In the past few days, both the U.S. stock market and the crypto market have been blinded by MSTR. In the latest wave of Bitcoin, MSTR not only took the lead in the rise, but also continued to maintain a premium growth over Bitcoin for a period of time afterwards, and its price also soared from $120 a week or two ago to the current $247.

For the surge in MSTR, most people in the market still interpret it as "leveraged Bitcoin". However, this does not seem to explain why MSTR's premium suddenly soared when the fundamentals of "issuing bonds to buy coins" remain unchanged. After all, MicroStrategy has been buying coins for so many years, and has never seen such a premium increase.

In fact, in addition to "issuing bonds to buy coins", the recent surge in MSTR premium is also due to another secret weapon of MicroStrategy, which not only has a huge impact on the fundamentals of MSTR, but is even called MicroStrategy's "unlimited money printing machine" by many analysts, making MSTR "more and more valuable as it is sold".

Leveraged Bitcoin? It's a commonplace

Microstrategy, a company focusing on business intelligence software, has adopted a radical strategy since 2020: raising funds through bond issuance to buy Bitcoin. The implementation of this strategy began in August 2020, when the company announced that it would convert $250 million of treasury reserve assets into Bitcoin. The motivation behind this strategy is mainly to cope with the challenges of global macroeconomic factors such as declining cash returns and depreciation of the US dollar.

In order to further expand the scale of Bitcoin holdings, Microstrategy raised funds through some long-term bonds in the capital market in the early years. These bonds usually have a longer term, most of which expire in 2027-2028, and some are even zero-interest bonds. This enables the company to keep financing costs low for the next few years and, after obtaining bond financing, quickly use it to purchase Bitcoin and add it directly to the company's balance sheet.

According to data from Bitcoin Treasuries, as of now, MicroStrategy already has 1.2% of the total circulating supply of Bitcoin on its account, making it the publicly listed company with the most Bitcoin in the world, far exceeding Bitcoin mining companies Marathon, Riot, and the top crypto trading platform Coinbase, which are more "crypto-native" in their business.

Through bond financing, MSTR continues to increase its holdings of Bitcoin, which not only increases the number of Bitcoins in its balance sheet, but also forms a significant driving force for the market price of Bitcoin. As the proportion of Bitcoin in MSTR's asset portfolio continues to increase, the positive correlation between the market value of the company's stock and the price of Bitcoin has further strengthened. According to MSTR Tracker, the correlation coefficient between MSTR stock price and Bitcoin price has recently surged to 0.365, setting a new record high.

This correlation makes investors willing to buy MSTR shares while being optimistic about Bitcoin, which further promotes the company's market value. Of course, after 4 years of market and time testing, MSTR's "leveraged Bitcoin effect" has long been a commonplace topic. Whenever the price of MSTR rises, people always use the logic of "issuing bonds to buy coins" to explain it.

However, in the recent Bitcoin market, MSTR's market price not only rose before Bitcoin, but even maintained an increasingly high premium to Bitcoin for a period of time afterwards. This puzzled many investors: Obviously, the fundamentals have not changed, why did the premium suddenly go up?

Premium issuance: "The more you sell, the more valuable it is", MSTR's cheat code

First, let's take a look at how exaggerated MSTR's recent premium is. According to MSTR Tracker, MSTR's premium to Bitcoin surged from February to March this year, rapidly increasing from about 0.95 to 2.43 and then falling back to around 1.65. The second rapid growth began on the eve of the recent rise in Bitcoin prices, increasing from about 1.84 to a high of 3.04, and currently remains at around 2.8.

It can be seen that although MicroStrategy has been accumulating Bitcoin in the past four years, its NAV (Net Asset Value) premium has not increased significantly, but has remained at 1:1 for a long time.

What is the reason for the rapid surge in the premium of MSTR? Has the fundamentals of MicroStrategy's "issuing bonds to buy coins" changed?

The answer: Yes. This change in fundamentals is called "premium issuance". Since the middle and late last year, MicroStrategy has adopted a new way to buy coins, that is, to buy more Bitcoin by issuing and selling its own MSTR shares. This strategy of "selling stocks to buy coins" seems very stupid at first glance, which may not only hurt the stock price, but may even threaten the market positioning of MSTR's "leveraged Bitcoin".

However, when you carefully analyze its logical chain, you will find that this new model of "selling stocks to buy coins" is simply the super flywheel of MSTR and the unlimited money printing machine of MicroStrategy.

The first thing that needs to be explained is the concept of "net asset value premium" (NAV). Since MSTR holds a large amount of Bitcoin through bond issuance, and the market has strong expectations for the future rise of Bitcoin, the value of MSTR shares often exceeds the value of the Bitcoin it holds. This premium is called "net asset value premium". This "net asset value premium" reflects the market's expectations for the company's future expansion of Bitcoin holdings and becomes the support point for MSTR to continue to issue additional shares and then purchase Bitcoin.

