Why is MSTR in such a hurry to seize the premium?

MicroStrategy (MSTR) has significantly increased its Bitcoin holdings for the ninth consecutive week, and the company continues to buy more as its stock price declines. What is the mystery behind this "mysterious operation"?

On the 6th, Craig Coben, former head of global equity capital markets at Bank of America, pointed out in a column for the Financial Times that MSTR's strategy seems to have a structural problem: the company tends to buy more when Bitcoin prices are higher. This strategy poses significant risks. If Bitcoin prices fall, MSTR's net asset premium will shrink, stock prices will decline, and the $7.2 billion convertible bonds may face the risk of maturity repayment instead of conversion into new shares.

Currently, Bitcoin prices are around $100,000, but MicroStrategy's stock price has declined. Since the peak of $552 on November 21, the company's stock price has dropped by 40%.

Consequently, the company's net asset value premium has dropped from a high of 3.8 times to 1.9 times. It is worth noting that MSTR executives have also been selling a large amount of company stock, cashing out $570 million just in 2024.

At the same time, MSTR has accelerated its Bitcoin purchases. The company announced a $21 billion "par" stock issuance plan last month, originally designed for a three-year period, but two-thirds of it has already been completed in just two months. According to analysts at JP Morgan, MSTR accounted for an astonishing 28% of the capital inflow into the cryptocurrency market in 2024.

MSTR is selling company stock while making significant purchases of Bitcoin. Analysts believe that by selling stock at 2-3 times net asset value, MSTR is effectively buying Bitcoin at a substantial discount.

Racing Against Premium!

MicroStrategy seems to be conducting an emergency action to expand its financing scale. Last Friday, the company announced plans to issue up to $2 billion in perpetual preferred stock this quarter to purchase more Bitcoin. Just over a week ago, MSTR sought shareholder approval to increase the number of shares from 330 million to 10.33 billion, an increase of over 3000%.

Coben believes that this behavior pattern suggests that the company's leadership is aware that the current net asset premium may not be permanent, and they are racing against time to take advantage of this opportunism.

The behavior of MSTR's senior management has also drawn attention. Company chairman Michael Saylor publicly condemned diversification investments and even suggested that investors mortgage their properties to buy Bitcoin. However, other executives in the company have been selling a large amount of company stock, cashing out $570 million just in 2024.

Coben pointed out that MSTR tends to buy more when Bitcoin prices are higher. During the cryptocurrency winter of 2022-2023, when Bitcoin prices hovered around $10,000 to $20,000, MSTR's purchasing pace noticeably slowed. But as Bitcoin prices soared, the company's buying frenzy followed suit

As long as the price of Bitcoin continues to rise, the company's net asset premium can be maintained, and this premium is key to the entire strategy.

However, this strategy faces significant risks. If Bitcoin falls, the net asset premium will shrink, stock prices will decline, and the $7.2 billion convertible bonds may face the risk of maturity repayment instead of conversion into new shares. Considering that MSTR's software business is in a loss-making state and Bitcoin does not generate cash flow, this will pose severe challenges for the company.

Coben believes that MSTR's current large-scale stock sell-off is a way to avoid this risk:

By selling stocks at 2-3 times net asset value, MSTR is effectively buying Bitcoin at a significant discount.