Mingdao: Transforming Illusions into Reality - Discussing MicroStrategy's Grand Strategy

Nov 25, 2024

Author | mingdao

Original link:

https://x.com/mindaoyang/status/1859637646072611254?t=bD5W0n5R-xD4GmFNJ3TOjQ&s=19

Let’s talk about MicroStrategy’s grand strategy today.

MicroStrategy has truly hatched the biggest golden egg in this crypto cycle, with paper profits exceeding $15 billion in less than two years.

It’s not just a triple arbitrage between stocks, bonds, and Bitcoin. The key lies in transforming MSTR stock into what is essentially traditional finance’s version of Bitcoin (recently, MSTR’s trading volume surpassed that of all Bitcoin ETFs combined). This is a masterpiece of “turning illusion into reality.”

Michael Saylor is neither a Wall Street blue blood nor an OG in the crypto world — he’s more like the underdog who knocked out seasoned pros with sheer ingenuity.

Here, I’ll briefly discuss the critical elements of his trade structure design:

The Stock/Bitcoin Relationship

There are two key flywheels at work here:

1. Stock Issuance to Buy Bitcoin: Issuing stock at a premium, using the proceeds to buy Bitcoin, which then pushes Bitcoin’s price higher, increases the company’s per-share net asset value and earnings. This is a linear leverage effect.

2. Financing to Buy Bitcoin: This accelerates profit growth and expands valuation multiples (P/B, P/E). The stock price transitions from linear to exponential leverage, causing market cap and stock price to grow faster than Bitcoin’s own price.

The Stock/Bond Relationship

As MSTR’s market cap rises, it enters more indexes, spurs the creation of more trading derivatives, and increases trading volume, which lowers both equity and bond financing costs. The hybrid nature of the structure — “convertible bonds or equity” — further reduces overall leverage risk.

MicroStrategy’s convertible bonds are an exquisitely designed instrument, full of Buffett-like wisdom.

These bonds are typically medium- to long-term (5 years, spanning at least one crypto cycle) and mostly zero-coupon, with no principal repayment during the term. This ensures there’s no partial repayment or interest payment pressure, mitigating the risk of debt default during Bitcoin price drops.

What’s more impressive is that, unlike traditional convertible bonds, the choice between conversion to stock or repayment in cash lies entirely with MicroStrategy, not the bondholders. This eliminates the risk of default due to an inability to repay at maturity (in the worst-case scenario, everything is converted into stock). This financing premium is extraordinary.

Although issuing bonds is generally seen as increasing leverage and risk premium, which could negatively affect stock prices, these convertible bonds are essentially a tool with full control in MicroStrategy’s hands. They are highly favorable to the stock price and shareholders.

The Bitcoin/Bond Relationship

The bonds are denominated in USD, which, from a Bitcoin-standard perspective, has purchasing power that trends toward zero over time. Meanwhile, Bitcoin’s purchasing power is potentially infinite. And with zero default risk, borrowing a “depreciating” asset (USD bonds) to buy an “appreciating” asset (Bitcoin) is, over the long term, a no-lose game.

In all my years in both crypto and traditional finance, I’ve never seen anyone master the triple arbitrage of stocks, bonds, and Bitcoin to such an extreme degree.

Some speculate whether MicroStrategy could end up as the stock-market equivalent of Luna. I believe the two are entirely incomparable in terms of risk structure, let alone any so-called death spiral.

As for when the flywheel might stop spinning or the music might end, the core question lies in how long the high premium of MSTR’s stock and net Bitcoin per share can be maintained.

If market trends defy expectations and the supply of Bitcoin derivatives increases, narrowing MicroStrategy’s stock/Bitcoin premium to below 1.2, such financing may no longer be sustainable. However, MicroStrategy would still emerge as a big winner.

MicroStrategy’s structurally sound and long-term winning approach is truly comparable to Buffett’s Berkshire Hathaway in the traditional financial world.

From the perspective of premium levels, it feels like MSTR reaching a $1 trillion valuation might actually be easier than Ethereum achieving the same milestone.

MicroStrategy now carries a 300% premium on Bitcoin. For secondary market participants, the risk is extremely high if they don’t understand the underlying variables. The continuously growing scale means the premium is more likely to shrink than expand. One key variable that can convert this premium from speculative to substantial is its sustained financing capability.

Ideally, everyone should adopt MicroStrategy’s approach. If 100 publicly traded companies were to follow its Bitcoin standard and collectively drive up the overall cost basis of Bitcoin holdings, they would effectively help reduce the speculative premium bubble.

Can the same strategy be applied to other assets like ETH, SOL, or meme coins? The viability of this strategy hinges on having enough counterparties willing to accept similar convertible bond terms. Their willingness stems from the expectation that even more counterparties are looking to gain exposure to various Bitcoin risk profiles.

For assets like ETH and SOL, beyond liquidity, additional layers of economic models, technology, and market risks make the strategy significantly more complex. However, the potential returns could be much higher. This might even result in a “degen version” of MicroStrategy.

I feel the whales are already gearing up for this.

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