On the other hand, when the price of Bitcoin rises, the market value of MicroStrategy will also increase accordingly, which forces various index funds to increase their purchases of MSTR based on weight considerations, further driving up its price and market value.

At this time, because of the existence of the "net asset value premium", MSTR can start its own "premium issuance" operation. By continuously issuing additional shares, more funds are obtained to buy Bitcoin, which drives the rise of Bitcoin. The rise of Bitcoin further increases the company's market value and financing capabilities, so that this cycle can continue. This strategy creates a "reflexive flywheel effect".

In this "reflexive flywheel effect" of MicroStrategy, the most subtle point is that the additional issuance will not only not have a negative impact on the price of MSTR, but will make MSTR more valuable.

When MicroStrategy issues additional shares to buy Bitcoin, the newly issued shares are usually traded at a price higher than their net asset value. With this premium, MicroStrategy will be able to buy more Bitcoin than the actual Bitcoin behind the individual stock when selling each share of MSTR.

For example, we use the correlation coefficient between MSTR and Bitcoin to calculate that 36% of the value of each MSTR share represents the Bitcoin endorsed by the company. In the absence of a premium, when MicroStrategy sells MSTR, it can only exchange for 36% of Bitcoin from the market. However, at present, the premium of MSTR to Bitcoin is about 2.74, which means that every time MicroStrategy sells a share of MSTR, it will be able to exchange for about 98% of Bitcoin.

This means that the company can increase its holdings of Bitcoin with funds higher than the net assets of Bitcoin, thereby expanding its Bitcoin holdings on the balance sheet. The core of this strategy is that MSTR has increased the speed and scale of its Bitcoin holdings by financing at a high premium, which is far faster than the previous speed of "issuing bonds to buy coins".

After the flywheel appeared, MSTR, with an increasing market value, was also included in the investment scope of the US stock index, which attracted more incremental funds and generated more net asset value premiums. Part of the reason why MSTR decoupled from BTC in the third quarter was that the market pre-priced MSTR to be included in the Nasdaq 100 Index, bringing a large amount of passive capital inflows.

Investors in the US stock index will be "forced" to invest in MSTR, and then return to the reflexive flywheel, with a larger net asset value premium, which will enable MSTR to raise more funds to increase its holdings of Bitcoin, drive up the price of Bitcoin, and increase the market's optimistic expectations for MSTR. The company's weight in the index may increase, which will trigger further buying demand from index funds, forming a self-reinforcing positive feedback loop, and generally forming an index buying pressure flywheel.

From a macro-level time perspective, the number of BTC held by each MSTR holder is increasing, which not only increases the market's recognition of MSTR as a "Bitcoin alternative investment tool", but also increases MSTR's pricing expectations.

"There will be more MSTR in the US stock market"

In the past few weeks, MicroStrategy CEO Michael Saylor has become more and more high-profile, shouting on major podcasts and news programs that "there will be more MSTR in the US stock market" and "MSTR's mechanism is simply an "infinite financial silver banknote failure."

Saylor believes that MSTR's "reflexive flywheel" model has strong capital operation potential. The model can not only accumulate Bitcoin continuously, but also maintain its own growth through financing and rising stock prices, showing how listed companies can use asset premiums and capital market financing capabilities to achieve long-term expansion. This model is not just a traditional "buy and hold" strategy, but a way to actively use the advantages of the capital market to expand the balance sheet. This mechanism is likely to become a model for other companies to follow, especially in resource-intensive or capital-intensive industries. In fact, many companies have indeed emerged that imitate MSTR to operate some assets.

At present, this model that sounds like "left foot on right foot" seems to be quite feasible. According to current statistics, MSTR will use $1 to purchase Bitcoin for every additional $2.713 of stock issued. Many people believe that he can "outperform" Bitcoin to a large extent by going long on Bitcoin with high leverage, but in fact, MSTR is very healthy. It is estimated that only when the price of Bitcoin falls below $700 per coin will MSTR be at risk of being liquidated.

At present, this mechanism seems to be still running perfectly, and MSTR continues to increase its holdings of BTC. However, when this mechanism is used more and more widely, the US stock index will undoubtedly be affected by more crypto assets and their related derivatives. This mechanism is like a rope that ties the cryptocurrency market and the US stock market together, which will bring about deep changes in the market. For the cryptocurrency market, it has undoubtedly introduced a large amount of liquidity overflowed from US stock funds (mainly undertaken by BTC), and for the US stock market, it seems to have increased the risk of volatility.

According to Sailor's (founder of MSTR) vision, in the future 2050, the price of Bitcoin will reach US$500,000 per coin. It is hoped that by then, MSTR will become a trillion-level company, promoting the deeper penetration of cryptocurrencies into people's lives and better application. Whether this model, which sounds like a "perfect version of the Ponzi scheme", can run until then, may require subsequent market testing.

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