MicroStrategy, a company that was once struggling in the business software industry, has undergone a remarkable transformation to become known as “the world’s first Bitcoin treasury company.” Over the past year, the company’s share price has skyrocketed by an impressive 450 percent, pushing its market cap to an astounding $80.9 billion. This incredible success is largely due to the surge of Bitcoin, with MicroStrategy now holding around 2 percent of all circulating cryptocurrency, valued at approximately $40 billion.
Founded in 1989, MicroStrategy initially focused on providing software solutions. However, its traditional revenue stream has been declining since 2014, leading to a low price-to-earnings ratio of -198.72 as of Dec. 26. But the company’s founder and chairman, Michael Saylor, came up with a revolutionary strategy to turn things around.
In August 2020, Saylor decided to use the company’s cash reserves to buy Bitcoin, along with issuing convertible bonds to raise more capital for Bitcoin investments. This innovative approach has allowed MicroStrategy to bridge the gap between traditional markets and the expanding crypto economy.
Essentially, MicroStrategy uses low-interest convertible bonds to acquire Bitcoin, driving up the cryptocurrency’s value through significant purchases. This boosts the company’s stock price and enables further borrowing at favorable rates. In the last five years, MicroStrategy has issued $7.27 billion in convertible bonds, including a recent $3 billion issuance at zero interest solely for acquiring Bitcoin.
The success of MicroStrategy’s Bitcoin-focused business model has been compared to a financial “perpetual motion machine” during bullish Bitcoin markets. Despite the company’s resurgence and impressive stock performance, concerns have been raised about the sustainability of its valuation, which currently surpasses the combined value of its Bitcoin holdings.
Saylor defends this valuation by emphasizing the leveraged exposure MicroStrategy provides investors to Bitcoin. However, critics warn of the company’s vulnerability to Bitcoin’s price volatility, especially during bear cycles. MicroStrategy’s stock price, closely tied to Bitcoin’s performance, could potentially drop below conversion prices in its convertible bonds, leading to the sale of Bitcoin to repay the loans.
As MicroStrategy navigates the ever-changing landscape of cryptocurrency investments, its future remains closely tied to the unpredictable fluctuations of the digital asset market. Saylor’s bold vision and strategic moves have positioned MicroStrategy as a trailblazer in the evolving intersection of traditional finance and cryptocurrency.
