Bitcoin and Capital Manipulation: MicroStrategy's Asset Gaming Strategy

1. Introduction

A corporate software company originally focused on business intelligence solutions has significantly shifted its focus to Bitcoin investment since 2020. The company raised funds to purchase Bitcoin by issuing stocks and convertible bonds, becoming a focal point in the U.S. stock market. In February of this year, the company officially changed its name, and at that time, it held 471,107 Bitcoins on its balance sheet, accounting for about 2% of the total global Bitcoin supply. By February 21, the company had amassed nearly 500,000 Bitcoins, worth over $40 billion.

This company essentially transforms the stock market into a Bitcoin ATM through capital structure design - raising funds to increase Bitcoin holdings by issuing new shares/convertible bonds, and then using Bitcoin holdings to support stock price valuation, creating a capital closed loop deeply linked with crypto assets. With this unique high premium financing mechanism in the US stock market, the company not only stands out among Bitcoin concept stocks but also has perfected a "alchemy" recognized by the US stock market through equity issuance and coin price manipulation.

2. The Driving Forces Behind Stock Price Speculation

The company's financing method is very clever, mainly completing fundraising through a combination of stocks and bonds. In the initial stage, it relied on issuing bonds and its own cash reserves, along with some common stock and convertible bonds. The downside of issuing ordinary bonds is that interest must be paid, but at that time its cash flow was good, with the software business bringing in tens of millions of dollars in positive cash flow, enough to cover the interest on these debts.

In this cycle, the company has made extensive use of a stock issuance mechanism called ATM(At-the-market), directly selling stocks in the secondary market. The strategy combines stock issuance and bond issuance to play the "alchemy" of the capital market. When the leverage ratio is low, it quickly raises funds by issuing more stocks to buy Bitcoin, thereby increasing leverage, and enhances its valuation premium when Bitcoin rises. During the bull market, its premium once reached as high as 300%.

As time passed, the market gradually became aware of the company's large-scale stock sell-off, leading to a decline in stock prices and a subsequent reduction in premiums. At the same time, the leverage ratio decreased, and the company gradually shifted to a bond-based financing method. This change slowed down the company's pace of buying Bitcoin, resulting in a weakening demand for Bitcoin in the market.

Therefore, the company played a game of "premium hedging." By selling stocks at a high premium to raise funds to purchase Bitcoin, and when the premium fell, it turned to issuing bonds. This model provided the company with enough capital to operate the buying of Bitcoin, although the market gradually became less enthusiastic about its stocks after realizing these operations.

Overall, the company uses different financing strategies in different cycles, taking advantage of the high premium in the stock market while steadily leveraging through bonds. For Bitcoin, the company's slower pace may indicate a weakening of the upward momentum for Bitcoin in the short term; for the company, this diversified financing approach allows it to respond flexibly to different market environments.

3. "Holding Bitcoin, Never Selling": A Holy War for Crypto Assets

The founder of the company has had a profound impact on the entire Bitcoin industry through this wave of Bitcoin promotion in the past. By continuously appearing in public, giving interviews, and delivering speeches, he not only brought Bitcoin into the spotlight but also attracted a large number of institutional investors into the market. It can be said that the company and ETFs are currently the two main buyers in the Bitcoin market, but in comparison, the company's operations are more noteworthy, as it only buys and does not sell, while ETFs occasionally sell some off.

What is most impressive in terms of marketing is that the founder once said he has made a will, intending to destroy the Bitcoin private keys he personally holds after his death, completely erasing these Bitcoins from circulation. His "messiah-level" operation seems to show that he has made an eternal contribution to the Bitcoin industry. Although no one knows if he will truly fulfill his promise in the future, this statement undoubtedly brought some stimulation to the market.

It is worth noting that the company's Bitcoin is not directly controlled by the founder himself or the company; these Bitcoins are held in custody by two trusted third-party custodians, complying with the audit and regulatory requirements for publicly listed companies.

The founder is not only a strong promoter of Bitcoin, but to some extent, he is even more extreme than some early Bitcoin investors. Long before the emergence of ETFs, he shaped the company into an existence similar to a Bitcoin ETF, and the dialogue between him and a well-known entrepreneur provided a crucial boost to Bitcoin investment. According to market rumors, the reason that entrepreneur decided to have his company purchase Bitcoin was largely due to the founder's suggestion.

The founder's vision is not limited to Bitcoin. His latest remarks indicate that he supports the development of the entire digital economy, suggesting that the United States should become the leader of the global digital economy and promote the on-chain tokenization of all assets. He is no longer just a Bitcoin extremist but has recognized the potential of blockchain technology across a wide range of fields. This open attitude has also earned him greater recognition in the blockchain industry.

In terms of the future digital economy layout in the United States, the founder even proposed the idea of incorporating Bitcoin into the national strategic reserve, further expanding America's leadership position in the global digital economy. He not only promotes Bitcoin but also presents a vision of a global on-chain economy, which allows us to see that the future global economy may move towards a more decentralized financial structure, and there may even be a cyber financial system that surpasses sovereign nations.

However, in this future scenario, capital flows and regulation will also face new challenges. Particularly if the United States leads this on-chain economy, other countries or organizations around the world will face greater pressure from capital outflows. Even if regulatory authorities in various countries try to control capital flows through traditional means, these measures may become ineffective in the face of a decentralized on-chain economy. Recently, a certain political family's crypto project announced plans to launch a stablecoin, which seems to suggest that the United States may increasingly use stablecoin issuance to alleviate the debt crisis in the future.

