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MicroStrategy (MicroStrategy) has been aggressively acquiring Bitcoin as part of its long term digital asset strategy. Michael Saylor has outlined the strategic vision to transform MicroStrategy into a “Bitcoin Treasury Company”, and even a “Bitcoin Bank”. In this post, we will examine the 21/21 Plan and the BTC Yield introduced by MicroStrategy, analyzing whether Michael is merely leveraging Bitcoin as a backing asset to sell equity, or if there’s more to the strategy. Additionally, we’ll explore whether this approach is simply a directional bet on Bitcoin prices, and who are placing the bets with MicroStrategy.

21/21 Plan

According to news from October 2024, MicroStrategy raised $2.1 billion in Q3 2024 to expand its Bitcoin holdings through two ways:

1) $1.1 billion by selling 8 million Class A common stock shares (regular company shares)

2) $1.0 billion through Convertible Senior Notes - bonds that can be converted into company shares at $183.19 per share by 2028

The new raised fund enabled the company to pay off a more expensive loan, which carried an interest rate of 6.125%. Also, by paying off this loan, which originally required Bitcoin as collateral, all the Bitcoin holdings in MicroStrategy are now free from any loan obligation.

Additionally, MicroStrategy outlined plans to raise $21 billion through equity financing and another $21 billion through fixed-income securities. The capital raise schedule is detailed below.

Assume an average execution price is $100,000 - Bitcoin’s milestone price achieved in 2024 - a total of $42 billion could purchase 420,000 bitcoins, while the current holdings in MicroStrategy is 444,262 Bitcoins as of 26th December, 2024. This suggests that their strategy to double their Bitcoin holdings over the next 3 years is actually relatively conservative compared to their past performance, where they doubled their holdings from 200,000 to 400,000 Bitcoins in just one year.

BTC Yield

The “BTC Yield” serves as a key performance indicator (KPI) for MicroStrategy’s acquisition plan. Essentially, BTC Yield is used to evaluate the pace of Bitcoin purchases relative to the number of outstanding shares. Specifically, it measures the “percentage change period-to-period of the ratio between the Company’s bitcoin holdings and its Assumed Diluted Shares Outstanding.”. The diluted shares are primarily influenced by the recently issued convertible bonds. In simple terms, MicroStrategy’s aims to increase its Bitcoin holdings per share, even after accounting for the potential dilution from convertible bond conversions.

For example, on 30th December, 2024, MicroStrategy acquired 2,100 Bitcoin, achieved a BTC yield of 47.8% QTD and 74.1% YTD. Interestingly, MicroStrategy frequently announces its Bitcoin acquisitions through SEC Form 8-K filings. The purpose of the Form 8-K is for listed companies to disclose material events and significant corporate changes - such as mergers and acquisitions - that could affect investor and shareholder decisions. MicroStrategy has announced Bitcoin purchases for eight consecutive weeks, with each disclosed in both company news releases and Form 8-K filings. This approach helps MicroStrategy mitigate potential risks of SEC scrutiny while providing investors with transparency regarding its current Bitcoin positions.

NAV premium

While all of this presents an appealing narrative, the caveat is that the NAV premium remains at a high level. The NAV premium is calculated as the ratio of MicroStrategy’s market capitalization to the total value of its Bitcoin holdings. Thankfully, the website MicroStrategy Tracker provides an excellent graph illustrating the current NAV premium and its trend.

The graph below illustrates the following key points:

1. The latest NAV premium, repsented by the red horizontal line, stands at 1.74x as of 31st December, 2024
2. The green line indicates a positive correlation between the NAV premium and the Bitcoin prices - the higher the Bitcoin prices rise, the greater the NAV premium reflected in MicroStrategy’s stock prices
3. The color of the data points represents the time period of the NAV premium. As of 31st December, the red and orange points correspond to the premiums from November to December, when MicroStrategy acquired nearly 40% of its Bitcoin holdings in just 2 months. These data points highlight a surge of the NAV premiums above the average level of 2x.

Even though MicroStrategy’s KPI focuses on increasing Bitcoin holdings per share, late joining investors actually are paying 1.74x premium on the MicroStrategy stock relative to the actual Bitcoin assets recorded on its books. This raises an important question: if the investors are well informed, why are they still willing to pay such a high premium for MicroStrategy stock instead of opting for Bitcoin ETFs, which may offer more direct and cost-effective exposure to Bitcoin?

