Microstrategy and Bitcoin

Brendan

There is another thread on here about asset allocation in the US stock market bubble. While the US stock market has done incredible over the last 2 years (20% and 30% in the last 2 years) I have long wondered if crypto has actually taken some of the heat out of the market. The volatility of crypto is insane and there are people piling into crypto instead of stocks.

I don't fully understand why you would buy MSTR instead of bitcoin or an ETF instead. There is an additional level of risk that MSTR will default or go bust. I'd also be against being in something that is traded Monday to Friday when the underlying assets are traded 24/7. There is an additional level of risk there too. I suppose people don't want to have to worry about losing their passwords for their crypto or fear of getting hacked. From what I understand, there is a fair amount of work involved in setting up Coinbase accounts and they charge for it. Being hacked is a massive fear from crypto owners.

Crypto has made a lot of people very rich but there is a real risk that it could all blow up and it is all worth nothing.
 
Haven't worked out if the financial details make sense, but isn't the deal with MSTR that it's a leveraged bet on bitcoin? The BI business is a bit of a zombie but it's feeding in a regular stream of revenue, which they're leveraging up at decent rates to buy bitcoin. Listened to a couple of Saylor interviews and his opinion is along the lines of he's buying equivalent of Manhattan property in mid-1600's. When you consider that bitcoin itself (not necessarily other coins) will hit an issuance limit soon (think something like 19 out of max 21 million bitcoin already mined), then it starts to look like a hedge against ever-inflating fiat currencies and a store of capital, except that it's more mobile than a football club or a Manhattan property and that's a feature that is undoubtedly valuable to some.

Or it's a bubble that could go belly-up... I'm just starting to think that it's bounced back so often that it's time to take it seriously as an asset class, proportionally within a broader portfolio. Tbh, 35 trillion USD of debt looks more like a bubble that could come crashing down any moment as much as BTC does, not sure why we have more significantly more faith in one than the other at this stage.

An interesting thought I heard was the tulip-mania bubble in the 1600's burst, but Amsterdam is still the centre of the global flower industry 400+ years later. Maybe BTC is a bubble, almost certainly some of the nonsensical memecoins are a vacuous bubble, but I'm starting to think digital store of capital is possibly here to stay at this stage.
 
conor_mc said:
isn't the deal with MSTR that it's a leveraged bet on bitcoin?
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It is for the early shareholders in MSTR.

But the idiots buying the bonds are providing the leverage and will lose it all when BTC crashes.

Even if BTC increases in value, they could have done better by buying BTC directly.

It makes no sense.

Brendan
 
I could say a lot about this. Things have changed a lot in many ways since 2020 when they first put most of their treasury funds into BTC. Saylor has adapted as time has passed. He first realised people were using MSTR as a proxy for bitcoin for example:
Brendan Burgess said:
Even if BTC increases in value, they could have done better by buying BTC directly.
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I originally bought MSTR because I can't buy BTC directly in my PRSA. Using MSTR as a proxy lets me trade without taxable events.

Then Saylor realised that there was demand for btc exposure in general in ways vary from holding bitcoin directly. In his own words he's securitizing it in ways that change the risk/reward profile. The convertible bonds are perhaps the best example.

The bond holders are willing to buy his bond with basically a 0% coupon because really it's more like a call option. If bitcoin goes up a lot, they can get shares in return that give them a good chunk of that upside, if bitcoin doesn't go up, they can just get the original principle back. The upside for the bond holders is capped though, so anything beyond the cap is a gain to MSTR itself.

And next you'll wonder "But what if bitcoin goes down so much that MSTR can't pay back the principle?" well it's possible, but as I understand it the bondholders also tend to have hedging shorts on MSTR to soften this. But in any case, bitcoin has to go pretty low for MSTR to be really in trouble at this point, and even then Saylor will say that if you think bitcoin isn't going to continue succeeding you shouldn't be interested in MSTR - it's for people who want exposure to bitcoin succeeding.

I can do another comment about MSTR trading at higher than NAV - that's a whole other can of worms.

