MicroStrategy’s $73 billion market cap, largely driven by its bitcoin holdings, has sparked confusion and skepticism. However, experts argue that the premium is justified due to the company’s ability to generate significant returns through its unique business model.
Strategy (NASDAQ: MSTR), a SaaS-based business intelligence company formerly known as MicroStrategy, is currently trading at a $73 billion market cap, ~1.6x the value of its underlying bitcoin holdings. This premium has been met with confusion and skepticism, but we believe there are three reasons why it is justified.
Reason 1: Investors Present-Value Future Carry
Strategy takes on leverage by issuing equity and debt to invest in bitcoin, earning the difference between the return on bitcoin and its cost of capital (ie. ‘carry’). This carry is not just earned this year, but also in future years, and investors present-value this expected future carry when determining MSTR‘s market cap.
Reason 2: Monetizing Intelligent Capital Markets Issuance
Strategy monetizes intelligent capital markets issuance for the benefit of shareholders. It accretes value via convertible debt issuance, where it earns returns from the bond market and also benefits from the volatility inherent in its stock as convertible bond arbitrageurs make more money with a more volatile underlying asset.
Reason 3: Advantage of Bitcoin‘s Secular Expansion
The entire construct takes advantage of bitcoin and crypto’s nascency, the fact that cryptocurrencies are in secular expansion, and that bitcoin‘s price has tended to rise over time. This is evident in MSTR‘s ability to increase its BTC per share at a 69% annual rate since it began investing in bitcoin in August 2020.
Bitcoin is a decentralized digital currency that allows for peer-to-peer transactions without the need for intermediaries.
Launched in 2009 by an anonymous individual or group using the pseudonym Satoshi Nakamoto, bitcoin uses cryptography to secure and verify transactions.
The total supply of bitcoin is capped at 21 million, making it a scarce asset.
Bitcoin's value has fluctuated significantly over the years, with prices reaching as high as $64,000 in April 2021.
A Thought Experiment
If I had a magic bank account with $100 USD in it that paid you a 69% interest rate, how much money would you pay me for that? While the answer may vary from person to person, it is likely much more than $100, meaning that the bank account would trade at a premium to its underlying USD (i.e. NAV). This is exactly what is happening with MSTR.
Risks and Considerations
While there are risks associated with investing in MSTR, such as basis risk to the price of BTC and the stock’s tendency to move more than bitcoin in both directions, the premium exists because investors believe MSTR will continue to increase its bitcoin per share in the future.
- coindesk.com | In Defense of the ‘MSTR Premium’