Convertible Bonds

The 21/21 plan involves raising funds from both the equity and debt markets to accumulate additional Bitcoin holdings. What stands out to the financial practitioners is MicroStrategy’s use of financial engineering, particularing in issuing the convertible bonds to secure significant capital for Bitcoin acquisitions.

As mentioned earlier, MicroStrategy rapaid its expensive debt which paid 6.125% interest rate in October 2024, and then subsequently issued a new convertible bond at a 0% interest rate in November. The new convertible bond is unsecured, represents senior obligations, and will mature in December 2029. The market reacted positively to the announcement, with the stock price jumping around 7% right after.

The table below lists all of MicroStrategy’s active convertible bonds. The (notional weighted) average of the interest rates is 0.48%, reflecting an exceptionally low borrowing cost for the company.

A blog post by the BitMEX research team provides a detailed explanation of the conditions and scenarios surrounding the convertibility of its convertible bonds. Using the September 2024 issued bond as an example, the key features of the bond are as follows:

1. Convertible: Bondholders have the right to convert the bond into Class A shares during two specific periods:

• Initial period (3.5 years): If the bond prices trade at a significant discount in the market, holders can convert it to stock immediately
• After the initial period: Conversion to stock

1. Put: Bondholders can demand that MicroStrategy redeem the bond in cash after 3 years, providing downside protection if the company - or Bitcoin - underperforms

2. Call: MicroStrategy can redeem the bond after 3 years and 3 months, particularly when the market conditions favour the company. For example, this could happen if MicroStrategy’s stock price exceeds the conversion price by 30%, which translates to being 82% above the reference stock price (a 30% premium over a 40% premium).

But it doesn’t seem that these features are for the directional bets and explosive upside of MicroStrategy and Bitcoin prices, does it?

Convertible Arbitrage Game

Convertible arbitrage remains one of the common strategies among institutional investors. For MicroStrategy’s convertible bonds, the execution strategy might look like this:

1. Going long on MicroStrategy convertible bonds
2. Simultaneously shorting MicroStrategy stock to achieve delta neutrality

For example, the September 2028 maturing bond was issued with a 40% premium over the reference stock price and a conversion rate of 5.4589 class A share per $1,000 principal amount. Approximately, 0.5 delta exposure of the MicroStrategy convertible bond is hedged by shorting half the bond’s notional value in the stock or deviative market. Before the period during which the bondholders have the right to exercise the conversion option, the strategy involves adjusting the short positions in stock to maintain the dollar neutrality. Sometimes, the derivative instruments, e.g. futures and options, are used to reduce the transaction and borrowing costs.

Once the entire position is maintained in dollar neutrality, the positive gamma generates profitability from significant stock movements. A report released by the Financial Times in mid December highlighted the “financial engineering” features of MicroStrategy’s convertible bonds, emphaising their strategic design.

“It’s some incredible financial engineering,” said a convertible bond portfolio manager invested in MicroStrategy. “[Saylor has] created this incredible situation where a stock trades at three times the price of the underlying bitcoin and then he just sells more shares every day and buys more bitcoin.”

There are also a few more coverages like the Bloomberg news and reddit post. A reddit comment summarized the full picture well

To put it in plain English what he is explaining is MicroStrategy is selling volatility to its bond holders.

So, MicroStrategy exactly knows what they are selling, and the bondholders might be very clear about the game they are in.

Who’s in?

Looking further into the bondholders, I am intrigued by how they might be executing the strategy. Since most of them are hedge funds, the filings required by SEC provides only aggregated holdings at the firm level. Form 13-F, for example, reflects the net holdings across all the strategies and pods within a firm, which may consists of tens or even hundreds of strategies and pods pursuing various strategies.

For instance, a long-short equity strategy team might hold a long position in the MicroStrategy stock, while the convertible arbitrage strategy team might short a similar size of position in the MicroStrategy stock for the delta hedge. The firm’s net MicroStrategy position, as reported in the 13-F form, simply aggregates the opposite positions, masking the underlying strategies.