(Disclaimer: I own around 1k MSTR shares)
 
DazedInPontoon said:
if bitcoin doesn't go up, they can just get the original principle back.
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DazedInPontoon said:
"But what if bitcoin goes down so much that MSTR can't pay back the principle?" well it's possible, but as I understand it the bondholders also tend to have hedging shorts on MSTR to soften this. But in any case, bitcoin has to go pretty low for MSTR to be really in trouble at this point,
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If BTC crashes, MSTR crashes twice as fast.

It's not just a "possible" risk. It is paying twice what the market thinks BTC is worth.
 
DazedInPontoon said:
I originally bought MSTR because I can't buy BTC directly in my PRSA. Using MSTR as a proxy lets me trade without taxable events.
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There is very good reason why you are not allowed to invest your pension in BTC.

And you are ignoring these reasons, by investing in it via a proxy.

I was kilt telling people that they should not be borrowing money in their pension fund to buy properties during the boom. They just would not listen. Many of these have lost their entire pension fund.
 
Brendan Burgess said:
Surely that is the main point? Whatever about a 10% premium for the convenience, a premium >100% cannot be justified.
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If we consider what MSTR was originally doing it was just converting treasury funds to bitcoin and then the value of the bitcoins started eclipsing the *intrinsic* value of the company. On the face of it you'd then expect the company to trade something like an ETF where the share price reflects value of Bitcoin + underlying business (negligible) less debt. So it should trade roughly at NAV.

Now, what if they're also issuing convertible bonds and immediately using those proceeds to buy bitcoin. If you think bitcoin will significantly go up in value in the 5 year term of the bond and MSTR share price will too, to the extent that bond will convert to stock. At this point the bond holders get some of that gain, and MSTR shareholders get the rest.

What the outcome of this scenario means in practice is that the bitcoin MSTR owns per share has increased. This is where it diverges from an ETF, as the btc per share in an ETF will never increase, in fact I guess it decreases due to fees being deducted.

If you think MSTR will significantly increase the btc/share it is logical to pay more than NAV for the shares. The question then becomes what is the appropriate NAV premium, and how sustainable is this approach over time. And this is where I see many both smart and informed people with wildly different opinions, which is one of the things that make this (mis)adventure in financial engineering so interesting.

Another aspect is that when the stock is trading at a premium, Saylor can do an ATM issuance of stock to capture that premium and further increase the btc/share, and this may be where your ponzinomics alarm starts going off.
 
DazedInPontoon said:
ATM issuance of stock to capture that premium and further increase the btc/share, and this may be where your ponzinomics alarm starts going off.
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Never mind my alarm. How about your alarm? Has it gone off yet?

You got in early and must have made a lot of money. So get out now before it collapses. You can't get the timing right. It will probably go up further before it collapses.

You can get direct BTC exposure outside the pension fund.
 
Brendan Burgess said:
There is very good reason why you are not allowed to invest your pension in BTC.
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Perhaps there are.
Brendan Burgess said:
And you are ignoring these reasons, by investing in it via a proxy.
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I am, because I found an even better reason to do so - the market was grossly mis-pricing the odds of the FTX failure as an extinction event for BTC, and also mis-pricing MSTR to the extent that it traded at a *discount* to NAV when I bought this tranche for example:

1734103033191.png

The efficient market hypothesis continues to flounder.
Brendan Burgess said:
You got in early and must have made a lot of money. So get out now before it collapses. You can't get the timing right. It will probably go up further before it collapses.
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I have taken more than my original investment off the table, but that was not much.
Brendan Burgess said:
You can get direct BTC exposure outside the pension fund.
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Oh I already have more than enough exposure to self-custodied bitcoin as you can imagine from my history posting here, MSTR was just a way to
be able to trade the obvious peaks and valleys a bit with some fun-money while avoiding CGT, but it's a bit more than fun-money now, so...
Brendan Burgess said:
Never mind my alarm. How about your alarm? Has it gone off yet?
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Yes, because I've realised Saylor isn't likely to stop, he can't stop, so the outcome for MSTR is probably fairly binary in the long run, much higher or much lower, and increasing btc/share mathematically cannot go on forever because eventually you would have all the bitcoin, so one question is how long before the 'btc yield' as Saylor calls it reduces to the extent that the only NAV premium that makes sense is pretty close to 1 and what are the consequences for future convertible bonds if that happens, OR can he find other ways to monetise the absolutely enormous stack of btc they're accumulating.