4. The Founder's Asset Game

The price of Bitcoin has now fallen to around $87,000 from its previous highs, while the company's holding cost is approximately $66,000. This raises the question: What will happen in the market if the price of Bitcoin falls below the company's purchase cost?

During the last bear market, the company's situation was even worse than it is now. At that time, their net assets had already turned negative, which is an extremely rare situation for any company. Although some companies may have negative net assets under special circumstances, generally speaking, negative net assets can easily trigger market panic. However, the company did not go into liquidation at that time, nor were they forced to sell Bitcoin, mainly because their debt maturity was still far off, and no one could force them to liquidate immediately.

It is worth noting that the company's founders hold nearly 48% of the voting rights, which makes it very difficult for anyone to propose a liquidation. Therefore, even in situations where the company's financial condition is tight, creditors and shareholders cannot easily put forward a liquidation request.

So, if Bitcoin really falls below the average holding cost, will the company's stock fall into the so-called "death spiral"? In fact, this question was raised during the last bear market. At that time, the company's net assets were negative, and the market was in a state of severe panic, but the current market should be more experienced; investors have gone through these fluctuations, so they won't panic as much as they did back then.

In addition, the founder and his team actually have some flexible means to cope with market fluctuations. For example, they can choose to issue bonds, increase the issuance of stocks, or even use the Bitcoin they hold as collateral to borrow money. The company currently holds about $40 billion worth of Bitcoin, which means they can use these Bitcoins as collateral to obtain funding. Even if the price drops, they can avoid being forced to sell by supplementing the collateral.

Moreover, their main debts will not mature until 2028 at the earliest, and before that, no one can force them to make unfavorable decisions. For the time being, even if the price of Bitcoin fluctuates, the company will not immediately face huge financial pressure and is unlikely to be forced to sell Bitcoin.

More importantly, an increasing number of sovereign funds and institutions worldwide have begun to view Bitcoin as a reserve asset, which is also a significant trend. Against this backdrop, the long-term prospects for Bitcoin remain optimistic. As market rumors suggest, countries like Abu Dhabi have already started purchasing large amounts of Bitcoin ETFs, a trend that indicates more countries and institutions will enter the Bitcoin market in the future. Although Bitcoin's price may experience some fluctuations in the short term, the company's strategies and market trends seem to align in the long run. However, their financial situation may face challenges in the coming months or even years.

So overall, we observe that although the price fluctuations of Bitcoin may indeed pose some short-term pressure on companies, considering their debt maturities and market trends, they currently do not face the risk of liquidation or being forced to sell Bitcoin. On the contrary, they may take advantage of the current market environment to continue increasing their Bitcoin holdings, further consolidating their position in the cryptocurrency space. Behind this series of events, there are several questions worth thinking about and further exploring:

Can the volatility of the Bitcoin market maintain its current level?

The company essentially provides itself with a high-leverage investment tool through the high volatility of Bitcoin. But if Bitcoin is gradually accepted by institutional investors and the volatility decreases, can the company maintain its current high-return strategy? With the launch of Bitcoin ETFs, the long-term cyclical nature of Bitcoin prices has been broken, and the spot price of Bitcoin has become more stable due to the decentralized financial derivatives like ETFs. The price trend of gold after the introduction of ETFs has provided us with a reference answer; the previous high volatility of Bitcoin will no longer exist, and the overall change will shift from aggressive to moderate.

How long can the company's financing methods last?

At this stage, the model of financing to buy coins is based on the premise of the market's long-term bullish outlook on Bitcoin. However, if the price of Bitcoin enters a long-term fluctuation or even a downward trend in the future, can the company's financial situation withstand it? If the company continues to raise funds by issuing bonds and increasing the issuance of stocks to buy Bitcoin, the market's premium on its stocks will further shrink, and the company's financing methods will essentially rely heavily on the market's optimistic sentiment. Once the price of Bitcoin enters a long-term fluctuation or downward trend, in terms of financial pressure, existing debts need to pay interest, and the company also has to deal with the diluted shareholder equity due to the increased issuance of stocks. The specific policy environment may also affect the company's financing model; certain policies during the Trump administration may have provided a relatively loose financing environment for enterprises, promoting the establishment of strategic reserves. However, if these favorable factors gradually fade, the company's financing conditions may not be as good as before.

Are founders idealists who support Bitcoin or arbitrageurs of Bitcoin?

The role of the founder is essentially a combination of idealist and arbitrageur, deeply understanding and recognizing the long-term potential of Bitcoin, while also being very adept at leveraging market mechanisms for the benefit of the company and individuals. By taking advantage of the high volatility of Bitcoin, the company's stock is promoted as a "leveraged Bitcoin investment tool." This practice attracts institutional investors who cannot directly invest in Bitcoin or Bitcoin ETFs, allowing these institutions to gain indirect exposure to Bitcoin by purchasing the company's stock. Rather than saying the founder is a staunch believer in Bitcoin, it is more accurate to say that the founder is an arbitrageur of the volatility opportunities in the Bitcoin market. The essence of the company's series of operations is to earn profits from the "fluctuating market" of the stock market by leveraging Bitcoin, ultimately benefiting the company itself.