We have now established that BTC/share is the main metric in determining the value of MicroStrategy on a per share basis, and BTC Yield is the measure of how well they are doing at increasing this metric. To dive in a bit deeper into how these metrics and other metrics we use to evaluate MicroStrategy behave I made the following model/visualization to simulate an ATM share offering to buy Bitcoin. The main metrics I am looking at and how they change are total Bitcoin holdings, BTC/share, and the BTC Multiple that represents the ratio of MicroStrategy’s market cap to their Bitcoin holdings value, and the amount of shares I had MicroStrategy issue were equal to 10% of the starting shares outstanding. I explored how these metrics changed over the following different starting BTC Multiples: 1, 2, 5, and 10. I was able to derive formulas to map out how these metrics change where the starting BTC Multiple and Share Issuance Percentage are input variables. So, if you do not like the numbers I chose you can input your own. I provide proofs for these equations as well, so you can see how I came to arriving at these formulas.
The goal of this model is to show the relationships between these metrics and how they change at different BTC Multiples. The goal is not necessarily to be precise. Because of this I wanted to make the model as simple and clear to understand while still accurately portraying these relationships. Different assumptions have been made, which are gone over in the following video and PowerPoint presentation. I will go over a couple now. One is that I look at the multiple to Bitcoin holdings versus the commonly used mNAV metric which looks at the multiple relative to the net asset value of their Bitcoin holdings, which is assets minus liabilities. I am simply looking at the assets, and they main reason is that it makes the calculations simpler and easier to follow. It also aligns with the idea that the debt on MicroStrategy’s balance sheet is designed in a way to be repaid in shares and not cash meaning one should use assumed diluted shares to calculate BTC/share. Another assumption is that I keep the price of MSTR and Bitcoin constant before and after the share offerings. One reason is that it makes the calculations simpler, but I also cannot reasonably predict a price change in either one. For the share price, once could argue the price should go down as new shares are flooding the market, but at the same time one could say they should go up because they are using that capital to buy Bitcoin, increasing shareholder value. For Bitcoin, it is a global 24/7 tradable asset, and though MicroStrategy is a large player, they are just one of many and cannot influence the price directly on their own. Saylor has even spoken about this where they have bought several hundred million dollars worth of Bitcoin in an hour, but the price goes down meaning someone else is selling more than they are buying.
Being that I find I sometimes learn better through visuals, I used different figures to represent the value of MSTR and the BTC holdings. The size of the figures are proportionate to each other throughout the presentation and not just the individual slides, unless otherwise noted. So, if the value of MSTR’s market cap is double the value of their BTC holdings, the area of the visual representing MSTR is double the area of the visual representing their BTC holdings.
I recommend going through the following video and/or PowerPoint presentation to get a full understanding of what I am going to go through in the rest of the page. The video is me narrating the PowerPoint presentation. In Both, I go over the framework of the model, different assumptions made, and the different scenarios. From there I was able to compile some results and conduct some analysis to plot the behavior of how the metrics in question change and how they relate to each other.
A point to note is that the behavior mapped out in this model to simulate what happens during an ATM share offering is somewhat similar to when convertible debt is issued to buy Bitcoin, but it is a little bit different. Reason for this is that the money raised from the debt offering can be used immediately to buy Bitcoin, but the shares represented by the debt will be converted at some point down the road assuming the debt is even converted. The price at which the debt is converted into shares are set in the terms of the converts when they are issued, which will most likely be at a price level different than the spot price at the time of issuance and conversion. Overall, it is a similar idea, they are issuing new shares to raise capital to buy Bitcoin. It just works a little differently.
Below I put in the visualizations for the scenarios where the multiple was 1 and 5. The starting points of all scenarios are very similar, the only differnece is the market cap of MicroStrategy, oviously with the higher multiples having the higher market cap. The Bitcoin stats are the same for all.
Below are what the issuances to buy Bitcoin look like. As you can see, since the premiums are different leading the market caps to be different, which means the amount of capital raised is different. The higher multiples allow to for the ability to buy more Bitcoin, and to go a step further they allow for a larger purchase of Bitcoin relative to the current amount held
Lastly here are the results page for each. As you can see the scenario where the multiple is 5 resulted in a much larger Bitcoin purchase, which led to a sizable increase in BTC/share and decrease in the Multiple. This contrasts with the results seen in the scenario where the multiple is 1 as there was no change in these metrics. The reason why the BTC Multiple being 5 led to a change while the scenario where the multiple was 1 did not was because in the scenario where the multiple is 5, MicroStrategy was able to increase their Bitcoin holdings by 25% while only increasing their share count by 5%. In the scenario. where the multiple was 1, there was a 5% increase in both Bitcoin holings and share count, leading the two to offset each other.
