MicroStrategy's stock has been a hot topic, with a dramatic 142% rise early in the month followed by a sharp 37% drop in days. This volatility has far surpassed that of bitcoin, the asset that has come to define the company’s market value. While bitcoin has gained 123% year-to-date, MicroStrategy’s stock has surged an astounding 707% - a rise that can be attributed almost entirely to BTC.

Indeed, MicroStrategy’s bitcoin holdings now dwarf the size of its initial software business. This effectively has turned the company into a quasi-fund, which does not hesitate to borrow when necessary. Over the last four years, MicroStrategy has raised over $6 billion through five rounds of convertible senior notes offerings, using the proceeds to purchase more bitcoin.

With MSTR outperforming BTC by nearly six times this year, questions arise about the sustainability of this strategy and the factors driving the disparity between the two assets’ price movements.

MicroStrategy’s transformation

Founded in 1989 by Michael Saylor, MicroStrategy initially focused on business intelligence, mobile software, and cloud services. By 2020, its market cap was $1.3 billion. However, everything changed on August 11, 2020, when Saylor announced the company’s first Bitcoin purchase: 21,454 BTC at an average price of $11,652.

Fast forward four years, and MicroStrategy now holds 386,700 BTC, acquired at an average price of $56,658. This $21.9 billion investment is currently valued at approximately $36.7 billion, yet the company’s market cap stands at $92 billion—far exceeding its bitcoin holdings.

This gap does not reflect the software business part. In 2023, MicroStrategy declared $496 million in revenue from product licenses, subscriptions, and services, and valuations for a similar business typically range between $2 billion and $5 billion. The key to understanding this discrepancy lies in MicroStrategy’s role as a bitcoin proxy.

A bitcoin proxy

MicroStrategy’s Bitcoin acquisition began with its own treasury, but Saylor’s ambitions quickly outgrew the company’s resources. To raise additional funds, the company has issued five rounds of convertible senior notes since December 2020. These debt instruments, somewhat akin to company bonds but with the possibility to convert into equity, typically have medium-term maturities.

The most recent issuance, completed on November 21, 2024, was the largest yet at $3 billion. Remarkably, the coupon rate on the last $3 billion offering was 0%, meaning that investors lent money to the company interest-free. Furthermore, the conversion price was set at $672—a 55% premium over the stock’s price at issuance. This means that investors in these notes would profit only if the stock price rises above $672. This says a lot about investor confidence, as well as about the current crypto market sentiment.

Such conditions might seem improbable, but from a financial perspective, they are relatively standard. With the convertible note offering, investors are essentially buying a call option on MSTR with a $672 strike and 2029 expiration date. For comparison, on Nasdaq, $670 MSTR call options expiring on the farthest available date – January 2027 –  are now trading at around $190. This represents a 50% premium, comparable with the convertible notes, but with a shorter time value.

However, more and more analysts are worrying that Microstrategy’s extra bullish bitcoin game is not sustainable.

How long can Microstrategy’s bitcoin game last?

MicroStrategy’s current modus operandi could be summed up in a cycle of issuing debt, buying bitcoin, and leveraging its rising stock price to repeat the process. Critics liken this to a Ponzi scheme, noting the risks of overleveraging and suggesting Bitcoin ETFs as safer alternatives for investors seeking exposure.

However, supporters emphasize the company’s operational revenue streams and the minimal risk from 0% debt. Saylor himself has argued that MicroStrategy is not merely a Bitcoin fund but an operating company that offers investors flexibility through its stock, which can be leveraged, borrowed against, or traded as an option.

Moreover, Saylor’s unwavering belief in Bitcoin and his efforts to promote the cryptocurrency have bolstered investor confidence. Now, Saylor has set his sights on a bold new goal: convincing Microsoft to adopt Bitcoin as part of its treasury strategy. In last week’s conversation on X Spaces, Saylor revealed that he’ll have three minutes to pitch Microsoft board on the potential benefits of holding Bitcoin, notable a more stable and less risky stock.

While concerns about its bitcoin game’s sustainability remain, MicroStrategy has redefined corporate Bitcoin adoption, demonstrating the power—and risks—of pairing traditional finance with cryptoassets.