The Microstrategy Advantage (MSTR)
The World’s Best Bitcoin Proxy
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If you’re new here, I share “buy-and-hold portfolios” that I believe can double in 3-5 years.
You can see my Investment Scorecard here:
The average 3-year return across 13 portfolios has been +96.96%.
$10,000 invested in each portfolio would have turned into roughly $256,000 today, outperforming the S&P500 Index by roughly $85,000.
Performance to date of our two current active portfolios:
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In the latest portfolio (Coffee Can 13: Eclectic), there have been 3 doubles so far, the most recent being our bet on the Microstrategy September $125 Strike 2025 Calls purchased about a month ago.
Let's talk about Microstrategy.
What is Microstrategy?
Here is how the company describes itself.
In 2020, the company, a Business Intelligence Company at the time, started betting on the price appreciation of Bitcoin. It has since used cash flow, debt, and equity financings to buy Bitcoin and sit on it. This has turned out well.
MSTR = Best Performing Stock?
As you know, I am a believer in Bitcoin, and I think it represents a wonderful investment opportunity. I first wrote about Bitcoin in February 2020 (Bitcoin, a Bet on the Power Law). It was part of Coffee Can 2 purchased for around $9600 per bitcoin.
That’s a 7X in 4.5 years.
Recently I heard Michael Saylor say that MSTR has been the market’s best performing stock over the past 5 years. I haven’t verified this, but that statement caught my attention.
It’s interesting to see that MSTR stock has performed better than Bitcoin.
Why has this happened?
Well, MSTR has engineered itself to become something for everyone:
You can go long the shares
The shares are optionable (we took advantage of this in Coffee Can 13)
You can buy debt or the convertible bonds
You can hedge your Bitcoin exposure
You can short the shares
This attracts a diverse capital base to the table.
Therefore, as a proxy to Bitcoin, Microstrategy is interesting.
Is it better than holding Bitcoin? Or the Bitcoin ETF?
Let’s review the benefits and disadvantages.
MSTR Benefits
First, some brokers, like Vanguard, don’t even allow you to buy Bitcoin. But you can buy MSTR. Similarly, some funds who may want exposure to bitcoin may not be allowed to buy it directly, but they are allowed to buy a stock like MSTR.
There is no management fee (compared to the ETF).
There are no trading costs (unlike owning bitcoin directly)
MSTR is optionable. Bitcoin and Bitcoin ETFs do not yet have this facility.
Most importantly, MSTR employs incredible financial engineering competence.
Microstrategy is constantly increasing the bitcoin it owns (financed with debt and equity). As a MSTR shareholder therefore, your ”bitcoin yield” continues to go up. That is, the number of bitcoin per share continues to go up.
How, you ask? Since MSTR trades at a premium to NAV, MSTR uses that to its advantage.
Today, MSTR’s NAV Premium is ~2.6x, this means MSTR can sell its shares at a premium, and buy Bitcoin with that money at the lower spot price, thereby increasing Bitcoin Yield.
This is the likely driver behind why MSTR share count has increased substantially since ~2020.
Bitcoin Yield is important to MSTR investors because it is analogous to wanting earnings per share or free cash flow per share to go up.
As a result, as long as NAV stays above par, and as long as Bitcoin prices continue to appreciate, this creates a pretty interesting flywheel.
MSTR Flywheel
Bitcoin Price expectations increase ⇒ premium to Nav increases ⇒ opportunity to increase leverage goes up ⇒ leads Microstrategy to buy more bitcoins ⇒ bitcoin yield increases ⇒ MSTR market cap increases
Like any form of leverage, this works in the opposite direction too (if the Nav Premium becomes a NAV discount):
Between June 2021 (Nav Premium ~2) and May 2022 (Nav Premium ~0.47), MSTR lost ~68% of its value while Bitcoin lost only ~33%.
MSTR Disadvantages
One: Microstrategy’s decision making relies solely on just 6 people, it’s board of directors:
Michael J. Saylor
Phong Le
Stephen X. Graham
Jarrod M. Patten
Carl J. Rickertsen
Leslie Rechan
I see this as a risk.
Boards change. People change. Their incentives change. Although there seems to be alignment with the board today, the future is unknown.
One of the features of Bitcoin is that the future of the technology is driven by a “self governing community”, not a small group of people sitting in a single room. Here is what I had to say about this when I first wrote about Bitcoin.
Two: One of the reasons that drew me to Bitcoin is the FICO-Score Effect: In my mind, it no longer matters whether Bitcoin is the best crypto-currency or whether it has the best underlying technology. That is certainly not the case when it comes to Microstrategy’s software business. This generates cash flows to service debt used to purchase Bitcoin. There is business risk here.
Three: Microstrategy has demonstrated exceptional financial engineering competence. But leverage is always a double edged sword. Where there is leverage, there is risk.
The Future of Microstrategy
In short: Microstrategy is betting that a single bitcoin will be worth 7 figures (USD) one day. As a result, the company plans to simply continue doing what it’s been doing for the past several years: use its cash flow, credit worthiness, and shares as currency to buy and hoard bitcoin.
In a recent interview with Bernstein, Micheal Saylor said this:
"If we end up with $20bn of converts, $20bn of preferred stock, $10bn of debt and say $50bn billion of some kind of debt instrument and structured instrument, we'll have $100-$150bn of bitcoin.”
"[Bitcoin] is the most valuable asset in the world. The endgame is to be the leading bitcoin bank, or merchant bank, or you could call it a bitcoin finance company."
By just doing this, Saylor believes Microsoft strategy will be worth $300-400 Billion.
"The company trades at a 50% premium, with more volatility and ARR, we can build a company that has a 100% premium to $150bn worth of bitcoin and build a $300-400bn company with the biggest options market, the biggest equity market."
"And then we basically start to chew into the fixed income markets, and we just keep buying more bitcoin. Bitcoin is going to go to millions a coin, you know, and then we create a trillion dollar company."
By comparison, MSTR 0.00%↑ is valued at just $48 Billion today.
Concluding Takeaways
Microstrategy has engineered itself into becoming an appealing Bitcoin Proxy.
It’s quite amazing how Microstrategy has pivoted into a Bitcoin holding company. And also that it has had the conviction to stick through the inherent volatility that comes with Bitcoin prices. (But you and I know that volatility is not risk).
If (when) there is another bear market in Bitcoin, it wouldn’t surprise me to see the Premium to Nav dissipate once again. At that time, if one still believes in the future of Bitcoin, buying MSTR stock may be a effective leveraged way to bet on Bitcoin, where one can benefit from a potential rebound in Bitcoin price, but also “multiple expansion” of the Premium to Nav. Not to mention, the leverage would require no margin and there would not be any time decay to worry about.
Microstrategy stock has become a very interesting asset.
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Disclosure:
Of course, none of the above is financial advice.