How does MicroStrategy use Bitcoin to make money?

Michael Saylor, Executive Chairman of MicroStrategy, is one of the greatest Bitcoin communicators of all time. His lectures are legendary and clearly show why Bitcoin is a capital asset in a class of its own.

With MicroStrategy, Saylor has built a business out of Bitcoin securitization by combining a range of financial instruments in innovative ways. The debate rages over whether its model is sustainable and whether and how investors should buy shares of $MSTR. And more importantly, the question is whether MicroStrategy’s rise is good for Bitcoin.

There’s a lot to unpack, so let’s start with an overview of what MicroStrategy actually does.

This is how MicroStrategy works

MicroStrategy is a business intelligence company founded in the 1990s. The company survived the technology bubble of 2000 and continues to develop B2B analysis tools today.

In 2013, CEO Michael Saylor famously said that Bitcoin’s days were numbered. But around 2020, he became a Bitcoin supporter and began adding it to MicroStrategy’s treasury. He believed that including Bitcoin on the company’s balance sheet would give him an advantage in the long term, as Bitcoin tends to appreciate in value over longer periods of time and involves very low storage costs and general business risks.

Following the announcement of this new Treasury strategy, investors began purchasing shares of $MSTR as they wanted exposure to the Bitcoin price for various reasons but were unable or unwilling to purchase them directly. Before spot Bitcoin ETFs, $MSTR was the best way to gain price exposure through a traditional brokerage account or a tax-deferred account. Even today, many large investment firms and brokerage firms cannot trade spot Bitcoin ETFs or commodities like Bitcoin, but they can trade the shares of a public company.

As interest in MicroStrategy increased, its stock price rose, allowing the company to accumulate more Bitcoin.

The company introduced a new concept it calls “bitcoin yield,” which refers to the increase in bitcoin holdings per share over time. When you purchase a share of $MSTR, there will be a certain amount of Bitcoin in MicroStrategy’s vault that day, which represents the underlying net asset value, or NAV. As MicroStrategy accumulates more Bitcoin over time, the amount of Bitcoin per share increases. This is the Bitcoin yield – the amount of Future Bitcoin per share.

Some investors believe that Saylor has discovered a treasury management model that exploits flaws in the fiat system and combines them with Bitcoin’s predictability, resulting in significant upside potential for $MSTR.

The entire thesis is based on a few assumptions. First, Bitcoin will increase in value over a five-year period – an average of about 25% per year. Second, MicroStrategy will continue to be able to borrow money at lower annual interest rates than Bitcoin’s annual increase.

This combination of proven assumptions allows MicroStrategy to “sell” short-term Bitcoin price volatility to options traders. At the same time, the ability to borrow money at 0% APR makes it possible to spend “free money” to accumulate more Bitcoin.

Because many of these 0% convertible bonds have a 5-year maturity, MicroStrategy will likely be able to use higher-priced Bitcoin holdings as collateral to roll over to new debt. If Bitcoin doesn’t appreciate quickly enough, bondholders still have the option to purchase $MSTR at a premium, supporting the share price.

The power and danger of the MicroStrategy model

At its core, the strategy leverages outdated capital markets where cheap debt and premium equity valuations still dominate. By converting inflationary fiat capital into deflationary digital capital, MicroStrategy’s treasury operations look like the early stages of a speculative attack on the US dollar.

A unique focus

MicroStrategy’s ability to sell equity volatility through instruments like convertible notes is only possible because the company is clearly focused on Bitcoin accumulation.

If MicroStrategy’s management team were less clear about its plans, investors would wonder whether they might one day decide to liquidate some or all of their Bitcoins. MicroStrategy’s ability to continue issuing shares without diluting current owners relies on continuous Bitcoin accumulation, which reliably increases its net asset value over time.

That’s why Saylor constantly appears in the media to communicate and reinforce his long-term plan to accumulate Bitcoin at any cost and keep it forever.

The genius and risks of MicroStrategy’s approach

The genius of MicroStrategy’s strategy lies in its ability to exploit the inefficiencies of legacy capital markets to gain leverage against fiat currencies. Simply put, it is borrowing cheap, inflated capital to purchase a scarce, appreciating asset. Of course, this strategy assumes that Bitcoin’s long-term success is inevitable. If Bitcoin fails, MicroStrategy’s entire thesis would collapse.

However, as Bitcoin acceptance increases, this probability decreases. Bitcoin’s increasing financialization and growing user base, now in the hundreds of millions, make complete failure extremely unlikely. For Bitcoin to fail, hundreds of millions of people would have to wake up and decide that they are all okay with abandoning it.

Why MicroStrategy is important

MicroStrategy’s aggressive approach doesn’t just benefit shareholders – it actively accelerates Bitcoin adoption. By reducing the available Bitcoin supply and introducing a model for other companies, MicroStrategy is helping Bitcoin be recognized as a front-runner asset.

$MSTR also catalyzes broader awareness of Bitcoin’s unique properties as a store of value, pushing the discussion further into the mainstream. Several companies are pursuing a Bitcoin treasury strategy.

Metaplanet, together with Semler Scientific, is pursuing a similar scheme. This week, Rumble, a video platform focused on free expression, announced that it is entering the game, potentially investing up to $20 million of its hoard in Bitcoin.

Bitcoin may still find a place on the corporate balance sheets of thousands of companies. If this were to happen, MicroStrategy would go down in history as a unique pioneer in finance.