Is Microstrategy a Pyramid Scheme?

Summary

The video delves into MicroStrategy’s use of convertible debt to fund Bitcoin purchases and its effects on shareholder value. The strategy appears to increase Bitcoin holdings per share, but this comes at the cost of shareholder dilution. While it may look like 'intelligent leverage,' the speaker argues that this model is unsustainable, relying on continual capital raises to maintain the value increase. The company must keep raising larger amounts of capital, creating a potential cycle of dependency. Ultimately, the strategy resembles Ponzi-like dynamics, as new investors support the value for earlier ones, making it risky in the long term.

Takeaways

• 😀 MicroStrategy issues convertible debt to acquire Bitcoin, which raises the stock price and dilutes existing shareholders.
• 😀 The strategy increases Bitcoin holdings but also results in a disproportionate increase in asset value per share compared to share count.
• 😀 The increase in asset value per share appears to be intelligent leverage, but it is dependent on continual capital raises.
• 😀 The core issue with the strategy is the mathematical imbalance: asset value increases without a corresponding proportional increase in share count.
• 😀 New investors bear the cost of increasing asset value per share, while those who entered earlier benefit the most.
• 😀 MicroStrategy's approach depends on raising larger and larger amounts of money, creating an unsustainable financial loop.
• 😀 The strategy requires constant capital injections to maintain the appearance of value growth, which raises concerns about its long-term viability.
• 😀 Despite seeming like intelligent leverage, the system relies on ever-larger capital raises and can be likened to a Ponzi scheme.
• 😀 The increase in Bitcoin holdings benefits shareholders early in the process, but later investors suffer dilution without equal gains.
• 😀 MicroStrategy's plan to raise $42 billion in capital over the next three years is meant to increase Bitcoin per share, but it can only work if more money is continuously raised.
• 😀 As long as the company continues to raise capital, it can maintain the illusion of increasing Bitcoin value per share, but this is at the expense of newer investors who are financing this growth.

Q & A

What is the core strategy that MicroStrategy is using in the script?

MicroStrategy is using convertible debt to purchase Bitcoin, which increases their Bitcoin holdings while diluting existing shareholders by issuing new shares to accommodate the conversion of the debt.

How does the use of convertible debt affect the company's share count?

The issuance of convertible debt leads to an increase in the total number of shares, as the debt is converted into equity. This dilutes existing shareholders, but the Bitcoin holdings increase faster than the share count, creating the illusion of rising asset value per share.

What is meant by 'intelligent leverage' in the context of this strategy?

'Intelligent leverage' refers to the notion that by increasing Bitcoin holdings through convertible debt, the company is improving the asset value per share, even though this value increase is primarily due to issuing more shares and raising more capital.

What mathematical flaw does the speaker highlight in MicroStrategy's approach?

The flaw is that although the asset value per share seems to increase, it relies on continually raising more money, which dilutes the value for existing shareholders. The increase in Bitcoin holdings is used to justify the higher asset value per share, but it depends on a never-ending cycle of new capital being raised.

How does the 'leveraging' process work in the simple example provided?

In the simple example, the company raises $10 in convertible debt, which converts to 20 shares. The debt allows the company to purchase more assets, increasing the total asset count. However, the share count increases only by 2%, leading to a 90% improvement in the asset value per share.

Why does the speaker question the sustainability of this strategy?

The speaker questions the sustainability because the strategy relies on continually raising larger amounts of money to maintain or increase the asset value per share. This can create a feedback loop that might become unsustainable if the company cannot raise the necessary capital or if market conditions change.

How does the concept of dilution play a role in this strategy?

Dilution occurs as the company issues new shares to accommodate the conversion of convertible debt into equity. This increases the total share count, but the asset value per share is propped up by the increasing Bitcoin holdings. However, the dilution means that each shareholder's proportion of ownership is reduced.

What does the speaker mean by saying the strategy is 'like a Ponzi scheme'?

The speaker compares the strategy to a Ponzi scheme because it relies on the influx of new money (via debt and equity issuance) to maintain or increase asset value. The new investors' money helps inflate the value for those who invested earlier, without necessarily adding new intrinsic value to the company.

What is the long-term concern about the company's ability to keep raising money?

The long-term concern is that raising large amounts of capital continuously may not be sustainable. As the company raises more money, it requires increasingly larger sums, and if it fails to do so, the strategy will break down, leading to potential losses for new investors and a collapse in the perceived asset value per share.

What role does the Bitcoin price play in MicroStrategy's strategy?

The price of Bitcoin plays a crucial role in the strategy because the company's Bitcoin holdings are central to its asset value. If the price of Bitcoin rises, the asset value per share increases, even though the real value per share is partly a result of the dilution caused by the new shares issued.