Original Title: You Don't Understand MSTR
Original Author: Dio Casares
Original Translation: TechFlow
Over the past 5 years, Strategy has spent $40.8 billion, equivalent to Iceland's GDP, to purchase over 580,000 BTC. This represents 2.9% of the Bitcoin supply or almost 10% of active Bitcoins (1).
Strategy's stock ticker $MSTR has risen 1600% in the past three years, compared to Bitcoin's rise of only about 420%. This significant growth has pushed Strategy's valuation beyond $100 billion and led to its inclusion in the Nasdaq 100 index.
This massive growth has also sparked doubts. Some claim $MSTR will become a trillion-dollar company, while others sound the alarm, questioning whether Strategy might be forced to sell its Bitcoin, potentially triggering a massive panic that could suppress Bitcoin prices for years.
However, while these concerns are not entirely unfounded, most people lack a basic understanding of Strategy's operations. This article will explore in detail how Strategy operates and whether it represents a major risk or a revolutionary model for Bitcoin acquisition.
How Did Strategy Purchase So Many Bitcoins?
Note: Data may differ from the time of writing due to new financing and other reasons.
Broadly speaking, Strategy primarily acquires funds to purchase Bitcoin through three methods: revenue from its operational business, stock/equity sales, and debt. Among these three methods, debt is undoubtedly the most scrutinized. While people often focus heavily on debt, in reality, the vast majority of funds used to purchase Bitcoin come from issuance, which means selling stocks to the public and using the proceeds to buy Bitcoin.
This might seem counterintuitive - why would people buy Strategy's stocks instead of directly purchasing Bitcoin? The reason is simple: arbitrage, the crypto industry's favorite business type.
Why People Choose to Buy $MSTR Instead of Directly Buying $BTC
Many institutions, funds, and regulated entities are restricted by "investment mandates". These mandates specify which assets a company can and cannot purchase. For example, credit funds can only buy credit instruments, stock funds can only buy stocks, and long-only funds can never go short, and so on.
These mandates allow investors to be confident that, for instance, a stock-only fund won't buy sovereign debt, and vice versa. They compel fund managers and regulated entities like banks and insurance companies to be more responsible, only taking on specific types of risks rather than being able to take on any type of risk. After all, the risk of buying Nvidia stock is completely different from buying US Treasury bonds or investing in money market funds.
Due to these highly conservative mandates, capital locked in funds and entities cannot enter emerging industries or opportunity areas, including cryptocurrencies, especially direct Bitcoin exposure, even if the fund managers and related personnel wish to engage with Bitcoin in some way.
Strategy's founder and executive chairman Michael Saylor (@saylor) recognized the difference between these entities' desire to gain asset exposure and the risks they can actually bear, and exploited this gap. Before Bitcoin ETFs, $MSTR was one of the few reliable ways for entities that could only buy stocks to gain Bitcoin exposure. This meant Strategy's stock often traded at a premium because demand for $MSTR exceeded its stock supply. Strategy continuously leveraged this premium - the difference between $MSTR stock value and the Bitcoin value per share - to buy more Bitcoin while increasing the Bitcoin content per share.
In the past two years, if you held $MSTR, your "returns" in Bitcoin terms reached 134%, the highest scaled Bitcoin investment return in the market. Strategy's product directly meets the needs of entities that typically cannot access Bitcoin.
This is a typical case of "Mandate Arbitrage". Before Bitcoin ETFs, as mentioned earlier, many market participants could not buy non-exchange-traded stocks or securities. However, as a listed company, Strategy was allowed to hold and buy BTC. Even with recent Bitcoin ETF launches, believing this strategy is no longer effective is completely wrong, as many funds are still prohibited from investing in ETFs, including most mutual funds managing $25 trillion in assets.
A typical case study is Capital Group's Capital International Investors Fund (CII). The fund manages $509 billion in assets but is restricted to the stock domain and cannot directly hold commodities or ETFs (Bitcoin is mostly considered a commodity in the US). Due to these restrictions, Strategy becomes one of the few tools CII can use to gain Bitcoin price volatility exposure. In fact, CII's confidence in Strategy is so high that it holds about 12% of Strategy's stock, making it one of the largest non-insider shareholders.
Debt Terms: A Constraint for Other Companies, But an Advantage for Strategy
Beyond the positive supply situation, Strategy also has certain advantages in the debt it takes on. Not all debt is the same. Credit card debt, mortgage loans, margin loans are entirely different types of debt.
Credit card debt is personal debt, dependent on your salary and ability to repay, unsupported by assets, and typically carrying annual interest rates of over 20%. Margin loans are typically issued against your existing assets (usually stocks), and if your total asset value approaches the amount you owe, your broker or bank might seize all your funds. Mortgage loans, however, are considered the "holy grail" of debt because they allow you to buy assets that typically appreciate (like houses) while only paying monthly loan interest (mortgage payments).
Although this is not entirely risk-free, especially in the current interest rate environment where interest can accumulate to unsustainable levels, it remains the most flexible compared to other loan types, with lower interest rates, and assets won't be seized as long as monthly payments are made on time.
Typically, mortgages are limited to housing. However, corporate loans can sometimes operate similarly to mortgages, meaning interest is paid within a specified time, and the principal (initial loan amount) only needs to be repaid at the end of that period. Although loan terms can vary significantly, generally, as long as interest is paid on time, debt holders have no right to sell the company's assets.
Chart Source: @glxyresearch
This flexibility allows corporate borrowers like Strategy to more easily navigate market fluctuations, making $MSTR a way to "harvest" crypto market volatility. However, this does not mean risks are completely eliminated.
Conclusion
Strategy is not operating in a leveraged business, but in an arbitrage business.
Although it currently holds a certain amount of debt, Bitcoin would need to drop to around $15,000 per coin within five years to pose a serious risk to Strategy. With the expansion of "treasury companies" (companies replicating Strategy's Bitcoin accumulation strategy), including MetaPlanet, Nakamoto by @DavidFBailey, and others, this will become a focus of another discussion.
However, if these treasury companies stop collecting premiums to compete with each other and start taking on excessive debt, the entire situation will change and could bring serious consequences.
