Mstr: A Smart Bitcoin Investment Strategy?

MicroStrategy (MSTR) is a publicly-traded software company that has become known for its aggressive Bitcoin (BTC) investment strategy. The company, led by Bitcoin billionaire Michael Saylor, has been buying large amounts of Bitcoin since 2020, and currently holds over 200,000 BTC, making it one of the largest corporate holders of the cryptocurrency. This has led to a debate among investors about whether it is better to invest directly in Bitcoin or in MSTR as a way to gain exposure to Bitcoin.

MicroStrategy's (MSTR)'s stock performance vs. Bitcoin's (BTC)'s

MicroStrategy (MSTR) is a publicly traded software company that has been accumulating Bitcoin since 2020. It is one of the largest corporate holders of Bitcoin in the world, with 152,800 bitcoins as of July 31, 2023. MSTR's stock performance has been positively correlated with the price of Bitcoin, and it has outperformed Bitcoin in recent years.

In terms of stock performance, MSTR has outperformed Bitcoin in the short and long term. In the year-to-date period, MSTR achieved a return of 109.65%, compared to BTC-USD's return of 39.91%. Over the past 10 years, BTC-USD has outperformed MSTR with an annualized return of 61.90%, while MSTR has yielded an annualized return of 25.32%. However, since MSTR adopted its Bitcoin strategy in 2020, it has outperformed Bitcoin, with a 3-year return of 117% compared to Bitcoin's 149% return.

MSTR's stock performance is positively correlated with the price of Bitcoin, as the company holds a significant amount of Bitcoin on its balance sheet. As of July 31, 2023, MSTR held 152,800 bitcoins, valued at $4.53 billion, or $29,672 per bitcoin. The company has been acquiring Bitcoin using excess cash and proceeds from debt and equity fundraising. MSTR's strategy of accumulating Bitcoin has been well-received by investors, and its stock has been outperforming a broad selection of assets in recent years.

One advantage of investing in MSTR over Bitcoin is that it provides investors with exposure to Bitcoin through a stock brokerage account. MSTR is traded on the Nasdaq stock exchange, making it accessible to investors who may not have access to Bitcoin or Bitcoin ETFs. Additionally, MSTR has a core software business that is not influenced by Bitcoin's price fluctuations, providing a stable source of revenue and limiting downside risk. MSTR has a solid customer base, including brands like Hilton Hotels and Sony Interactive Entertainment, and generates predictable annual revenues.

However, investing in MSTR also comes with risks. The company relies heavily on debt and stock issuances to fund its Bitcoin purchases, and there is no guarantee that it will be able to continue raising capital on attractive terms. Additionally, MSTR's decision to hold Bitcoin on its balance sheet adds complexity to the valuation process, and the company's Bitcoin holdings lead to frequent impairment charges due to GAAP accounting policies.

In summary, MicroStrategy's (MSTR) stock performance has been positively correlated with the price of Bitcoin, and it has outperformed Bitcoin in recent years. MSTR provides investors with exposure to Bitcoin through a publicly traded company, offering a convenient way to gain access to the cryptocurrency market. However, investing in MSTR comes with risks, including the heavy reliance on debt and the complexity of valuing the company due to its Bitcoin holdings.

MSTR's ability to deploy cheap, long-term debt to buy BTC

MicroStrategy's (MSTR) ability to deploy cheap, long-term debt to buy BTC is one of its key advantages and a compelling reason for investors to consider it over other investment options.

MSTR has been able to secure low-interest debt to fund its Bitcoin purchases, with interest rates on its latest convertible note sales at just 0.6% and 0.8%. This is significantly lower than the Federal Reserve's benchmark rate and the rates offered in the crypto lending market. The low-interest debt allows MSTR to boost its Bitcoin holdings at a lower cost, increasing the "BTC per share" for shareholders.

MSTR's access to low-cost capital is a significant advantage when compared to other investment options, such as ETFs, which cannot issue debt to buy Bitcoin. This ability to utilise debt and its convertible notes structure provide MSTR with increased financial flexibility and a unique investment proposition.

MSTR's management has also demonstrated their commitment to this strategy by regularly issuing new shares to raise capital for further Bitcoin purchases. This approach has resulted in an 83% increase in the number of shares since the Bitcoin investment strategy began. While this dilution may concern some investors, it has provided the company with additional funds to acquire more Bitcoin.

The combination of low-interest debt and share issuances has allowed MSTR to accumulate a substantial Bitcoin holdings, currently totalling over 200,000 BTC. This positions MSTR as one of the largest publicly traded corporate holders of Bitcoin and reinforces its commitment to this investment strategy.

