Strategy: The $84 Billion Bitcoin Flywheel

Summary MicroStrategy stock surged ~25% since coverage began, outperforming the S&P 500’s 9% return during the same period. The company holds 607,770 Bitcoins worth ~$71.96 billion, while trading at a ~$120.87 billion market capitalization. The $84 billion “42-42 Capital Plan” aims to raise $42B in equity and $42B in debt to scale. A prolonged crypto winter could cripple MSTR’s capital flywheel, with $12B in liabilities and no organic cash flow to cover them. Despite $12B in liabilities, including debt and preferred stock, MSTR uses leverage to boost Bitcoin-per-share growth. Investment Thesis Since initiating coverage on MicroStrategy ( MSTR ), the stock has surged ~25%, far outperforming the S&P 500’s 9% price return. The analysis was focused on the company’s Bitcoin ( BTC-USD ) accumulation strategy through capital markets that generated $15.7 billion in unrealized gains. Today, that thesis has evolved into a capital flywheel. Strategy’s main strength lies in its systematic use of equity and debt at a premium to its Bitcoin NAV that is allowing it to outperform even BTC itself. This strategy, combined with new fair-value accounting standards and $84 billion capital plans push MSTR as the most leveraged, and potentially rewarding, Bitcoin proxy. seekingalpha.com Strategy Targets Bitcoin Per Share Growth via $84 billion Capital Flywheel Strategy’s main strength is in its execution of a strategic capital-to-Bitcoin acquisition flywheel. This is far more than a simple corporate treasury strategy of buying and holding an asset. It is a self-reinforcing mechanism to leverage the public capital markets to systematically increase its Bitcoin holdings per share. The entire operation is predicated on the significant premium at which its stock trades relative to the net asset value (NAV) of its Bitcoin holdings. This premium expressed as the mNAV multiple (Market Capitalization divided by Bitcoin NAV) serves as the value-creation machine that separates Strategy from any passive investment vehicle, including the big spot Bitcoin ETFs. By converting its inflated equity value into additional Bitcoin, the company creates a narrative for investors that can continue to outpace the performance of Bitcoin itself. This flywheel is not a byproduct of its stock performance. It is an architected and transparently communicated corporate strategy that may continue to support its growth. strategy.com/charts The mechanics of this flywheel is in fundamental market arbitrage. Based on the provided data, Strategy’s market capitalization stands at ~ $120.87 billion with the market value of its 607,770 bitcoins is ~$71.96 billion as of writing. This yields an mNAV multiple of roughly 1.68x that means the market values the company at a 68% premium to its direct Bitcoin holdings. It is the gap that the company exploits. When Strategy executes an at-the-market (ATM) offering, as observed in its recent sale of 1.64 million shares for $736.4 million , it is effectively selling its equity at this 1.68x premium. For every dollar of underlying Bitcoin value that a new share represents, the company receives $1.68 in cash. This additional $0.68 refers to as a “BTC Gain,” that represents an immediate and direct value accretion for existing shareholders. The capital raised is then deployed to purchase more Bitcoin that is increasing the total size of the company’s treasury. Because the capital was raised at a premium, the number of Bitcoins acquired with that capital outpaces the dilutive effect on a value-for-value basis. In short, this is increasing the total amount of Bitcoin for each pre-existing share. strategy.com/history The Q1-FY25 earnings call reveals the $84 billion “42-42 Capital Plan” that is a framework to raise $42 billion in equity and $42 billion in fixed income . This plan solidifies the flywheel and signaling that the company intends to continue this process at scale. Michael Saylor’s aim on framing the company as a “crypto reactor” that runs on volatility and market premiums is a source for continued stock value growth. He argues that this active management and value creation is the reason why investors should pay a premium for MSTR over a passive spot ETF. An ETF merely provides exposure to Bitcoin’s price movement. However, Strategy holds the potential for leveraged outperformance through its treasury operations. This active, value-accretive process creates a loop and justifies the stock’s premium, and this premium enables the flywheel to continue operating, driving further accretive acquisitions and supporting the company’s long-term growth beyond the passive appreciation of its core asset. Strategy Q1 Strategy Bets $12 Billion on Leverage to Amplify Bitcoin Gains Strategy’s most vital problem is its aggressive and ever-expanding use of leverage that has become an indispensable component of its growth. From a traditional perspective, the company’s balance sheet exhibits numerous red flags that signal excessive risk and potential instability. The debt and preferred