Bitcoin investors, whether by way of direct holdings or exchange traded funds, are likely familiar with Michael Saylor’s Strategy (NASDAQ: MSTR). Previously known as MicroStrategy, the company owns 580,250 bitcoin, or 2.76% of the total supply of 21 million that will ever be mined.
That makes it far and away the largest corporate owner of bitcoin, thus making the stock one of the most crypto-correlated. As seen in the chart below, Strategy’s bitcoin purchases have rapidly accelerated and Saylor has signaled more are on the way.
(Image: Bitcoin Treasuries)
Owning bitcoin is no longer controversial, but Strategy is a stock with a tendency to evoke strong emotions and it’s easy to understand why. As of late May 28, the company’s bitcoin holdings were valued at $62.43 billion, well ahead of the $33.19 billion it spent on those purchases. However, that $62.43 billion is also well below Strategy’s market capitalization of $101.76 billion as of May 28. Some argue that makes the stock an expensive way to play bitcoin because it trades at a significant premium to its net asset value (NAV). That premium was close to 123% on Wednesday.
In simple terms, an investor buying shares of Strategy is paying more than what the combined value of the company’s bitcoin NAV and enterprise software business are worth. So regarding Strategy’s premium, it’s the result of the market wagering the company will continue buying bitcoin – a safe bet – and that the value of the firm’s holdings will continue rising. That’s one element in the Strategy premium, but there’s more to the story.
Financial, Regulatory Premiums
The other two elements in the Strategy premium are financial leverage and regulatory. Let’s examine the latter first. Essentially, the regulatory premium centers around the inability of some fund managers, including those in the U.S., and investors in other jurisdictions not being able to buy bitcoin, so they buy Strategy stock as an alternative.
“Numerous jurisdictions treat Bitcoin unfavorably for tax treatment and capital holding requirements, which causes investors to favor a publicly traded equity vehicle like MSTR,” according to VanEck research. “Because it is a common stock, MSTR also offers financial advantages as a collateral asset. These investor limitations render MSTR an attractive proxy for Bitcoin exposure, particularly for investors otherwise excluded from the asset class.”
Regarding financial leverage, that’s Saylor’s use of Strategy debt and equity to finance bitcoin purchases. It’s an advantage unique to Strategy – one that allows the company to essentially dollar cost average into bitcoin during pullbacks.
“Unlike typical margin traders, who are often forced to liquidate in downturns, Saylor can sustain losses and maintain long-term positions,” adds VanEck. “During parts of 2022 and 2023, even as Strategy’s equity deficit reached hundreds of millions of dollars, MSTR's market capitalization remained in the billions, reflecting investor confidence in the long-term leverage structure offered by Strategy.”
In March, Strategy announced plans to sell $21 billion in preferred stock, following a similar $584 million offering the prior month. Those offerings, which offer investors income plays on Strategy and bitcoin, follow billions worth of convertible debt sales, confirming Saylor is also willing to use Strategy equity to buy bitcoin. Strategy’s various premiums combine to make it a levered play on bitcoin and a volatile one at that.
(Image: VanEck)
Why Strategy Capital Issuance Matters
As VanEck points out, there’s a fourth premium pertaining to Strategy, which is derived from its capital structure and the subsequent volatility it creates. Saylor leverages preferred equity, convertible preferred equity, convertible debt, and common stock sales to drive bitcoin gains to shareholders. Hence when Strategy engages in a form of financing that is dilutive to common stock investors, it uses the proceeds to acquire more bitcoin, potentially enhancing investors’ return profile – assuming bitcoin prices rise.
While dilutive in some cases, Strategy’s moves are popular with most shareholders because its cost of capital is low. For example, the aforementioned convertible issues have 0% interest rates. Some market observers argue that the allure of Strategy stock is sourced by its volatility, which Saylor capitalizes on by selling that volatility at favorable prices.
(Image: VanEck)
Of course, investors must ponder the sustainability of this way of doing things. This year, Strategy could pay $265 million combined in interest and preferred stock dividends with those figures swelling to $991 million next year, estimates VanEck. The company is expected to notch $475 million in sales this year, so financing is a significant part of the equation.
That financing is heavily dependent on bitcoin prices, which is to say the better the cryptocurrency performs, the easier it is for Strategy to access capital markets on favorable terms. History proves as much. In the back half of the crypto winter of 2022, Strategy sold just $60 million in securities.
Strategy’s methodology “is actually much more similar to trying to dynamically replicate a call option on BTC by adding leveraged exposure as the price increases. Strategy’s gambit is to increase its BTC position as financing becomes available, and this typically occurs when the price of BTC is on an upswing,” observes VanEck. “The risk of this strategy is not just prices dropping, but also the contraction of the Premium based upon the collapse of financing BTC purchases. Additionally, this strategy deploys capital at arguably inopportune times, i.e., when BTC reaches highs.”
MSTR is a call option of sorts on bitcoin and one that works in investors’ favor when the cryptocurrency is soaring, but there are risks associated with Strategy’s mechanics. Those include the obvious of declining bitcoin prices, high interest rates and slack demand for marketed securities. Other issues to consider include the possibility of regulators eventually approving leveraged bitcoin products, prolonged periods of low market volatility and the specter of NAV erosion or outright collapse.
Bottom line: MSTR’s ties to bitcoin are clear and potentially beneficial, but there are a lot of moving pieces with the underlying investment thesis. Stating the obvious, the stock isn’t for everyone, but there are some “synthetic” plays on it that broaden the field of potential investors while offering income.