MicroStrategy's Bitcoin Bet: A Revolutionary Attempt at Corporate Financing

At the Wikia Villa in Miami, a grand New Year's party is underway. Orange and gold decorations adorn the century-old mansion, with over 500 guests gathering on the neatly trimmed lawn. This celebration marks not only the arrival of the New Year but also Bitcoin surpassing the $100,000 milestone.

The host of the party, Michael Saylor, wearing his iconic black suit jacket and a T-shirt emblazoned with the letter "B", warmly converses and takes photos with the guests. Here, Bitcoin is faith, and Saylor is its prophet.

For Saylor, cryptocurrency is the second spring of his career. During the internet bubble, he earned and lost over $10 billion. After graduating from MIT in 1989, Saylor founded the software company MicroStrategy. The company initially focused on data mining and business intelligence software, but in 2000 it clashed with the SEC over accounting issues, had to pay fines, and restate its financial reports.

In the next 20 years, MicroStrategy's performance was mediocre, with a market value hovering around $1 billion. It wasn't until 2020 that Saylor decided to make Bitcoin the core strategy of the company, and everything changed.

Last year, as large asset management institutions were approved to issue Bitcoin ETFs, cryptocurrency prices more than doubled within 12 months, breaking $100,000 in early December. MicroStrategy also joined the Nasdaq 100 index before Christmas, driving its stock price up over 700% last year. The company has now become the second largest holder of Bitcoin after Satoshi Nakamoto, owning 471,107 Bitcoins. During 2024, Saylor's net worth surged from $1.9 billion to $7.6 billion. A month into the new year, his net worth has reached $9.4 billion.

MicroStrategy's astonishing earnings have raised questions from critics. They cannot understand why a small software company that holds only 48 billion dollars in Bitcoin has a market value of 84 billion dollars. However, critics overlook one point: MicroStrategy has cleverly bridged two realms - the domain constrained by traditional financial rules and the cryptocurrency world dominated by staunch believers.

The driving force behind MicroStrategy's success is embracing and nurturing volatility. Volatility is the nemesis of traditional investors, but it is a close ally of options traders, hedge funds, and retail speculators. This makes MicroStrategy one of the most actively traded stocks in the market. Although its annual revenue is only $496 million, its daily trading volume can rival that of tech giants.

Sailor said: "People think this is crazy. How can such a small company have such high liquidity? This is because we have placed a crypto reactor at the center of the company, attracting capital and making it circulate. This increases the volatility of the stocks, making our options and convertible bonds the most interesting and best-performing products in the market."

Since 2021, MicroStrategy has issued $7.3 billion in convertible bonds, which have been sought after by institutional investors. These bonds offer security to holders while granting them the option to convert the bonds into stocks at a predetermined price before maturity. As MicroStrategy's stock price fluctuates due to Bitcoin price volatility, this increases the value of the implicit options in the bonds. As a result, Saylor has been able to issue these bonds with almost no interest payments.

Currently, MicroStrategy has issued 6 convertible bonds with maturities ranging from 2027 to 2032 and interest rates between 0% and 2.25%. In the shrinking public bond market, institutional investors are eager for excess returns. MicroStrategy's bonds are not only one of the few avenues for large investors like Allianz in Germany and State Street Bank in the United States to invest in digital assets, but they are also among the best-performing bonds in the market, with a return of over 250% since their issuance.

Saylor deeply understands the mentality of institutional investors who buy high-risk stocks to improve performance. The issuance of a large number of convertible bonds by MicroStrategy not only did not dilute the stock but created a bullish effect, as these bonds represent future demand for increasingly higher-priced stocks. Through secondary offerings and convertible bonds, MicroStrategy's outstanding shares increased from 97 million shares to 246 million shares since 2020. During the same period, its stock price rose by 2666%. At the end of January, shareholders approved a significant increase in the company's authorized shares to 10.3 billion shares. This cycle is self-reinforcing: issuing low-cost or zero-cost debt and stock, driving up Bitcoin prices through large purchases, and causing significant fluctuations in MicroStrategy's stock. This cycle continues repeatedly.

As long as the price of Bitcoin continues to rise, everything will go smoothly. But what if Bitcoin crashes like it has many times before? Unless the apocalypse truly comes, MicroStrategy should not have any issues. Bitcoin needs to crash more than 80% from its current level of over $100,000 and remain at that level for at least two years for MicroStrategy to be unable to repay its current debts.

Saylor once again demonstrated his talent in leveraging capital markets and the behavior of bond investors. The $7 billion debt issued by MicroStrategy is all unsecured, meaning that technically, none of the Bitcoin in its treasury can be used as collateral. Furthermore, based on the company's current stock price of $373, its more than $4 billion in debt has already "gone in the money," or essentially has become equity.

Imitators are providing ammunition for critics of MicroStrategy. However, many analysts believe that, much like Netflix in the streaming space, MicroStrategy's first-mover advantage and scale make it stand out. It is the most liquid source for trading Bitcoin-related risks, whether in the spot market or the options market.

Sitting by the pool at the Villa Vikia, Saylor dismissed his critics. "For the past 40 years, traditional business wisdom has considered capital to be a liability and volatility to be a bad thing. The Bitcoin standard defines capital as an asset and volatility as a good thing - that's its nature," he insisted, "they live in a flat world, in a pre-Copernican era. We are sitting on a train going 60 miles per hour, spinning a gyroscope that carries 30 tons on top, while the rest of the world stands by the tracks, motionless."

For Seiler, the Wikivia villa itself is the best example. This 18,000 square foot mansion was built in 1928, and he purchased it in 2012 for $13 million. "This house was worth $100,000 in 1930. A few years ago, it was valued at $46 million," Seiler said, "do the math - it's heading towards $100 million, which means the dollar has depreciated by 99.9% over 100 years. Most importantly: money in the bank is not money."

Saylor occasionally reflects on his entrepreneurial journey. "We adopted Bitcoin out of desperation, and then it became an opportunity, then a strategy, then an identity, and finally a mission. The irony of my career is that I invented 20 things and tried to make them successful, but none of them really changed the world. Satoshi created something, gave it to the world, and then disappeared. Ironically, this has made me more successful than trying to commercialize every one of my own ideas. It’s a lesson in humility."

This also reminds us that lightning can indeed strike the same place twice, especially when a savvy and opportunistic manager is at the helm.