MicroStrategy: Bitcoin Gamble and Corporate Financing Revolution

MicroStrategy is not only a huge adventure in Bitcoin, but also a model of corporate financing revolution.

Billionaire Michael Saylor's publicly listed company MicroStrategy cleverly straddles two realms: one constrained by traditional financial rules, where the company issues debt and equity bought and sold by hedge funds, traders, and other institutions; the other dominated by loyal, steadfast believers who believe that Bitcoin will bring a better world.

The core driving force behind MicroStrategy's success is embracing and nurturing volatility, which is a significant characteristic of its core asset, Bitcoin. Volatility is the nemesis of traditional investors, but it is a dear friend to options traders, hedge funds, and retail speculators, making MicroStrategy one of the most active stocks on the market. Although its annual revenue is relatively modest at $496 million, its daily trading volume can rival that of tech giants.

Saylor understands that institutional investors, who measure performance on a quarterly basis, will continue to buy his high-risk stocks in order to enhance portfolio returns. MicroStrategy's issuance of a large number of convertible bonds not only did not dilute the company's stock, but also created a bullish effect, as these bonds represent future demand for stocks with increasingly higher prices. This cycle is self-sustaining: issuing low-cost or no-cost debt and equity, driving up Bitcoin prices through large purchases, and causing significant volatility in MicroStrategy's stock. Round and round.

In August last year, Saylor invented a brand new financial metric called Bitcoin Yield or BTC Yield. This "yield" is not related to any income generated, but simply measures the percentage change over time of the ratio of Bitcoin held by the company to the company's fully diluted shares.

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

What is preventing other companies from copying Saylor's Bitcoin financial engineering? Nothing at all. Many companies have already begun to follow suit. According to statistics, about 90 listed companies, including well-known enterprises like Tesla and Block, have incorporated Bitcoin into their balance sheets.

Imitators are providing ammunition for MicroStrategy's opponents. However, some analysts believe that, like Netflix in the streaming space, MicroStrategy's first-mover advantage and scale set it apart. Whether in the spot market or the options market, they are the most liquid sources for trading Bitcoin-related risks.

While many companies are unlikely to fully turn to Bitcoin like some extreme cases, the number of Bitcoin holders will certainly increase. In January of this year, the Financial Accounting Standards Board in the United States modified a rule that previously only allowed companies to account for the decline in the value of cryptocurrencies as losses in quarterly reports. Now, holding cryptocurrencies will be valued at market value, allowing for profit and loss hedging at the same time. For MicroStrategy, the company that lobbied for the rule change, this could mean profits for multiple quarters in the future and the potential to be included in the S&P 500 index.

In Saylor's view, Bitcoin is the best choice to cope with the devaluation of the US dollar. He believes that the dollar will lose 99.9% of its value in 100 years, and that "money in the bank is not money".

The irony of Saylor's career is that he invented 20 things and tried to make them successful, but none truly changed the world. In contrast, Satoshi Nakamoto created something, offered it to the world, and then disappeared. Now, MicroStrategy is merely carrying on that spirit. This also reminds us that lightning can indeed strike the same place twice, especially when there is a savvy and opportunistic manager at the helm.