equity need the dependence on capital markets to service its obligations rather than organic cash flow. The multi-layered nature of its financing instruments create a weakness. However, Strategy has not sought to mitigate this weakness but has instead supported it. The company is transforming leverage from a source of risk into a tool for expanding returns for its stockholders. This calculated move, that the rewards of leveraged Bitcoin acquisition will outweigh the associated financial risks, is a main feature of its corporate strategy. The company carries a big burden of +$8 billion in debt, primarily structured as convertible notes,and an additional +4 billion in various series of preferred stock (including STRC). This is a total of ~$12 billion in liabilities that hold a claim on the company’s assets senior to that of its common stock. This figure represents a material ~17% of the company’s entire Bitcoin NAV with fixed annual obligations for interest and dividend payments. Critically, these obligations are not covered by the cash flow from its legacy software business but rather by the proceeds from “new stock issuances.” This practice of issuing new equity/debt to pay the interest on old debt is a hallmark of financial distress in conventional sense. Why? The company has a complete dependence on favorable capital market conditions to remain solvent. The capital is stacked with the stock and four distinct series of preferred stock (STRK, STRF, STRD, STRC), each with unique dividend yields and terms, in addition to multiple tranches of convertible bonds. This complex structure can make it hard to determine the actual risk profile of the company. strc-investor-presentation Despite these risks, Strategy has inverted this weakness into a growth driver. The company’s leadership, particularly Michael Saylor, has a clear framework for how this leverage generates superior returns (“BTC Torque”) on common stock. The logic is that raising capital through debt + preferred stock is more accretive than issuing equity when the mNAV premium is high. When Strategy issues $100 million of its 10% perpetual preferred stock (Strife), it acquires $100 million in cash to purchase Bitcoin without any immediate dilution to the common share count. The entire upside from these newly acquired Bitcoins accrues to the benefit of existing stockholders with the only cost being the 10% annual dividend. This single transaction generates a “BTC dollar gain” of the full $100 million and a BTC yield of 0.19%-points. Whereas, raising the same $100 million via common stock at a 2x mNAV would yield a gain of only $50 million and a yield of just 0.09%-points. Overall, this comparison points to how the weakness of leverage is wielded as a tool for amplification. This entire strategy is a high-stakes move on the forward price of Bitcoin. The company is borrowing capital at a fixed and known cost to invest in a highly volatile asset that it believes will appreciate at a far greater rate. The spread between Bitcoin’s return and the cost of servicing its complex capital structure represents the pure profit generated for MSTR stock. By deliberately taking on the risk associated with this leverage, Strategy aims to grow its Bitcoin-per-share holdings at an accelerated pace for outsized growth that would be impossible to hit through unlevered financing. Built for Bull Runs, Exposed to Crypto Winters MicroStrategy’s strategy is genius in upmarkets but vulnerable in downtrends. A key risk to the thesis is an extended crypto winter where Bitcoin prices stagnate or drop for several months. Bitcoin typically loses momentum 12-18 months after the halving cycles and usually goes on multi-quarter pullbacks. We’re about 15 months out from the prior halving cycle , and the risk of Bitcoin losing momentum, especially should macro tightening re-engage or retail sentiment die back, is rel. MSTR’s entire capital flywheel is based on maintaining a healthy market premium over its Bitcoin NAV. If Bitcoin prices drop sharply, or the mNAV multiple contracts due to broader crypto pessimism, the company’s ability to raise accretive capital (via equity or preferreds) dries up. Worse, its $12 billion in fixed liabilities (this is mostly debt and preferred dividends) don’t pause when crypto pauses. Unlike a passive ETF, MSTR has actively committed funding with little recurring operating cash flow to fund them. If the capital markets lose faith and Bitcoin drops, MSTR could face a squeeze both ways: falling asset values and tightening funding options. The flywheel that amplifies upside could just as easily magnify the downside. calebandbrown.com Takeaway MicroStrategy isn’t just buying Bitcoin, it’s engineering a capital flywheel that converts market premiums into accelerated Bitcoin-per-share growth. By strategically using leverage and equity at a premium, MSTR is outperforming Bitcoin itself. For investors seeking amplified BTC exposure, this is arguably the boldest, and potentially most rewarding, Bitcoin proxy on the market.

Source: Seeking Alpha