Over the past five years, Strategy has spent $40.8 billion, equivalent to Iceland's GDP, acquiring over 580,000 Bitcoins. This accounts for 2.9% of the Bitcoin supply or nearly 10% of active Bitcoins (1).
Strategy's stock code $MSTR has risen by 1,600% over the past three years, while Bitcoin's increase during the same period was only about 420%. This significant growth has led to Strategy's valuation exceeding $100 billion and its inclusion in the Nasdaq 100 index.
This tremendous growth has also raised questions. Some claim that $MSTR will become a trillion-dollar company, while others are sounding the alarm, questioning whether Strategy will be forced to sell its Bitcoins, potentially triggering a massive panic that could depress Bitcoin prices for years.
However, while these concerns are not entirely unfounded, most people lack a basic understanding of how Strategy operates. This article will explore in detail how Strategy works and whether it represents a significant risk to Bitcoin acquisition or a revolutionary model.
How did Strategy purchase so much Bitcoin?
Image Source: Dio Casares
Note: Due to new financing and other reasons, data may differ from when it was written.
Broadly speaking, Strategy primarily acquires funding to purchase Bitcoin through three methods: income from its operating business, selling stock/equity, and debt. Among these three methods, debt is undoubtedly the most scrutinized. People tend to focus heavily on debt, but in reality, the vast majority of the funds Strategy uses to purchase Bitcoin come from issuing stock, selling shares to the public, and using the proceeds to buy Bitcoin.
It may seem somewhat counterintuitive; why would people buy Strategy's stock instead of directly buying Bitcoin? The reason is quite simple, returning to the most favored business type in the cryptocurrency industry: arbitrage.
Why do people choose to buy $MSTR instead of directly purchasing $BTC?
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Many institutions, funds, and regulated entities are restricted by 'investment mandates'. These mandates specify the assets companies can and cannot purchase. For example, credit funds can only buy credit instruments, equity funds can only purchase stocks, and long-only funds can never short sell, and so on.
These mandates assure investors, for example, that a fund that only invests in stocks will not purchase sovereign debt, and vice versa. It forces fund management companies and regulated entities (like banks and insurance companies) to be more responsible, taking on only specific types of risks rather than freely taking on any type of risk. After all, the risk of purchasing Nvidia stock is completely different from the risk of buying U.S. Treasury bonds or investing in money markets.
Due to the highly conservative nature of these mandates, much capital remains 'locked' in funds and entities, unable to enter emerging or opportunity industries, including cryptocurrencies, especially unable to directly access Bitcoin, even if the managers of these funds and related personnel wish to engage with Bitcoin in some way.
Strategy's founder and Executive Chairman Michael Saylor recognized the gap between these entities' desire for asset exposure and the actual risk they are willing to take and capitalized on it. Before the Bitcoin ETF emerged, $MSTR was one of the few reliable ways for these entities that could only buy stocks to gain exposure to Bitcoin. This means that Strategy's stock often trades at a premium, as demand for $MSTR exceeds the supply of its shares. Strategy continually exploits this premium, the difference between the value of $MSTR stock and the Bitcoin value per share, to acquire more Bitcoin while increasing the amount of Bitcoin held per share.
In the past two years, if you held $MSTR, your 'return' in Bitcoin terms has reached 134%, the highest among scalable Bitcoin investment returns in the market. Strategy's products directly meet the needs of entities that typically cannot access Bitcoin.
Image Source: Dio Casares
This is a typical case of 'Mandate Arbitrage'. Before the launch of the Bitcoin ETF, as mentioned before, many market participants could not purchase non-exchange-traded stocks or securities. However, as a publicly listed company, Strategy is allowed to hold and purchase Bitcoin ($BTC). Even with the recent launch of the Bitcoin ETF, it is completely wrong to believe that this strategy is no longer effective, as many funds are still prohibited from investing in ETFs, including most mutual funds that manage $25 trillion in assets.
A typical case study is Capital Group's Capital International Investors Fund (CII). This fund manages $509 billion in assets, but its investment scope is limited to equities and cannot directly hold commodities or ETFs (Bitcoin is mostly regarded as a commodity in the U.S.). Due to these restrictions, Strategy has become one of the few tools for CII to gain exposure to Bitcoin price volatility. In fact, CII has such high confidence in Strategy that it holds about 12% of Strategy's stock, making CII one of the largest non-insider shareholders.
Debt Terms: A constraint for other companies but a boost for Strategy
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In addition to a favorable supply situation, Strategy also has certain advantages regarding its debt. Not all debts are the same. Credit card debt, mortgages, margin loans—these are distinctly different types of debt.
Credit card debt is personal debt, depending on your salary and ability to repay, rather than asset-backed, and the annual interest rate is often over 20%. Margin loans are typically issued secured by existing assets (usually stocks), and if the total value of your assets approaches the amount you owe, your broker or bank may seize all your funds. Mortgages are considered the 'Holy Grail' of debt, as they allow you to purchase assets that typically appreciate (like houses) with a loan, while only paying the monthly interest (i.e., mortgage repayments).
Although this is not entirely without risk, especially in the current interest rate environment where interest could accumulate to unsustainable levels, it still remains the most flexible compared to other types of loans, as the interest rates are lower, and as long as monthly payments are made on time, assets will not be seized.
Generally speaking, mortgages are limited to housing. However, corporate loans can sometimes operate similarly to mortgages, where interest is paid over a specified period, and the principal (i.e., the initial loan amount) is only repaid at the end of that term. While loan terms can vary widely, as long as interest is paid on time, debt holders have no right to sell the company's assets.
Image Source: Dio Casares
This flexibility allows corporate borrowers like Strategy to more easily navigate market volatility, making $MSTR a way to 'harvest' volatility in the crypto market. However, this does not mean that risks are completely eliminated.
Conclusion
Strategy is not in the leverage business, but in the arbitrage business.
Although there is indeed a certain amount of debt currently held, the price of Bitcoin would need to drop to around $15,000 per coin within five years to pose a serious risk to Strategy. With the expansion of 'Treasury Companies' (referring to companies that replicate Strategy's Bitcoin accumulation strategy), including several companies like MetaPlanet and @DavidFBailey's Nakamoto, this will become another focal point.
However, if these Treasury Companies stop charging premiums to compete with each other and begin to take on excessive debt, the entire situation could change and lead to serious consequences.
This article is reprinted with permission from: (Deep Tide TechFlow)
Original Title: (You Don't Understand MSTR)
Original Author: Dio Casares
Translation: (Deep Tide TechFlow)
The article 'MicroStrategy's Bitcoin Reserve is Not Pure Leverage! Experts Analyze How the 'Arbitrage Business' Works' was first published in 'Crypto City'