A Company That Bet Its Fate on Bitcoin: MicroStrategy (MSTR)

MicroStrategy (MSTR) is originally a software company.
By developing and providing data analytics and business intelligence (BI) software, it offers data visualization, reporting, large-scale data analysis, and cloud-based analytics services, but the company has hit a singularity.

It began boosting its corporate value by purchasing Bitcoin.

Michael Saylor, the CEO of MicroStrategy, held a strong conviction about Bitcoin’s long-term value and began issuing convertible bonds.
Convertible bonds are bonds that can be converted into equity.

1. Raise funds to accumulate Bitcoin through zero-coupon convertible bonds,
2. As the company starts accumulating Bitcoin as a corporate asset, its stock price rises when Bitcoin appreciates,
3. As the stock price rises, investors buy the convertible bonds that can be turned into shares,
4. The company uses the proceeds from this process to buy even more Bitcoin,
5. When the convertible bonds are converted into equity, the liabilities disappear from the company’s balance sheet — completing the structure.

In this way, MicroStrategy has become the company that holds the most Bitcoin in the world, and at the same time, the company that has issued the most convertible bonds.

MicroStrategy made its first Bitcoin purchase on August 11, 2020. In October 2023, it announced plans to raise an additional $42 billion over the next three years, and it now holds 423,650 BTC, equivalent to about 2% of total circulating supply.

Major investment firms such as AQR Capital Management and Man Group have joined in, and MicroStrategy’s moves have drawn the attention of many institutional investors — Eli Pars, CIO of Calamos Advisors LLC, for example, holds more than $130 million worth of its convertible bonds.

In practice, the strategy of issuing convertible bonds to increase Bitcoin holdings and thereby raise corporate value is far less burdensome than borrowing to buy more Bitcoin. That’s because convertible bonds are ultimately converted into equity.

But the stock price is puzzling.
The value of the Bitcoin held by MicroStrategy is about $42.365 billion.
Meanwhile, MicroStrategy’s market capitalization is about $111.39 billion.

In other words, the company is trading at a market cap that is about 2.6 times the value of the Bitcoin it holds.

That’s a reasonable line of thought. However, MicroStrategy appears to be more focused on its Bitcoin strategy than on its core software business.
In 2024 Q3, MicroStrategy’s subscription revenue was $32 million, while total revenue reached $116 million.

On December 1, 2024, Michael Saylor even gave a presentation to Microsoft’s board of directors outlining a strategy for adopting Bitcoin.

He argued that holding bitcoin is a better choice than buying back company shares or holding bonds, and that Microsoft must not miss this “wave of technology.”

In response, Microsoft shareholders opposed the proposal and it was voted down. Still, the way he describes bitcoin as economically and technologically superior to physical assets, more efficient for capital preservation, and enjoying broad popular and political support shows just how ardent a bitcoin advocate Michael Saylor is.

If we start from the premise that the premium is not simply because “the company also runs an operating business,” we can infer the following reasons.

Restricted market access.

Some institutional investors are unable to buy bitcoin or bitcoin ETFs directly because of regulations or internal rules. But MicroStrategy is an ordinary listed stock. It is not subject to those constraints. Hedge funds, mutual funds, and convertible bond investors may therefore prefer MicroStrategy for this reason.

However, it does not make sense that institutions, which are so focused on value, would pay more than double the price purely because of such constraints.

At this point, we need to revisit how MicroStrategy raises capital. MicroStrategy accumulates bitcoin using the funds it continuously raises through convertible bonds.

It may be that buying MicroStrategy is an expression of fervent support for bitcoin. Owning MicroStrategy stock is not so different from setting up a bitcoin mining rig.

To put it simply: MicroStrategy has pledged to keep buying bitcoin on an ongoing basis. Mining rigs work in much the same way.

This structure delivers financial utility that can exceed the effect of a leveraged ETF.

Naturally, there is no strategy in financial markets that is invincible to all risks.
MicroStrategy’s share price has posted an average daily volatility of 5.2% this year, far higher than the 0.6% volatility of the S&P 500.

You may be an investor who does not particularly care about volatility relative to the broader market.
Such investors need to understand the structural risks involved.

You now know that steady demand for convertible bonds has been supporting MicroStrategy’s share price.
The next step is to understand how that demand is created.

Fundamentally, the value of a convertible bond is heavily influenced by the value of the issuing company. A bond is, by nature, debt, so the higher the risk that the issuing company will go bankrupt, the lower the value of the bond becomes. In other words, as long as the value of bitcoin continues to rise, the company’s bankruptcy risk stays low, and because that risk is low, the value of its bonds is maintained.
Now imagine a scenario where the value of bitcoin declines within this structure. The bankruptcy risk of MicroStrategy, whose asset value depends on bitcoin, rises in proportion.
In the short term, the company could sell some of its bitcoin holdings to repay its debt. But the longer the downturn persists, the more that risk increases exponentially.

Because there is no established methodology for valuing Bitcoin.

If a company that can generate $10 in cash per day is going to shut down in a week, a simple calculation would put its value at $70. Bitcoin, however, does not generate cash. For now, as Bitcoin is being adopted by the financial sector, financial institutions can profit from its liquidity, but there are still questions about whether Bitcoin itself generates quantifiable value.

From a risk management perspective, that makes it a high-priority concern, and if conditions deteriorate, it becomes the first asset you need to manage.

MicroStrategy not only carries regulatory risk related to Bitcoin itself, but also regulatory risk related to being a company that holds Bitcoin on its balance sheet. On top of that, as its convertible bonds are exchanged for equity, there is also the risk of dilution of existing shareholders’ stakes.

Once you understand this structure, you can recognize the possibility that even if MicroStrategy holds two Bitcoins, its share price could trade below the value of those two Bitcoins.
The idea that “perhaps buying MicroStrategy is an expression of fervent support for Bitcoin” is based on this. As long as Bitcoin does not enter a prolonged downturn, MicroStrategy can be an exceptionally attractive investment.

For investors who want exposure to Bitcoin while having a certain conviction in the market itself, direct investment in Bitcoin may be appropriate. For those who have strong conviction in Bitcoin’s price as well, investing in MicroStrategy could be ideal.
Institutional investors who lack this conviction, however, have taken short positions in MicroStrategy. Is MicroStrategy’s premium justified, or is it overvalued?
I will leave that judgment to you, now that you have all the information you need to decide.