Summary MicroStrategy's stock is best viewed as a closed-end Bitcoin fund, trading at a premium or discount to its Bitcoin NAV, depending on market euphoria. The concept of "Bitcoin Yield" is flawed and misleading, as it relies on issuing equity at a premium without even matching a simple Bitcoin ETF. MicroStrategy faces significant refinancing risk, especially outside of crypto euphoria, which could lead to unfavorable debt terms or even bankruptcy. Investors should consider selling MSTR and replacing it with more reasonable Bitcoin exposure, if they must. There’s a lot of confusion around MicroStrategy ( MSTR ), namely, around the possibility that MicroStrategy has somehow found some new strategy which can provide it with value in excess of what its Bitcoin assets plus its business provide. This article will seek to wash away such confusion. First, The Business The least important thing about MicroStrategy is the actual business it is in. This business is enterprise analytics software, delivered as a package or as a web service. This business is stagnant to declining, and is currently not profitable. When this business was slightly larger, shrinking less and profitable, back in 2019, the market valued it at around $0.5 billion ($1 billion market cap, $0.5 billion net cash, thus the business itself was worth $0.5 billion). Considering the above, we can safely ignore MicroStrategy’s actual business, since MicroStrategy, on 256.3 million fully diluted shares at $422 has a $108.3 billion market capitalization, and the business at $0.5 billion represents less than 0.5% of that. The Bitcoin Treasury Of course, the real reason MicroStrategy trades at a $108.3 billion market cap isn’t its business. Instead, it relates to the large Bitcoin investment it has amassed since it started buying Bitcoin in August 2020. As of the most recent filing, MicroStrategy has bought 331,200 Bitcoins. Since Bitcoin is at $98,000 as I write this, these are worth $32.5 billion. But wait, this means MSTR actually trades at an extremely large premium to the Bitcoin it holds. After all, it trades at a $108.3 billion market cap, and it only holds $32.5 billion in Bitcoin. This can be seen in two ways: For MSTR to trade at the same value as the Bitcoin it holds, Bitcoin would have to be at $326,600 (up 233%). Or for MSTR to trade at the same value as the Bitcoin it holds, MSTR would have to be at $126.70 (down 70%) Of course, there is a narrative out there justifying the extremely large premium. This narrative revolves around the concept of “Bitcoin Yield”, or said another way, the supposed ability that MicroStrategy has of increasing the Bitcoin MSTR holders hold per share as time goes by, through a combination of issuing equity and debt. This, as we’ll see, is an absurd concept. The Bitcoin Yield The Bitcoin Yield, as defined by MicroStrategy, represents the % change, period-to-period, between MSTR’s bitcoin holdings and its diluted shares outstanding. Or, said another way, this is the % change in the bitcoin content per share. Obviously, the widespread idea is that since the bitcoin content per share (number of bitcoin per share) can increase over time, you can pay a premium today for the already-held Bitcoin. MicroStrategy makes use of this concept in its own presentations, and presents "Bitcoin Yield" as a KPI (Key Performance Indicator), showing its significance in attracting investor bees to the honey. MicroStrategy presentation MicroStrategy presentation But how and why does the bitcoin per share actually increase? It increases by issuing equity when MSTR is trading at a premium. Why? Because: When MSTR issues shares, it buys $1 in bitcoin per $1 of issued new stock. Yet, the already-issued shares trade for a lot less than $1 in bitcoin per $1 of already-issued shares (that’s why the stock trades at a premium to Bitcoin). Hence, when you mix the bitcoin from the newly issued shares with the “less bitcoin rich” existing shares, the whole cake now has slightly higher bitcoin per share. As a result, “Bitcoin Yield” will have been positive. But this is an absurd concept for two reasons: First, because it’s a circular concept – it justifies the stock trading at an irrational premium because if stock is issued at the irrational premium then the premium will be slightly smaller. This, of course, assumes it will always be possible to issue more stock in the future. Second, because the amount by which MSTR would have to dilute to get to $1 in bitcoin content