MicroStrategy's "Infinite Money Glitch" Explained

Summary

MicroStrategy, a software company, has become a major player in the market, largely due to its massive Bitcoin holdings. The company's stock has soared by over 400% in 2024, driven by the rising price of Bitcoin. MicroStrategy’s strategy, led by founder Michael Saylor, revolves around leveraging equity issuance and convertible bonds to acquire more Bitcoin, even at a premium to its net asset value. Despite the apparent overvaluation, the company has generated substantial profits from this volatile strategy, which some view as an 'infinite money glitch'. However, the risks of this high-leverage approach raise concerns about the sustainability of such gains.

Takeaways

• 😀 MicroStrategy's stock has surged over 400% in 2024, driven by strong gains in Bitcoin's price, making it one of the best performers in the market.
• 📈 MicroStrategy's market capitalization reached over $80 billion, far surpassing the value of its Bitcoin holdings, with a NAV premium reaching up to 300%.
• 💰 Despite seeming overvaluation, many investors remain bullish on MicroStrategy, seeing it as a proxy for Bitcoin exposure, while its founder calls it a 'Bitcoin bank'.
• 🔒 In 2020, MicroStrategy shifted from a software business to a Bitcoin-focused treasury strategy, using cash reserves to buy Bitcoin as a hedge against inflation.
• 📉 MicroStrategy's stock price fell 80% during a Bitcoin bear market in 2020, but the recovery of Bitcoin prices helped prevent bankruptcy.
• 💻 As of November 2024, MicroStrategy owns 386,000 Bitcoins, approximately 1.8% of all Bitcoin ever mined, with a total cost of $17.5 billion and an average price of $45,000 per Bitcoin.
• 💳 MicroStrategy raises capital via convertible bonds, traditional bonds, and equity issuance, using these funds exclusively to acquire more Bitcoin.
• 📊 The company’s NAV premium increased significantly in 2024 as the stock price outpaced Bitcoin’s growth, reaching a NAV premium of 2.4 times as of November 2024.
• 💡 MicroStrategy is often seen as utilizing an 'infinite money glitch' by selling shares or issuing convertible bonds to buy Bitcoin, but this strategy is highly dependent on Bitcoin’s price continuing to rise.
• 🤔 Michael Saylor, MicroStrategy's founder, justifies the premium on MicroStrategy's stock by arguing that the company profits from Bitcoin’s volatility and its ability to recycle capital into more Bitcoin.
• 🚨 There is a risk that if Bitcoin prices fall, MicroStrategy may struggle to pay back its debts, making its strategy of borrowing to buy Bitcoin a potentially dangerous investment.

Q & A

What is MicroStrategy, and why is it in the spotlight in 2024?

MicroStrategy is a software company that gained significant attention in 2024 due to its large Bitcoin holdings. Its stock price surged by over 400% year-to-date, largely driven by the performance of Bitcoin, as investors buy MicroStrategy stock to gain exposure to Bitcoin.

How did MicroStrategy’s stock price become so highly valued?

MicroStrategy's stock price soared as a result of the company's Bitcoin holdings, which acted as a proxy for investing in Bitcoin itself. The company issued bonds, convertible bonds, and equity to raise capital, which was used to purchase more Bitcoin, further driving up the stock price.

What is the concept of 'premium to net asset value' (NAV) in the context of MicroStrategy?

The 'premium to net asset value' (NAV) refers to the difference between MicroStrategy’s market capitalization and the market value of the Bitcoin it holds. In 2024, this premium increased to as high as 3 times the NAV, meaning investors were paying significantly more for the stock than the value of the Bitcoin it held.

What risks are associated with MicroStrategy’s strategy of using debt to buy Bitcoin?

The strategy is risky because if the price of Bitcoin were to fall significantly, MicroStrategy could face difficulties in repaying its debts. In 2020, the company’s stock price dropped by over 80% due to Bitcoin’s market downturn, raising concerns about its ability to manage its growing debt.

How much Bitcoin does MicroStrategy currently hold, and what is its acquisition cost?

As of November 2024, MicroStrategy owns 386,000 Bitcoins, which represents about 1.8% of all Bitcoins ever mined. The company spent around $17.5 billion to acquire these Bitcoins, with an average cost of $45,000 per coin.

What are convertible bonds, and how have they played a role in MicroStrategy's strategy?

Convertible bonds are debt instruments that can be converted into shares of stock at the bondholder’s discretion. MicroStrategy issued billions of dollars in convertible bonds to raise capital, which was then used to buy Bitcoin. These bonds are likely to be converted into stock, increasing the number of shares outstanding and further diluting the value per share.

What is the potential impact of convertible bond conversions on MicroStrategy's stock?

If the price of MicroStrategy’s stock remains high, the convertible bonds will likely be converted into shares, increasing the number of shares outstanding. This will dilute the value of each existing share, but the company continues to benefit from the increasing value of Bitcoin.

What is the 'infinite money glitch' concept being discussed in relation to MicroStrategy?

The 'infinite money glitch' refers to the idea that MicroStrategy can continuously issue shares and convertible bonds, use the proceeds to buy more Bitcoin, and repeat the process, causing its stock price to rise further. This creates a self-perpetuating cycle where the increasing stock price enables more Bitcoin purchases.

How does Michael Saylor justify the premium MicroStrategy stock trades at?

Michael Saylor justifies the premium by arguing that MicroStrategy’s Bitcoin holdings increase the number of Bitcoins per share, which adds value to the stock. He also mentions that the company generates profits by 'monetizing volatility' through various strategies, such as issuing convertible bonds and equity to fund Bitcoin purchases.

What are the potential downsides of MicroStrategy’s business model in the event of a Bitcoin market downturn?

If the price of Bitcoin falls significantly, MicroStrategy could face financial challenges, as it would still need to repay its debts, including the principal on convertible bonds. Additionally, the company’s strategy heavily relies on the ongoing appreciation of Bitcoin, and any significant decline could lead to substantial losses.