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MicroStrategy: Buying Its Bitcoin Macro Strategy

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MicroStrategy: Buying Its Bitcoin Macro Strategy

For quite some time, I’ve been eager to write about MicroStrategy (NASDAQ:MSTR). This is a company that I greatly admire due to their bold Bitcoin strategy. MicroStrategy’s CEO, Michael Saylor, has impressed me with his courage and conviction in adopting a new and unconventional currency as the company’s standard. Despite Bitcoin not yet being a widely accepted currency, Saylor believes it can provide more value than holding dollars. As I’ve delved into understanding Bitcoin further, Saylor has played an instrumental role in my learning process.

MicroStrategy’s Bitcoin Strategy

MicroStrategy adopted its Bitcoin strategy on August 10, 2020, and has been actively buying Bitcoin ever since. While the company has faced criticism for purchasing Bitcoin at higher prices and using leverage to do so, a comparison across various stock market bellwether companies shows that MicroStrategy has actually outperformed them since implementing their Bitcoin strategy.

As of the last quarterly presentation, MicroStrategy currently holds 152,800 Bitcoin, with a total value of over $4 billion. It’s worth noting that this only represents 10% of their total holdings.

Considering the current state of Bitcoin’s hashrate, which measures the computing power devoted to the Bitcoin network, it’s becoming less profitable for miners to mine Bitcoin unless the price increases proportionately. This indicates that existing Bitcoins may become more valuable over time.

The cost of mining one Bitcoin is estimated to be around $22,500, but this will continue to change with fluctuations in energy costs and overall market conditions.

In terms of their energy usage, MicroStrategy calculates that mining one Bitcoin requires 72 kWh of energy per day. By converting this to the energy equivalent value of a barrel of oil or natural gas, one Bitcoin is estimated to be equivalent to 132 barrels of oil or $2,758 worth of natural gas. These calculations highlight the distinct connection between Bitcoin and hydrocarbon prices, as any disparity between these energy sources can impact Bitcoin’s price.

This arbitrage opportunity, as Bitcoin’s price intersects with energy prices, presents both potential advantages and risks for investors. Ultimately, MicroStrategy’s ability to efficiently finance their Bitcoin strategy and navigate these changing dynamics will determine the success of their overall approach.

Aside from their Bitcoin strategy, MicroStrategy also operates a software analytics business. While it’s crucial to acknowledge that the primary reason for investing in MicroStrategy is its Bitcoin holdings, the company’s core business provides the leverage necessary to execute their Bitcoin strategy effectively.

In conclusion, MicroStrategy’s Bitcoin strategy showcases a solid foundation, although it is not without risks. The company has strategically managed its leverage and protected itself from potential market downturns. While it may be more prudent to take a wait-and-see approach until after the Bitcoin halving, MicroStrategy remains a long-term buy for individuals with a longer time horizon. Additionally, MicroStrategy’s software business adds further stability to the company’s overall profile.

Bitcoin ETF vs. MicroStrategy vs. Bitcoin

MicroStrategy offers several advantages compared to other ways of gaining exposure to Bitcoin. These advantages include ease of access, downside protection through their non-Bitcoin business, intelligent leverage, yield generation, healthy derivatives, and closely tracking Bitcoin’s price.

MicroStrategy Advantage over other forms of bitcoin exposure

Balance Sheet and Tax-Advantages

MicroStrategy’s balance sheet analysis reveals that their debt-to-asset ratio has risen above 1. Despite this, the carrying value of their Bitcoin on the balance sheet is much lower than its actual value. The company also has the ability to sell shares at-the-market for additional liquidity. However, potential changes to accounting standards regarding digital assets may impact MicroStrategy’s tax advantages in the future.

Bitcoin Holdings Carry Value vs Market Value

MicroStrategy’s (Other) Core Business

Although MicroStrategy’s Bitcoin strategy garners significant attention, it’s important to remember that the company also operates a software analytics business. While revenues and income metrics may fluctuate due to the impact of their Bitcoin holdings, analyzing their core business’s top-line growth and profitability provides insight into its strength and stability.

Financial Highlights From Core Business in Q2

The Historical Chart

MicroStrategy’s chart reflects its journey since going public in 1998. The company experienced significant growth during the tech bubble and reached new heights when it began acquiring Bitcoin. While past performance does not guarantee future results, the potential for MicroStrategy to increase in value threefold or more exists, given enough time.

MicroStrategy Stock Chart

Risks

Despite MicroStrategy’s strong Bitcoin strategy, several risks should be considered. These include the potential for Bitcoin prices to decrease as energy prices reach equilibrium, the impact of the Bitcoin halving on the mining industry, potential mistakes in financing the Bitcoin strategy, and the risk of losing Bitcoin holdings. Market disruptions resulting from energy and money market dynamics also pose risks.

Conclusion

MicroStrategy’s Bitcoin strategy demonstrates a solid footing, but it’s essential to acknowledge the associated risks. Waiting until after the Bitcoin halving may be prudent for some investors, while others may view MicroStrategy as a long-term buy due to their steady software business and Bitcoin holdings. Continual monitoring of market conditions and MicroStrategy’s ability to effectively execute their strategy will be crucial in determining its success in the long run.