Saylor is doing endless interviews and podcasts, but this one (and there's a less interesting 'part 2' video) might be the best one where he's explaining what they're doing: https://www.youtube.com/watch?v=eThjo9wYoF0

There's a whole other aspect to this too. I've been monitoring whether MSTR is becoming a meme-stock and it certainly seems to be. There is a youtube channel dedicated to posting *daily* just about the stock, with around 10k subscribers. There is the "irresponsibly long MSTR" Xitter group which has been growing like a weed. The Quant Bros youtube channel, less than 6 months old with again over 10k subscribers and loads of deep dives into aspects of MSTR. The reddit forum for MSTR stock has grown from nothing to 30k members this year.

MSTR has grown so big so quickly that it's getting everyone's attention now. About a month ago on November 20th:

MicroStrategy (MSTR) just knocked it out of the park, becoming the most traded stock in the United States today. With $18.6 billion in trading volume, it’s outshining Tesla (TSLA) and Nvidia (NVDA), two giants that practically own the trading floors.

In any case I see no short term existential risk for MSTR in isolation, since they don't even have any debt due until I think 2029. Earlier loans have already been paid back. So I have plenty of time to study this more. The price action of BTC is what I expect to mainly affect MSTR in the next year so I will base my next decisions on that primarily.

https://mstr-tracker.com/ has some good charts showing trends in MSTR related metrics.
 
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Brendan Burgess said:
People actually bought €3b in bonds in MicroStrategy
They pay no interest
You can convert these bonds into MicroStrategy stock if the stock rises by 70%

If you think that Bitcoin is going to rise in value, why would you not just buy Bitcoin directly?
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Sorry if I'm spamming too many comments, but I've another point to make about this. The fixed income market can only buy fixed income instruments. The capital allocated to that market cannot buy bitcoin directly, and it turns out it's a pretty massive market, and it seems to want some exposure to bitcoin.

The earlier bond holders that leitroll was worried about made out like bandits. I can't remember the figures off the top of my head but maybe something like 100% return, what ever it was it was a *lot* for a fixed income bond.
 
DazedInPontoon said:
The fixed income market can only buy fixed income instruments. The capital allocated to that market cannot buy bitcoin directly, and it turns out it's a pretty massive market, and it seems to want some exposure to bitcoin.
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Sorry, that makes no sense to me.

As an investor I can choose to invest in any combination of Fixed Income instruments ,equities or BTC.

I would be annoyed if I invested in Fixed Income and found that they had actually bought BTC.

If someone wants to invest in BTC, they will always be better off by buying BTC directly.
 
It is fixed income, MSTR borrowing against their software recurring revenues. What they do with it is kinda up to them, and the bond guys will get their pound of flesh regardless of the BTC price.

It’s the equity investors buying in today that are paying over the odds for BTC.
 
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MSTR was added to NASDAQ100 last week.
Products that track it will now need to buy MSTR for their portfolio and up she goes...

Invesco's QQQ for example.
 
Michael Saylor, CEO of MicroStrategy, recently made an interesting statement regarding Bitcoin. His company holds a significant amount of Bitcoin in its treasury, second only to BlackRock, the world’s most prominent asset manager, which has launched a Bitcoin exchange-traded fund (ETF).

According to Saylor, Bitcoin will grow at an average annual interest rate of 29% over the next 21 years, and by 2045, in his best-case scenario, Bitcoin will be worth $13 million.
www.youtube.com

Mike Saylor - 13m forecast

This video interview of Michael Saylor forecast the Bitcoin price at 13 million on 2045
www.youtube.com www.youtube.com


Now this could get interesting.
 
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