According to the filings, major bondholders include prominent asset managers such as Allianz and State Street. Some of these holders appear to maintain long positions in the bonds with positive delta exposure. Delving deeper into specific participants, I found that a few, like Point72, seems to have positioned themselves skillfully in this complex game.

Point72

First, let’s examine Point72 Asset Management, one of the largest multi-strategy hedge funds founded by Steven Cohen. Their Q3 2024 filing reveals the following holdings in MicroStrategy: the first two rows represent MicroStrategy call and put options respectively, while the final row corresponds to MicroStrategy convertible bonds maturing in February 2027. ​​

Although the filing only provides aggregate positions for the pull options without specifying their strikes or maturity dates, it is reasonable to infer that the put options, rather than shorting the outright stocks, were likely used for delta hedging. This position suggests a possibility of the convertible bond arbitrage. The benefits of using put options over shorting the stocks are the capital efficiency and sometimes a lower borrowing cost. Holding the bond issued in 2021 indicates that Point72 may have already joined the game early.

Millennium management

According to Millennium’s official website, the firm consists of over 320 investment teams. Given Millennium’s broader range of strategies and trading methodologies (ranging from medium term investments to intraday reallocation), it becomes significantly more challenging to map the 13-F holdings to specific strategies. This is especially true if Millennium has deployed multiple equity and fixed income strategies and teams.

From their latest 13-F filing, as of 2024 Q3, similar to Point72, Millennium held both MicroStrategy convertible bonds and the put options. Notably, their convertible bond position, with over $100M in notional value, is substantially larger than that of Point72. This suggests that multiple pods within Millennium might be participating in the convertible bond arbitrage strategy.

BlackRock

Meanwhile, one of Blackrock’s top performing fixed income funds may have entered the game as well. The Strategic Income Opportunities Fund, with $40 billion in AUM managed by Rick Rieder, has extensive coverage of the global fixed income and derivative markets and has been consistently delivering strong performance.

According to their Q3 2024 portfolio document, the fund held approximately $16 million in notional value of MicroStrategy convertible bonds (maturing in 2028 and 2032), along with a short position of 38,000 shares of MicroStrategy stock. While their exposure is relatively small compared to the fund’s total AUM and positions, it will be interesting to see if they acquired the Nov 2024 issued bond in the upcoming Q4 2024 report.

AQR

The AQR Diversified Arbitrage Fund is one of the institutional investors holding the Sep 2028 maturing bond. According to their Q3 2024 holdings document, he fund held the following positions

1. A long position of $15.75M in notional value of the Sep 2028 MicroStrategy convertible bond
2. A short position of 172.400 shares of MicroStrategy stock, valued at approximately $29 million

Since the issuance of Sep 2028 maturing bond, MicroStrategy’s stock price ($168.60 as of Sep 2024) has approached the bond’s conversion price ($183.19) as of early October. Despite the bond being in the money, the fund has significantly oversold the stock, creating a significant negative delta position.

This negative delta position is not straightforward interpret. However, two potential reasons might explain this strategy: first, a strong conviction that the stock price lacks upward momentum; and second, a possible anticipation of another round of bond issuance and subsequent opportunities to adjust positions. With the upcoming Q4 2024 report, we may gain a clearer understanding of their overall strategy and total exposure.

Conclusion

The market always seems to move faster than I anticipate. When I’ve been writing about this story, new developments about MicroStrategy keep unfolding every day. It has become increasingly difficult to keep up, layering new information on top of the previous research.

In the meanwhile, I am glad to see that crowdsourcing platforms, like saylortracker.com and mstr-tracker, are actually playing a critical role in unfolding Michael Saylor’s strategy in the market. Though some of the contributors are actually supporters of the crypto market and MicroStrategy’s strategy, the transparent information they provide helps others better negativate the complex game behind.

Finally, I have no intention to conclude whether this strategy is right or wrong, but I hope to bring up the questions about the fundamental valuation of the equity - Where does its valuation really come from, and what’s the source of the revenue generated from the Bitcoin acquisition?

Further Readings

These readings are released later than when I have finished my writing, and this gives further updates on this story

• “If bitcoin is the future, what explains MicroStrategy’s need for speed?” - FT

• “MicroStrategy Buys Bitcoin After Adding Preferred Offering” - Bloomberg