Strategy (MSTR) - Bitcoin, Big Bets, Leverage & Market Convulsions

Strategy (formerly MicroStrategy; NASDAQ: MSTR) is recognized as the world’s first Bitcoin Treasury Company and the largest corporate holder of Bitcoin, with 499,096 BTC valued at $33.1 billion. Bitcoin's price has decreased by 20% over the past two months, and MSTR shares have fallen by 46% in the last four months, potentially due to concerns about the commoditization of its AI and business intelligence operations. This one-two punch scenario has raised market concerns about Strategy's ability to meet its long-term debt obligations and has led to speculation regarding potential forced liquidation of Bitcoin holdings.

Let us explain.

Strategy was perhaps best known for its business intelligence (BI) software, which was used onsite and could analyze information from different technology silos in a company. MicroStrategy (at the time) was successful and landed a number of household names such as Visa, Sony, Pfizer and others. There are four primary verticals the company targets for its BI and AI offerings: Financial Services, Healthcare, Retail and Government. However, the more embedded MicroStrategy became in its large clients’ sites, the more difficult it was to move swiftly to the cloud. Nonetheless, gradually, the company moved BI to the cloud and more recently introduced their own AI solution. But just when all its pistons were firing, investors started feeling AI fatigue from the massive capital investment into the sector by BIG Tech? (hyperscalers like Microsoft, Amazon and Google), to the tune of $100s of billions of dollars, and the introduction of a seemingly endless stream of smaller players. These factors, in sum, have contributed to investor unease.??

Enter Bitcoin.

Michael Saylor, who co-founded MicroStrategy in 1989, and, as many investors may have willfully forgotten, was one of the Dot-com Bubble’s biggest washouts, served as MSTR’s CEO until 2022, and now holds the position of Executive Chairman, directly overseeing the company's Bitcoin strategy. Saylor advocates that Bitcoin (BTC) is a universal store of value with a finite supply, that will outperform all other asset classes over time.?

Statistically, Saylor has been correct. The first BTC transaction was $0.003 in 2008, compared to Sunday morning’s pre-Trump announcement price of $85,521. If we understand correctly, Strategy has issued six separate convertible bond offerings over the last twelve months for $8.2 billion. Those proceeds were used to purchase BTC.? The “rub” is, two of those convertible bond tranches, $5 billion worth, were issued when BTC was trading at a higher price of $92.3k and $96.2k, respectively.? Thus, investors may be concerned over dilution to the common stock if the convertibles are redeemed at a lower BTC price compared to the BTC purchase price, and more shares need to be awarded to the bond holders to make up the valuation difference.? These two tranches both have 2028 put dates. However, we note if we divide the total purchase value of Strategy’s BTC holdings of $33.1 billion by 499,096 (coins) we calculate an average BTC purchase price close to $66k, below the current trading price (a positive).??

Bitcoin may very well play a significant role in the realm of cryptocurrency solutions, with few independent and globally accepted alternatives available. However, at the time of this writing, the Trump administration announced its intention to create a digital asset / crypto reserve, and conspicuously left out of the initial reserve’s asset types, including XRP, Solana, and Cardano, was, you guessed it, BTC - something our Managing Member has for years remained skeptical of. Yet, a little more than an hour later, the president did follow-up with a social media post saying, “obviously, BTC and ETH, as other valuable Cryptocurrencies, will be at the heart of the Reserve. I also love Bitcoin and Ethereum”.

As for Strategy’s core BI & AI business, it possesses substantial value due to its robust client base and extensive data portfolios, which are coveted by larger AI platforms. Transitioning from product licenses to subscription services is often challenging for technology companies, but Strategy is progressing well. MSTR is a unique entity that bridges two predominant technology waves—AI and cryptocurrency—and merits close attention, especially in light of its big bet on Bitcoin.

Written by Wayne Johnson

Contributing Author Adam T. Hark

Chart by Poe Shi