In summary, MSTR's ability to deploy cheap, long-term debt to buy BTC, along with its effective utilisation of share issuances and convertible notes, makes it a unique and compelling investment option for those seeking exposure to Bitcoin.

MSTR's tax efficiency in the UK

MSTR can also be held in a self-invested personal pension (SIPP), which offers tax advantages. Contributions to a SIPP attract a 25% bonus from the government, and higher and additional rate taxpayers can claim back tax at their respective rates. Additionally, no tax is payable when withdrawing from a SIPP until the age of 55.

MSTR's tax efficiency is further enhanced by its ability to raise capital at attractive terms. The company has access to low-interest debt, which enables it to accumulate Bitcoin without incurring high financing costs. This strategy of utilising debt to purchase Bitcoin is not available to Bitcoin ETFs, giving MSTR a unique advantage in the market.

The tax benefits of investing in MSTR through an ISA or SIPP in the UK make it a compelling choice for investors seeking exposure to Bitcoin while minimising their tax liability.

MSTR's core software business

MicroStrategy (MSTR) is an enterprise software company that has been providing business intelligence products and services for decades. It has a solid customer base that includes brands like Hilton Hotels and Sony Interactive Entertainment. MSTR employs about 2,000 people, including engineering teams that work in its core product.

A key strategic initiative currently underway in MSTR's core business is the transition of its business intelligence customers to the cloud. This involves a shift from generating revenue from product licenses to generating revenue from subscriptions. The subscription model is proving to be successful with high renewal rates.

MSTR's core business intelligence platform is also integrating with AI, particularly generative AI and deep learning. In Q2, MSTR expanded its relationship with Microsoft, announcing a multiyear partnership that integrates MSTR's analytics capabilities with the Azure OpenAI service and Microsoft 365.

While MSTR's core software business is stable and profitable, the company's aggressive Bitcoin investment strategy has taken the reins of its overall stock performance. MSTR's stock price is closely tied to Bitcoin's price movements, resulting in significant fluctuations.

In summary, MSTR's core software business provides a stable foundation for the company, but its stock price and overall investment appeal are heavily influenced by its Bitcoin investment strategy.

MSTR's high volatility

MicroStrategy (MSTR) is a publicly-listed software company that has become known for its aggressive Bitcoin (BTC) investment strategy. Since 2020, the company has been using excess cash, debt, and equity fundraising to accumulate Bitcoin, and its holdings have grown to over 200,000 coins, making it the world's largest corporate holder of Bitcoin.

As a result of this strategy, investing in MSTR has become an alternative way to gain exposure to Bitcoin through a stock brokerage account. However, it comes with added volatility and risk.

MSTR's stock price has become highly volatile due to its close correlation with Bitcoin's price movements. When Bitcoin's price rises, MSTR often experiences even larger gains, and vice versa. This volatility is further exacerbated by the company's continued efforts to acquire more Bitcoin, leveraging debt and equity to increase its holdings.

For example, in 2024, MSTR rose 155% in the same period that Bitcoin rallied 54%. This outperformance has led to debates among experts about whether MSTR or Bitcoin is a better investment.

MSTR's price volatility is driven by several factors:

• Debt and Equity Fundraising: MSTR has been issuing debt and selling shares to raise capital for Bitcoin purchases. This has resulted in a low share count compared to other companies in the Bitcoin space, providing more room for equity financing. However, this strategy has also diluted investors and increased the company's debt burden.
• Bitcoin Price Swings: The cryptocurrency market is known for its wild price swings, and MSTR's stock price is influenced by these fluctuations. When Bitcoin's price rises, MSTR often experiences a boost as the value of its Bitcoin holdings increases. Conversely, when Bitcoin's price drops, MSTR can see significant losses.
• NAV Premium: MSTR often trades at a premium to its Net Asset Value (NAV) in Bitcoin. This premium is volatile and can expand or contract, impacting the stock price.
• Limited Downside Risk: MSTR's downside risk is mitigated by its core software business, which has stable revenues and is not directly impacted by Bitcoin's price fluctuations. This has provided a cushion during crypto bear markets and periods of Bitcoin-related scandals and crashes.
• No Management Fees: Unlike Bitcoin ETFs, MSTR does not charge management fees, making it a more cost-effective option for investors.
• Tax Efficiency: In certain jurisdictions, investors can buy MSTR in tax-efficient accounts like ISAs or pensions, avoiding capital gains taxes associated with direct Bitcoin purchases.

In conclusion, MSTR's high volatility is a result of its aggressive Bitcoin investment strategy and the close correlation between its stock price and Bitcoin's market movements. While MSTR offers an alternative way to gain exposure to Bitcoin, it comes with added volatility and risk due to the company's financial leverage and the inherent volatility of the cryptocurrency market.

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