As a professional translator, I would translate the news article as follows:
MicroStrategy, with nearly $37 billion worth of Bitcoin, has a stock market valuation exceeding $100 billion. Does this high valuation give rise to a bubble? This article is sourced from an article written by Zack Guzman and compiled, translated, and authored by Baihua Blockchain.
(Previous context: Missing out on the skyrocketing stock of MicroStrategy, my reflections and upgraded understanding)
(Background supplement: MicroStrategy adds $5.4 billion in Bitcoin purchase: Bitcoin at $97,000 is not expensive!)
MicroStrategy founder Michael Saylor has become one of the most outspoken supporters of Bitcoin, boldly claiming, “There is no second-best choice.” Since 2020, Saylor has accumulated over $30 billion worth of Bitcoin through his publicly traded company, with a paper profit of over $14 billion, making MicroStrategy the company with the most Bitcoin holdings. This strategy has won praise from Bitcoin extremists while also raising questions from traditional investors.
However, as MicroStrategy continues to raise billions of dollars – planning to raise an additional $42 billion in financing over the next three years – to quadruple down on Bitcoin, concerns from the outside world are intensifying. Will this give birth to another massive bubble? What will happen to MicroStrategy’s bold moves if the price of Bitcoin falls?
1. Echoes of Ghostly Trades
MicroStrategy’s Bitcoin strategy shares similarities with one of the most notorious trades in the crypto field, the “GBTC Premium Trade.” During the peak of this arbitrage trade, investors obtained Bitcoin exposure through the Grayscale Bitcoin Trust (GBTC), as its trading price was higher than the value of underlying Bitcoin holdings. They borrowed against their GBTC shares and earned premium profits when the lock-up period ended.
This type of trade experienced a dramatic collapse in 2021 when GBTC premiums turned into discounts. Companies like Three Arrows Capital and BlockFi, which were excessively leveraged or associated with leveraged clients, went bankrupt. A subsequent wave of bankruptcies, including Genesis’ bankruptcy, highlighted the risks of financial strategies built on a fragile market imbalance.
Now, critics warn that MicroStrategy is treading on a similar tightrope. However, unlike exploiting GBTC premiums, MicroStrategy has paved a new path by leveraging its own stocks and bonds for Bitcoin trades – effectively transforming the company into a leveraged Bitcoin proxy.
2. The Magic of Convertible Bonds
MicroStrategy’s core strategy is to raise funds through the issuance of convertible bonds and stocks, which operates as follows:
MicroStrategy borrows at low interest rates (0%) and offers bonds to bondholders at extremely low or even zero interest rates.
In return, bondholders are offered the potential for stock appreciation, allowing them to convert the bonds into MicroStrategy’s stock when the stock price rises. This potential return has attracted numerous institutional investors, including Allianz, Germany’s largest insurance company.
The funds raised through the purchase of more Bitcoin are then used to buy even more Bitcoin, thereby driving up the stock price further.
This feedback loop has resulted in MicroStrategy’s stock performance, which has increased by nearly 500% in 2024 alone. This strategy has been so successful that bond investors are willing to lend tens of billions of dollars to the company at 0% interest rates, allured by the potential increase in stock value.
The proposition is compelling: why settle for low-interest returns on bonds when MicroStrategy offers the opportunity for investment to double or even quintuple? As Saylor stated in a recent investor conference call, bondholders are fleeing the “world of negative real returns” and chasing the potential gains from Bitcoin.
Currently, MicroStrategy’s strategy is working exceptionally well, as the rise in Bitcoin prices creates a virtuous cycle. But what will happen if the trend reverses?
MicroStrategy owns nearly 387,000 Bitcoins, valued at around $37 billion, but its stock market valuation exceeds $100 billion. This high valuation largely depends on the assumption of continuous Bitcoin price increases. If Bitcoin falls, the company’s stock price – essentially a leveraged bet on Bitcoin – could plummet significantly.
It is also worth noting that leveraged ETFs like MSTU and MSTX, which focus on MicroStrategy, further exacerbate speculation in the market based on MicroStrategy’s Bitcoin speculation.
All of these factors contribute to the massive Bitcoin purchases. According to Fundstrat’s research, MicroStrategy’s actual buying volume far surpasses the total inflow of all Bitcoin ETFs earlier this month. If the market begins to doubt MicroStrategy’s ability to achieve its $42 billion financing target, Bitcoin prices may fall, further jeopardizing MicroStrategy’s ability to raise funds.
Once this situation changes, the situation could quickly deteriorate. Similar scenarios have occurred during FTX’s financing attempt when it most needed funds, as well as during Terra’s $40 billion collapse.
Although Saylor’s firm belief in Bitcoin may inspire confidence, history has shown that markets cannot rise indefinitely. As evidenced by the $40 billion loss during Terra’s collapse in 2023, overconfidence in a “self-sustaining system” led to similar liquidation moments if Bitcoin prices fall, MicroStrategy’s stock price may face a similar fate.
3. Lessons from History
The warning story of the GBTC Premium Trade remains vivid. When market conditions change, this bubble bursts, exposing the vulnerability of leveraged strategies. While MicroStrategy’s approach avoids some of the pitfalls of GBTC trades – such as not relying on an inefficient fund structure – it still faces the core risk: if Bitcoin prices fall, leverage may amplify losses.
Saylor’s unwavering belief in Bitcoin may inspire confidence, but history shows that markets cannot rise indefinitely. Just as Terra’s $40 billion collapse occurred due to excessive confidence in a “self-sustaining system,” MicroStrategy’s stock price may also face a similar liquidation moment if Bitcoin prices fall.
However, for Bitcoin supporters who firmly believe that the U.S. government will soon follow suit and include Bitcoin in its strategic reserves, MicroStrategy’s bet has the potential to become one of the greatest investments in history – either becoming famous for its “brilliant move” or notorious for its “disastrous failure.”