided into four quarterly payments). Based on the current market price of STRF, the indicated yield is about 10.6%. (Because the issue is so new, Seeking Alpha data presentations don’t yet show the dividend or the yield.) Bear in mind, here, that MSTR has the right to pay the dividend in cash or MSTR common shares. It’s OKI if a STRF holder does not want to own MSTR common. The latter is liquid. So any shares received as a dividend can immediately be monetized by selling. That wouldn’t be the smoothest thing in the world. But for a 10.6% yield, I’d say that situation is quite acceptable. MicroStrategy Incorporated 8.00% SERIES A PERPETUAL STRIKE PFD (NASDAQ: STRK) is very similar to STRF. There are two differences. First, the dividend here is 8% of the $100 face value. In other words, it’s $8 per share. At STRK’s current price, that works out to an indicated yield of 8.7%. Here, too, the dividend can be paid in cash or MSTR stock. In the capital structure hierarchy, STRK ranks below STRF and above MSTR. So, why might anyone buy STRK instead of the higher-yielding STRF? The answer is convertibility. Unlike STRF, STRK gives the holder a little bit of upside exposure to bitcoin and MSTR. It’s not a lot… Each STRF share is convertible into only 1/10 of a share of MSTR. The conversion feature is not valuable today. Assuming a $92 price for STRF, you’d need $920 worth of face value (10 shares) to get a single MSTR share. The latter trades at around $415. But conversion could become worthwhile in the future if these securities rise. It’ll take a long time. But with an 8.7% yield, it pays to be patient. Risk The risk here is that bitcoin suffers a major, catastrophic, and sustained collapse. MSTR’s intelligent leverage program is such that the company can readily withstand periodic corrections, or even downturns that amount to more than corrections. (Anyone can define “correction” in their own way.) But if bitcoin suffers a tulip-like prolonged crash, that would be troublesome for MSTR and all related instruments. Bitcoin/crypto cynics will undoubtedly trumpet this. And I can’t condemn anyone who does so. But the reason I devoted so much attention to the relationship between bitcoin and the collectible world is to put the worst-case scenario into a more familiar context. Art prices could enter a serious and prolonged crash. So, too, could antique. So, too, could vintage baseball cards. Ditto even gold. According to Statista , only 7.16% of 2024 gold production was used in industry. Imagine how the price could crash if the other 92.84% of demand were to become compromised. Even if we add back the 44% used in jewelry, that would still leave 48.84% of demand that is completely non-utilitarian. That could still suggest widespread nightmares. Think of the devastating bitcoin crash risk in this context. Suddenly, it has much in common with many other things that have long been readily accepted. I believe that makes it much less scary. What to do About MSTR, BMAX, STRK, and STRF Securities Here’s the MSTR price chart. StockCharts.com Conventionally speaking, this looks fine. I like how the 10-day exponential moving average (EMA) recently moved up and through the now up-trending 50-day EMA. Consider, too, Chaikin Money Flow ( CMF ) and the Chaikin Oscillator (CO). Both measure which party to trades is more motivated. CMF does it for institutional investors. CO does it for the market in general. Both indicators are nicely bullish, Buyers being more motivated than sellers exert upward pressure on stock prices. And CMF tells us it’s not just individuals chasing memes. That indicator measures the group labeled by Marc Chaikin (its creator) as “ smart money .” Here’s a much shorter-term look at MSTR and the rest of its ecosystem (BMAX, STRF, and STRK)… just a few weeks. (BMAX, STRF, and STRK are really NEW !) Seeking Alpha The picture shows exactly what the above verbiage suggests. MSTR is the main event. BMAX is a slightly more conservative alternative. STRF and STRK are much more stable as income vehicles. But between them, STRK’s tiny conversion feature gives it a little bit of volatility relative to STRF. So, as minuscule as this sample is, we already see the securities properly aligned according to reward-risk theory. When it comes to rating stocks, I think in terms of probable future stock performance relative to the market, rather than literally buying, holding, or selling. And since I’m not rating based on a quant model, I’ll eschew “Strong …” extremes. Absent an exceptional degree of conviction, I think “Buy,” Hold,” or “Sell” are enough. I see all as attractive relative to their respective security types. I translate that to the Seeking Alpha rating taxonomy by assigning “Buy” ratings to all four — MSTR, BMAX, STRF, and STRK. The difference between them should be based entirely on one's own reward-risk preferences.