MicroStrategy Deep Dive Part 1

Why buy MSTR when you can just buy a Bitcoin ETF? A Bitcoin ETF is an exchange-traded fund that manages Bitcoin custody on behalf of the holders. A Bitcoin ETF should always trade in line with the spot price of Bitcoin. MicroStrategy isn’t redeemable for Bitcoin, so it's free to trade in whatever direction regardless of the price of Bitcoin. MicroStrategy is a business intelligence company, using its core business to generate cash flow to buy Bitcoin. As of September 2024, MicroStrategy’s core business intelligence operations have generated $467 million year-to-date. Yet remarkably, they have managed to buy 243,150 BTC at an average price of $16,300 per Bitcoin. How is this possible?

MicroStrategy has two primary ways of buying Bitcoin: either by issuing common stock or by issuing convertible notes. At face value, issuing more stock dilutes the shareholders since there are now more shares of the company; however, since the excess cash is being used to buy the hardest asset on earth—Bitcoin—it’s accretive to shareholders.

NAV, or net asset value, is typically used to value a company. But lately, MicroStrategy has been trading at a premium to Bitcoin, known as mNAV, or Multiple Net Assets to Value.

Here’s a simple example of how issuing common stock to buy Bitcoin is accretive to shareholder value:

Let’s assume MicroStrategy has 1,000 shares outstanding, and one share of MSTR is currently trading at $200. Let’s also assume that Bitcoin is $100,000 and that MicroStrategy holds only 1 BTC. If MicroStrategy issues another 100 shares at $200 and buys Bitcoin at $100,000, how much Bitcoin does each share increase by?

In our example, the market cap of MSTR is 1,000 shares * $200/share = $200,000. The amount of Bitcoin each share holds in this example is 1 BTC / 1,000 = 0.001 BTC per share. Since 0.001 BTC is worth $100, that means the current mNAV is 2x. In this example, MicroStrategy is trading at 2 times higher than the Bitcoin on their balance sheet.

If MicroStrategy issues another 100 shares at $200 and buys Bitcoin at $100,000, they would buy $20,000 worth of Bitcoin. The amount of Bitcoin per share is $20,000 / $100,000 = 0.2 BTC, meaning MicroStrategy bought 0.2 BTC at that price. The new Bitcoin per share is 0.2 / 100 = 0.002 BTC per share.

Now, the total amount of Bitcoin they own is 1.2 BTC / 1,100 shares = 0.0010909 BTC per share.

So, the total amount of Bitcoin increased per share will be 0.0010909 - 0.001 = 0.0000909 BTC per share. In dollar terms, each share will increase by $9.09 worth of Bitcoin.