MicroStrategy’s meteoric rise is a testament to the power of innovation and risk-taking in the business world, but its success may not be sustainable in the long term.
The Bitcoin Effect: How a Failing Software Company Became a Cryptocurrency Darling
MicroStrategy, a business software firm, has undergone a remarkable transformation in the past year. The company’s share price has surged 450 percent, catapulting its market cap to an astonishing $80.9 billion. This meteoric rise is largely attributed to the company’s massive Bitcoin holdings, which have become the driving force behind its success.
A New Business Model
Founded in 1989, MicroStrategy was once a thriving software solutions company. However, since 2014, its core business has been steadily declining, resulting in an unusually low price-to-earnings ratio of -198.72 (as of Dec. 26). In response to this downturn, founder and chairman Michael Saylor devised a plan to save the company by leveraging its cash reserves to buy Bitcoin.
A Strategic Move
In August 2020, Saylor began using MicroStrategy’s cash reserve to acquire Bitcoin. He also initiated the issuance of convertible bonds – bonds that can be converted into shares at a set price at a later time – to raise additional funds for buying Bitcoin. This innovative approach has enabled MicroStrategy to securitize its Bitcoin holdings and tap into the capital markets.
How It Works
MicroStrategy’s business model relies on borrowing money through convertible bonds at low interest rates to buy Bitcoin. As the company is a significant buyer, its purchases push up the price of Bitcoin, thereby increasing the value of its holdings and stock price. This cycle allows MicroStrategy to borrow more money at low interest rates, further fueling its growth.
Citrini Research described MicroStrategy’s business model as “the financial equivalent of a perpetual motion machine” in a November 2021 blog post. Indeed, the company’s success has been remarkable, with its stock price surging since Donald Trump‘s election win, which sparked hopes for crypto-friendly policies under the incoming administration.
Risks and Uncertainties
While MicroStrategy’s Bitcoin bets have yielded impressive returns, its stock price may not be sustainable in the long term. The company’s market cap is currently twice the value of its Bitcoin holdings, raising concerns about the risks associated with a potential bear cycle. As Sherwood News’ financial writer Jack Raines pointed out, “leverage works both ways,” and MicroStrategy is not shielded from the risks of a dramatic drop in Bitcoin prices.
A High-Stakes Game
MicroStrategy’s success has been built on its ability to navigate the volatile world of cryptocurrency markets. However, as the company continues to bet big on Bitcoin, it must be prepared for the potential consequences of a downturn. As Raines warned, “the conversion prices for its collective $4.2 billion due between 2027 and 2032 range from $143.25 to $232.72,” highlighting the risks associated with convertible bonds.
In conclusion, MicroStrategy’s transformation into a cryptocurrency darling is a testament to the power of innovation and risk-taking in the business world. However, as the company continues to navigate the high-stakes game of Bitcoin markets, it must remain vigilant and prepared for the potential uncertainties that lie ahead.