per $1 is value per share would be infinite . Why? Because the end ratio as calculated above is a combination of shares which have $0.xx ratio and a $1.0 ratio, and this combination, as you issue more and more shares, tends to one, but never reaches it . Hence, it would be senseless to pay a premium for the future increase in bitcoin content per share over just buying a Bitcoin ETF which trades at $1:$1 to its bitcoin content per share, since the bitcoin content per share can never exceed $1:$1 through equity issuance at a premium! But wait, MicroStrategy can also issue debt! MicroStrategy has a second way of increasing the bitcoin content per share. It involves issuing debt, when possible at a low coupon and convertible into stock (so that the low coupon can even exist -- the reason why bond investors accept a low coupon on MSTR is for another day, but it's NOT related to Bitcoin or MSTR's strategy, instead being tied to riskless strategies on high-implied volatility stocks). Here, the magical trick is different. When MicroStrategy issues debt and buys bitcoin in the market with the proceeds, the proceeds are turned $1:$1 into bitcoin, but since no shares are diluted at issuance, the mere fact of issuing debt and buying bitcoin mechanically increases the bitcoin per share , and hence, produces “Bitcoin Yield”. But this is a sleigh of hand, in the sense that the “Bitcoin Yield” is calculated with gross bitcoin held, not with net bitcoin held. And of course, when MSTR issues debt, it buys $1 of bitcoin with $1 of debt, thus at the start and unless bitcoin goes up, it has added exactly $0 in net bitcoin value. Thus, issuing debt to buy bitcoin or the “investor” himself buying bitcoin on margin is rather similar. What Is MicroStrategy, Then? A Closed-End Fund The closest thing we can compare MicroStrategy with, is a closed-end Bitcoin fund. After all, at any given moment shareholders can only buy or sell MSTR – they can’t actually subscribe or redeem the underlying, exactly like it happens with a closed-end fund. And MSTR can trade both at a premium, like now, or at a discount, to the underlying. Furthermore, a closed-end fund can also issue more preferred shares or debt to buy more underlying. Yes, closed-end funds can trade both at a premium, like MSTR, and at a discount … like MSTR. The current crop of euphoric shareholders might not know it, but MSTR has, indeed, already shown it was possible to trade at a discount. In closed-end funds, outside of euphorias, the normal is to trade at or below NAV. And so it was for MSTR: MSTR-tracker.com Note that in the chart above there are observations of up to a 49% discount in 2022, and a 15% discount already within 2024. Basically, outside of straight-up Bitcoin euphoria, it hasn’t taken long for MSTR to converge to its NAV or even below it. We have, of course, examples of other closed-end funds behaving exactly the same. For instance: The GBTC example The Grayscale Bitcoin Trust ETF ( GBTC ) traded both at a large premium to Bitcoin NAV, including over 100%, and a large discount to NAV (-49%, must like MSTR) when Bitcoin lost its allure. Ultimately, it converged to NAV once it became an open-end ETF. I wrote about this at the time ( I , II ). ycharts.com The LTCN example Like MSTR and GBTC, the Grayscale Litecoin Trust ( OTCQX:LTCN ) also traded at extremes, which included premiums of over 1,000%. However, these were the result of very low liquidity and very few available LTCN shares to trade. And again, after the euphoria was gone and more shares were available to trade, it, too, managed to trade at a discount of more than 60%. I, too, wrote on this situation ( I , II ). Grayscale We have thus established that it is possible, likely even, that MSTR will once again trade at its NAV / value of the bitcoin it holds. This is likely to happen as soon as crypto / Bitcoin euphoria dies a bit, just like it did cyclically in the past. Of course, in the present market it’s even more possible than in the past because the present market now has several ETFs which hold Bitcoin and trade at NAV, like GBTC or the iShares Bitcoin Trust ( IBIT ). There is something else which can happen to MSTR, besides trading at or below NAV, though. MicroStrategy’s Refinancing Risk Since MicroStrategy has issued debt, and since MicroStrategy doesn’t produce much cash from operations or has much cash in its balance sheet (it turns everything into Bitcoin), MicroStrategy has refinancing risk when some of its debt