After completing all 4 scenarios, what I then did was compile the results of the metrics of interest as well as did a bit more examination to see if I could detect any relationships in how these metrics changed.
What I found was that as the multiple increased both the amount of Bitcoin held increased, and the amount of BTC Yield generated increased. At the same time the multiple to its Bitcoin holdings decreased more as the starting multiple increased. It essentially shows an inverse relationship between the amount of Bitcoin acquired and their premium, and as the starting multiple increased the spread between the two became wider. It is an interesting phenomenon as it results in shareholders having more Bitcoin represented by their position, increasing shareholder value, and the multiple decreasing means MicroStrategy’s assets are trading at a discount relative to before the share offering. This occurance is what leads people to refer to MicroStrategy’s Bitcoin strategy as accretive dilution. When most public companies dilute their shareholders it leads to a decrease in shareholder value as you decrease the same amount of value over more units. With MicroStrategy’s strategy they are able to increase the value of each share as they create new shares. You could consider accretive dilution to be an oxymoron.
Upon further examination, I noticed a pattern between the increase in BTC holdings and the Multiple where a starting multiple of 1 led to a 10% increase, a multiple os 2 created a 20% increase, 5 was 50%, and 10 was 100%. A direct correlation between the starting multiple and increase in BTC holdings. I looked to see if there was an equation I could formulate to map out this pattern across different multiples and share issuance percentages. I was able to derive an equation and from there I wanted to see if I could map out how the other two metrics, BTC Yield and Multiple, also change. I found I was able to do that as well. Below are the variables I used and the proofs I derived to get to these equations, so you can verify my thought process and work. You can plug the numbers from the different scenarios or your own numbers to verify these equations are correct.
These equations also validate the relationships I witnessed initially after running the numbers of the 4 different scenarios. As the variable representing the Multiple (M) increases the number of Bitcoin held and BTC Yield both increase, while the ending multiple decreases.
Looking specifically at the equations of BTC Yield asnd Multiple Compression, you may notice they look similar to each other. The two are essentially reciprocals of each other. They are not technically reciprocals, but they are very close. If there was no minus 1 at the end of each then they would be. The slopes of the equations are reciprocals of each other though meaning how these metrics change are reciprocals of each others. This further emphasizes the idea that BTC Yield and Multiple Compression have an inverse relationship to each other.
This is further scene when you look at the equations for BTC/Share and the Multiple as seen below. The numerators and denominators are essentially flipped. BTC/share has Bitcoin on top and shares outstanding on the bottom, while the Multiple has shares outstanding on top and amount of Bitcoin on the bottom.
It is the relationship that leads to the interesting phenomenon where a higher starting multiple leads to a larger increase in BTC/share and a larger decrease in the Multiple. It is why I view a multiple premium (multiple of over 1) as forward looking BTC Yield and Multiple Compression. It essentially manifests or creates the opportunity to achieve both. If the multiple were 1 then there would be neither, and if it were less than 1 you would have negative BTC Yield and Multiple Expansion. It creates an interesting phenomenon where a higher multiple leads it to be trading at a smaller multiple in the future assuming the share price stays the same. That brings us to our next point.
Instead of Multiple Compression there can alternatively be an increase in the stock price. Assuming a constant Multiple, the stock price would go up the same percentage as BTC Yield. Besides the intuitive fact that having more BTC associated with your position increases the value of it, this occurence further emphasizes thart BTC Yield is accretive to shareholders and what you should be wanting and focusing on as an MSTR shareholder.
Overall, when MicroStrategy raises capital while trading at a premium to their Bitcoin holdings and then use that capital to buy Bitcoin, investors get more Bitcoin represented by their shares marking an increase in shareholder value, while at the same time they either get a discount to MicroStrategy’s assets relative to before the share offering, an increase in the share price, or a combination of the two.
This gives the investors some options, and is where the psychological aspect of MicroStrategy’s stock price comes into play. If an investor feels the multiple is too high for their liking then they can sell shares helping to reduce the Multiple. If they feel it the Multiple is good then they can continue to hold and let the stock price continue to soar. Ultimately the multiple is subjective, and ultimately comes down to the culmination of whatever individual investors feel is appropriate. There is no singular Multiple it should be trading at, but if you are trying to generate as much BTC Yield as you can to increase BTC/share then it makes sense for the multiple to be higher. I get more into the Multiple and how to view it more in the next section.
In conclusion, I view MicroStrategy’s strategy as pure math as they are simply looking to acquire more Bitcoin, and the goal here with this model and visualization was to build upon the idea that BTC/share and BTC Yield are the two metrics to be focusing on as well as give one an insight into the mechanics of MicroStrategy and how their Bitcoin acquisition performance changes as the Multiple changes.
