189,150 BTC have been hoarded. Will MicroStrategy’s strategy fail?

Recently, Michael Saylor, founder of Microstrategy, tweeted that Microstrategy has once again increased its holdings by 14,620 BTC at an average price of about $42,110. As of December 26, 2023, Microstrategy has accumulated 189,150 BTC, with a total cost of about $5.9 billion and an average cost of about $31,168.

A simple calculation shows that based on the current BTC price of about 43k, MicroStrategy's floating profit is (43000-31168)/31168 = 38%, and the net profit is about more than 2.2 billion US dollars.

Jiaolian sorted out the historical data of all positions added by MicroStrategy from the beginning of August 2020 to the end of December 2023 as follows:

Since buying the first batch of BTC at the end of 2020, MicroStrategy has continued to increase its positions, going through bull and bear markets. It increased its positions at the peak of the bull market in 2021 and also experienced increasing its positions at the low point of the bear market at the end of 2022. It has climbed snow-capped mountains, walked through grasslands, and gone through hardships, and finally achieved initial success.

From a long-term perspective, the only effect of the bull market is to increase the cost of adding positions. So for long-term hoarders who continue to add positions, which one is a better journey, the broad plateau bull (the kind in 2021) or the pointy mountain bull (the kind in 2017)?

Interestingly, MicroStrategy's strategy of insisting on adding BTC positions regardless of bull or bear markets is also the only strategy suitable for most beginners. Refer to the article "From Investment Novice to Financial Freedom" on August 21, 2021 by Jiaolian.

It is particularly noteworthy that there are three basic points of this strategy: 1. Only add, not subtract, only buy, not sell. 2. Add positions in batches, not all in. 3. Only add BTC, not touch copycats and local dogs.

However, if we look deeper, MicroStrategy has actually done some "more professional" operations beyond Xiaobai.

First, lend your position.

Michael Saylor has said more than once that MicroStrategy will always hold their BTC positions and never sell them.

However, he also disclosed at the end of 2021 that MicroStrategy would lend its BTC to hedge funds.

In other words, MicroStrategy itself will never sell its coins, but the hedge funds that borrow BTC will definitely sell their coins, buying and selling back and forth to conduct arbitrage.

This is similar to the U.S. Treasury/Federal Reserve not selling the gold it holds, but lending it to investment banks like JP Morgan to "make a market" in the gold market.

Therefore, there is an additional layer of risk here, that is, the hedge fund that borrowed BTC messed up and lost the BTC. The hedge fund could not afford to pay and went bankrupt and liquidated. MicroStrategy could not get back the same amount of BTC in currency standard, and there would be a net loss of BTC.

In the long run, it is inevitable that hedge funds will lose money. This issue has been discussed in detail in the article "Why Your Investment Can't Outperform Bitcoin?" on January 1, 2021.

Some friends may put their digital assets on the financial management platform to "earn interest on deposits", which is similar to what MicroStrategy does. The risk point is naturally that the financial management platform loses money or even runs away.

Second, off-market leverage.

MicroStrategy has issued some long-term junk bonds in the past few years. Some of them are even interest-free, and the maturity date is as long as several years, most of which will mature around 2027-2028. Michael Saylor firmly believes that the price of BTC will be higher in a few years, which will enable MicroStrategy to repay the debt and pay the maturity income.

It is said that MicroStrategy currently holds a total of about $2.2 billion in debt, and its current BTC position is worth about $8.1 billion, which means that every $100 BTC corresponds to $27 in debt. This does not include MicroStrategy's other business assets. These debts are over-the-counter debts, and unless BTC falls below $11,000 on the maturity date, which is around 2027-2028, its BTC will be enough to cover these debts.

However, if MicroStrategy is forced to sell such a large amount of BTC to repay its debts, it could be a heavy blow to the market.