matures. This refinancing risk isn’t acute during times of crypto euphoria. But it can be, outside those times. And crypto euphoria is often not very long-lasting. If a debt maturity happens outside of crypto euphoria, here are the avenues available to MicroStrategy to be able to pay the maturing debt: Selling BTC outside a crypto euphoria (so at a bad moment). Selling MSTR outside of a crypto euphoria (so at a bad moment, selling MSTR likely below NAV) Refinancing debt at unfavorable terms. We actually have an example of what refinancing debt at unfavorable terms means for MicroStrategy. Back in June 2021, MSTR was forced to issue debt. That’s when the market, fearing the worst, sold MSTR down to a near-50% discount to NAV. Here are the conditions that MSTR then got to issue just $500 million of debt: A 6.125% coupon, at a time the FED funds rate was 0% and the 10-year was at 0.7%. Senior secured debt, secured by all of its 92,079 bitcoins. With Bitcoin then at roughly $35,500, that meant the debt was secured at an LTV (Loan-To-Value) of 15.3%. This shows how much the creditors “wanted” bitcoin as a collateral. So there it is, if MSTR is forced to refinance debt at a non-euphoric time, history has already shown us that such could happen at a time when MSTR is trading at a 40%+ discount to NAV (so selling shares would be incredibly dilutive to NAV), Bitcoin is kind of crashing (it went lower still, though) and whatever debt can be issued will be under extremely unfavorable conditions. Worse still, had MSTR’s NAV (bitcoin – debt value) been, at the time, significantly lower, it’s likely that no creditor would want to finance MSTR. If that happened, MSTR could simply face bankruptcy. This is an unlikely, but possible, event, with MicroStrategy’s current strategy. Some Scenarios Here are some scenarios for MicroStrategy, if it converges to its bitcoin NAV , for people to have a better understanding of what it means to buy MSTR currently: Bitcoin falls 80% to $19,600 . MSTR currently has $7bn in net debt, the bitcoin it holds, under a scenario of a 80% drop in Bitcoin, would be worth around $7.1bn (I assume the recently issued $3 billion in debt has been used to buy $3 billion in BTC). In a best-case scenario MSTR would drop 93.2% to $27.7. In a worst-case scenario, if a debt maturity happens, MSTR would be facing potential bankruptcy. Bitcoin falls 50% to $49,000 . MSTR falls 83.6% to $69.2. In a worst-case scenario, if a debt maturity happens, all of MSTR’s bitcoin gets offered as collateral to issue secured debt at an 8%+ coupon. Bitcoin stays the same . MSTR drops 70% to $126.6. Bitcoin goes up 100% . MSTR drops 37% to $265.0. Bitcoin goes up 200% . MSTR drops 4% to $403.3. In short, if, as it has done in the past in the absence of a crypto euphoria, MSTR’s value returns to its bitcoin NAV (never mind below, which it has also done in the past by a good margin), current MSTR shareholders need Bitcoin to go up more than 200% for them to even break even . This isn’t a rational position to be in. Conclusion MicroStrategy’s stock is best seen as a closed-end fund. It looks like one, it walks like one, it quacks like one. It has traded both at a premium to its NAV and at a discount to its NAV, even in the recent past. It has traded at a discount or close to NAV the entire time, since it has been buying Bitcoin, where the crypto market wasn’t euphoric. The Bitcoin yield concept is not rational. It can be shown that through equity issuance alone, it’s impossible for MSTR to even surpass the content per share of a normal Bitcoin ETF ($1 of bitcoin per $1 of stock price). Indeed, using this concept in marketing is highly misleading and might one day attract regulatory scrutiny. All it takes for MSTR to be a disaster for its investors, is for MSTR to again trade at or below NAV, like it has done plenty in the past. Disaster can strike if and when MSTR faces refinancing risk for its existing debt, outside of a crypto euphoria. There has already been an example of what this means in the past, with the need to issue debt at unfavorable rates in a favorable rate environment, secured by all of MSTR’s bitcoin. This isn’t even the worst-case scenario. It is possible, but unlikely, for MSTR to go bankrupt if Bitcoin falls enough at the wrong time (when debt matures). In general, even the most optimistic MSTR shareholder, a full believer in Bitcoin, would do well to sell MSTR and buy GBTC or IBIT instead. To not do so is irrational and dangerous.
