He rally most famous on Wall Street, Nvidia, pales next to MicroStrategy. This software company, best known for being the company with the most bitcoins in the world – the largest owner only behind the creator of the cryptocurrency himself, Satoshi Nakamoto – has recorded a rise of 654% in the last year. All thanks to a very risky strategy, which is supported by a dangerous financial scaffolding. It is a matter of bitcoin stopping rising for the problems to begin.
MicroStrategy is one of the companies that will enter the Nasdaq 100 next Monday, after experiencing an extraordinary rally this year. And his strategy is very simple: issues convertible bonds to finance its bitcoin purchases. Convertible bonds are bonds that, after a certain date, can be cashed in like a normal bond or can be converted into company shares, as buyers choose.
This operation makes sense in companies that are confident that their activity will go well in the medium term and their shares will rise significantly. After all, if investors opt to convert bonds into shares, the company wins twice: it does not pay interest on that debt, and, when converted into shares, it never has to pay it back again. The investor, for his part, is guaranteed At the very least, you will earn the interest promised by the bonds, and leave the door open to greater profits. if the shares rise above the conversion price offered by the company.
“The marginal buyers of MicroStrategy bonds are hedge funds that are looking for cheap volatility, basically, at discount prices, which opens up a wide range of arbitrage options,” says Manuel Villergas, digital assets analyst at Julius Baer. The strategist explains that the hedges to minimize MicroStrategy’s long-term risk are among the most expensive in the market currently and the lifeline is important, since it would not be the first time that the bears have been trapped in their position.
The key is that MicroStrategy is not using the money from these bonds to invest in R&D, expand its business or hire new employees, but rather to buy bitcoins. Bitcoins do not give interest or any type of profitability for having them, so Its only value is that its price continues to increase and that this investment drives the firm’s shares upward, who value their cryptocurrency holdings more than their business model.
The company’s latest results make it clear: in the last quarter, the firm earned 116 million dollars from its software business, with profits of 72 million. Tiny figures for a company whose market capitalization is around $100 billion: its PER, that is, the number of times the company’s profits are included in its market capitalization, is about 295 times. In other words, the firm would have to spend 295 years with current profits to justify its price.
For comparison, although its meteoric rise in the stock market ridicules that of Nvidia, the processor company has a much more reasonable PER of 51.7 times and profits of 19,309 million dollars in the same period, the last quarter. MicroStrategy’s metrics are surprising to say the least, since a small Ibex 35 firm like Acerinox (with a capitalization of just 2,380 million) multiplies its income by 10 and has very similar profits, but a capitalization 42 times lower.
Of course, what the crypto firm is listing is not its ‘real’ business, but rather its accumulated bitcoin holdings: 439,000 bitcoins, valued at about $45 billion. That is, 2.2% of the total bitcoins mined to date. That, and no other, is the business that its actions represent.
Thus, the firm’s strategy is very simple: sell convertible bonds, buy bitcoins with them, watch how the price of bitcoin rises, dragging its holdings upward, and watch how the debt disappears as investors convert their bonds into shares. In theory, the benefit is mutual: if everything goes well, investors will end up with very valuable shares and the company will have ‘free’ bitcoins, purchased with its own capital. And if it goes wrong, at least investors will be able to get their money back when those bonds mature, instead of watching their stocks devalue.
“It’s a self-reinforcing cycle, and a very dangerous one at the same time. The issuance of debt means more demand for bitcoin from MicroStrategy, which causes the price of the cryptocurrency to rise and so does the debt. If it were An exchange-traded fund (ETF) would trade at a premium three times higher than the net value of bitcoins. The rise is very good, but if all this begins to unravel, it would end with an excessive supply of bitcoin,” explains Villergas. “This factor is going to exacerbate the direction of the price of bitcoin,” he adds.
The danger, precisely, is that it occurs a negative spiral like the one Enron experienced. The American firm, which signed one of the largest bankruptcies in history, was financed through debt issues that put its shares as collateral. When its shares began to fall in price, its bonds matured and the company was forced to sell more shares to repay those loans, which plunged its share price and worsened a negative spiral that ended with its closure.
The difference, in this case, is that the company is going ahead: Enron used tricks to hide the reality of its accounts, while MicroStrategy’s plan is perfectly transparent. But that does not reduce the risk: if the price of bitcoin stagnates or turns around, and the firm’s shares fall below the targets of those bonds, the company will be forced to sell thousands of units of bitcoins, pressing down the price of the cryptocurrency, and worsening the situation of the following bonds. And the firm accumulates more than 4,000 million in debt. In other words, its financing model is a giant bet that the price of bitcoin will not stop growing.
Despite everything, analysts still give MicroStrategy potential in the stock market. Specifically, after the 654% rise, they believe that their shares can rebound 28.8% more in the next 12 months, to $557. These are market consensus valuations, but There are investors who are betting even bigger. For example, bond buyers who attended the November 20 issue are confident that the shares will reach $672.4 in December 2026, when their debt would be converted to equity. That is, they believe that the escalation is not going to stop.
Saylor, the ringleader of the plot
Michael Saylor is the ringleader of this plot. He is the founder of the company and its executive president, although he was also CEO for 33 years until 2022. He studied at the prestigious Massachusetts Institute of Technology (MIT) and specialized in strategic consulting that relied on computer simulations to make decisions. He offered his services to firms with Dow or Exxon.
Additionally, he has become a crypto ambassador. In fact, he participated in the last Microsoft Shareholders’ Meeting to convince investors to approve the purchase of bitcoins for the technology company’s portfolio. Although they voted no, he was inviting one of the largest companies in the world to follow in his footsteps.
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