Many people who hoard coins with mortgages may be in a similar situation to OTC leverage like MicroStrategy. Of course, mortgages require monthly interest payments, and the interest rate is quite high, and it is floating (LPR), which is much worse than MicroStrategy's leverage. However, mortgages are almost the best leverage that ordinary workers can use. Regarding the discussion of this issue, Jiaolian once wrote an article "Saved 500,000, pay off the loan or hoard coins?" (2023.6.3 article).

Third, increase financing and positions.

Earlier this year, MicroStrategy issued additional shares (MSTR) in the U.S. secondary market, raised funds from the secondary market, and used the money of U.S. stockholders to increase their BTC holdings. Benefiting from the BTC market this year, MSTR's stock price rose strongly, allowing Michael Saylor to use the method of issuing additional shares to raise funds to increase his holdings.

Some people question whether MicroStrategy will be forced to sell BTC to save the market if BTC turns downward or MSTR decouples from BTC performance?

However, we should know the difference between stock financing and bond financing. Stocks do not promise to pay back, so even if MSTR falls to zero, MicroStrategy can ignore it. Of course, it is not clear whether Michael Saylor has done equity pledge financing. If so, then the stock price will fall to a certain level, which will cause the stock to explode, and the relevant pledged stocks will be liquidated by the broker. However, the broker cannot force MicroStrategy or Michael Saylor to sell BTC to replenish the margin.

Grayscale's continued negative premium in 2022 has set a certain example. Even at the worst time, GBTC's negative premium was as high as -50%, but Grayscale remained unmoved. At that time, many people FUDed the market, saying that Grayscale was going to explode. However, Grayscale is a trust and cannot be penetrated by any recourse. Those who don't understand can review the article "Gemini rips DCG for emotional deception, but Grayscale's 10 billion yuan holdings will not explode?" on the Teaching Chain on January 12, 2023

Grayscale Trust, with 630,000 BTC, is more than three times the size of MicroStrategy’s holdings.

From the perspective of legal firewall, Grayscale Trust is definitely more impregnable than MicroStrategy.

But in any case, even if, as some netizens said, the listing of the Bitcoin spot ETF robbed MSTR users and caused users to sell MSTR, it would only cause the US stock MSTR to fall, or even decouple from BTC, but it would not necessarily force MicroStrategy to sell its BTC holdings. Grayscale does not promise that GBTC will perform the same as BTC, and MicroStrategy will not promise that MSTR will always perform the same as BTC.

Here we need to remind some friends who hold MSTR as a Bitcoin ETF in the U.S. stock market to pay attention to the risk of negative premium due to decoupling.

This kind of gameplay essentially transfers the risk to external investors through the rules of the game. For example, Grayscale GBTC has a negative premium, and the risk is blocked by the trust firewall, which has exposed speculators such as Three Arrows Capital who speculated on GBTC premium arbitrage (refer to the stage play "Money Flower" written by Jiaolian on January 13, 2023). Then, MicroStrategy MSTR may also have a negative premium, and equity financing itself cuts off the return promise, isolating the risk in the US stock market, and US stock investors pay for it.

For ordinary people, there may not be such a commitment-free financing channel to obtain funds to increase BTC holdings.

Fourth, off-field income.

Don't forget that MicroStrategy itself has business, which means it has business income. It has a steady stream of off-market cash flow to support its position increase.

Of course, this is similar to most ordinary Bitcoin hoarders. The best strategy is to make money off-market and use the income earned off-market to increase BTC holdings.

In summary, we can see that MicroStrategy can use some financial tools that are not available to ordinary people, or are better than ordinary people, to help it better hoard BTC. Therefore, it is highly likely that MicroStrategy can outperform most ordinary hoarders. The excess returns they earn come from structural advantages.

After analysis, MicroStrategy may lose its BTC position due to its aggressive leverage strategy in the event of extreme black swan risks, causing it to underperform the coin standard. However, as long as BTC continues to outperform the traditional world, it will probably be difficult for MicroStrategy to go bankrupt.