The secrets behind the surge of Bitcoin shadow stock MSTR — ATM mechanism

MicroStrategy once became a typical victim of the internet bubble in 2000, with its stock price plummeting from $300 to $0.42. In 2020, the company's founder made a life-changing decision to transform the company into a cryptocurrency investment platform: All in on Bitcoin, claiming that Bitcoin is "the most valuable asset in the world."

With the resurgence of Bitcoin, MicroStrategy has returned to its peak, becoming a "Bitcoin shadow stock." This year, MicroStrategy's market value once soared to nearly $70 billion, with its stock price increasing sixfold in a year and nearly twentyfold over the past five years. The current stock price is reported at $328.

All along, MicroStrategy has continuously made significant purchases of Bitcoin through equity and debt financing, achieving "wealth" through the appreciation of Bitcoin, which is also the core reason for the surge in the company's stock price. The myth of MicroStrategy's wealth creation is inseparable from its unique equity financing method—ATM (At-the-market offerings).

ATM refers to issuing or increasing shares at market price, meaning that a listed company gradually sells newly issued shares or shares it already owns into the secondary trading market through designated brokers at the current market price.

Recently, MicroStrategy made a bold plan to ramp up financing to gather ammunition for the "Bitcoin buying frenzy." This plan is called the "21/21 Plan," which aims to raise $42 billion over the next three years through $21 billion in equity and $21 billion in bonds. At current prices, this means the company will purchase nearly 600,000 Bitcoins, accounting for about 3% of the total Bitcoin supply.

The $21 billion financing in this plan is being completed through the ATM equity financing method, and over $3.5 billion has already been raised. What are the characteristics of the ATM mechanism, and can it help MicroStrategy reach new heights again?

The ATM Mechanism Behind the Surge in Stock Price

MicroStrategy is the company with the largest Bitcoin holdings among publicly traded companies in the U.S., and its stock price is deeply tied to Bitcoin. Initially, it used cash flow to buy Bitcoin, and later raised funds through methods like ATM to leverage its purchases. As a result, MicroStrategy's stock price has even increased more sharply than Bitcoin.

MicroStrategy employs banks to sell stocks through a method known as "At-the-Market (ATM)" issuance, allowing the company to sell shares without submitting additional regulatory filings. This model provides all investors with equal opportunities to participate in stock purchases, without favoring institutional investors, aligning with the decentralized spirit of cryptocurrency.

The ATM model also allows for flexible fundraising, avoiding the significant discount issues that arise with traditional financing, making it particularly suitable for high-volatility stocks like MicroStrategy. Meanwhile, MicroStrategy's high trading volume makes large-scale stock sales feasible, with its stock market value having a 2.8 times premium relative to its Bitcoin holdings, creating arbitrage opportunities in financing.

MicroStrategy raises funds through the ATM model, leveraging the high volatility of the stock and Bitcoin markets to maximize its Bitcoin holdings while maintaining a high valuation of its stock. However, the success of this strategy is highly dependent on the continued rise in Bitcoin prices, so the potential risks brought by market volatility cannot be ignored.

The Financial Times analyzed the characteristics of the ATM equity financing mechanism, specifically:

• Flexibility of ATM Stock Issuance/Increase

  ATM stock issuance allows companies to gradually push new shares to the market rather than issuing a large volume all at once through traditional methods. This flexibility is particularly suitable for companies like MicroStrategy with volatile stock prices, as it enables them to raise funds flexibly during price peaks, avoiding the significant discount issues that arise from large-scale issuance.

• Alignment with the Decentralized Spirit of Cryptocurrency

  "Everyone can participate," the ATM issuance provides all investors with equal opportunities to purchase stocks, without favoring institutional investors. This model, which minimizes intermediary intervention, aligns with the decentralized philosophy advocated by cryptocurrency. Additionally, the use of ATM saves management time and effort that would otherwise be spent meeting with fund managers or participating in roadshows for fundraising.

• Applicable to Capital-Intensive Industries

  The ATM model is widely popular in capital-intensive industries, such as real estate investment trusts, life sciences, and energy sectors. MicroStrategy's use of ATM financing demonstrates the versatility of this tool.

• High Liquidity Supports ATM Operations

  MicroStrategy's stock has high liquidity, allowing it to sell large amounts of stock through the ATM method without putting excessive pressure on the stock price. The company can gradually sell shares based on market conditions, even selling large amounts when fund managers make offers, but management retains complete decision-making authority over this process

• ATM Provides Arbitrage Opportunities

  Due to the highly leveraged balance sheet, MicroStrategy's stock market value has a 2.8 times premium relative to the value of its held Bitcoin. The funds obtained from selling stocks through the ATM can be used to purchase more Bitcoin. This means that issuing more shares effectively increases the number of Bitcoins represented by each share, thereby creating an arbitrage effect.

• Risks Emerge When Bitcoin Prices Fall

  Although the current ATM operations benefit from the rise in Bitcoin, the article mentions two major potential risks: First, if Bitcoin prices fall, the premium of the stock relative to net asset value (Bitcoin) may shrink or even turn into a discount; second, continuous stock issuance may gradually erode the premium, leading to a decline in stock prices to the actual value of Bitcoin.