Think Long-Term
As is the case with nearly any investment, it is best to have a long-term view, and the same goes with MicroStrategy. Being that MicroStrategy is a levered play on Bitcoin and Bitcoin is still an emerging technology that is very volatile, MicroStrategy is even more volatile. Trying to time the market and make short term gains is possible, but it could also lead to you wrecking your portfolio. Having a long-term outlook with MicroStrategy is the best way to maximize your chances of seeing great returns.
MicroStrategy’s valuation is based off their Bitcoin holdings, it is the culmination of their Bitcoin holdings (amount of Bitcoin they owned multiplied by the price) and the premium that the market assigns to their holdings. If you were to look at it on a per share basis it would be a similar concept. You have three different factors that determine the stock price, which are BTC/share and BTC price that represent that fiat value of Bitcoin per share and lastly there is BTC Multiple. Being that MicroStrategy’s share price is based on three different factors it is incredibly difficult to predict the price in the short term. Below is an equation delineating how these three factors come together to form the MicroStrategy share price.
MSTR Share Price = BTC/Share x BTC Price x BTC Multiple
MicroStrategy has no plans of selling Bitcoin anytime soon but is rather planning on buying more Bitcoin in a way that is accretive to shareholders. MicroStrategy has bought Bitcoin in every single quarter since adopting their Bitcoin strategy in 2020, and as we have established, as long as they trade at a premium to their Bitcoin holdings, they can increase BTC/share when they raise capital to buy Bitcoin. Meaning, you should expect for BTC/share to continue to go up.
It is the other two variables that create a lot of volatility. It is Bitcoin’s price and the multiple to Bitcoin holdings that are the ones to be looking at. It is a well-known fact that predicting Bitcoin’s price in the short term is nearly impossible, but in the long term you will be directionally right. In all of Bitcoin’s history if you have bought Bitcoin and held for 4 years you would be in the green. Being that MicroStrategy’s price is very much influenced by Bitcoin’s price, one should take the same long-term view of holding MicroStrategy. Holding for 4 years means that 2 of the 3 variables will have gone up in value, BTC/share and BTC price. That just leads the last one remaining, BTC Multiple, which is what the remainder of this page is about.
BTC Multiple
The BTC Multiple is an interesting variable and is a widely argued topic not just between MicroStrategy investors, but Bitcoiners and tradfi as well. People have their opinions with some saying it should be 1:1 to their Bitcoin holdings like an ETF and others say it should be 20-30, which falls in line with PE ratios for growth and technology companies. Like I have said before, the BTC Multiple is ultimately subjective and comes down to whatever the market deems is appropriate. Just like there is no single multiple to earnings a particular stock should be trading at there is no single multiple to Bitcoin holdings that MicroStrategy should trade at. Despite this, the BTC Multiple is not only an important factor in determining the stock price, but it heavily dictates how much Bitcoin they can buy and how accretive they can do it. As we have gone over, a BTC Multiple of over 1 allows for BTC Yield to be generated and the higher the BTC Multiple goes the more BTC Yield that can be generated. Take a look at this table below that shows how BTC/share changes over multiple share issuances across different multiples
As you can see from the table above, it shows how much more accretive MicroStrategy can be with their Bitcoin treasury operations when the BTC Multiple is higher. This not only manifests in far more Bitcoin associated with an investors position, but it also leads to a meteoric rise in the stock price as the BTC Multiple is held constant throughout the issuances. A higher multiple is a no brainer to long term investors as it is what will allow MicroStrategy to maximize the value they drive to your shares. A higher BTC Multiple maximizes shareholder value.
Despite these incredible results witnessed here you may still be a bit hung up on MicroStrategy and paying a premium for their Bitcoin. If the BTC Multiple is 5 that means you are getting exposure to 5 times less Bitcoin than if you bought Bitcoin itself. Though you may be thinking, I know I get to benefit from BTC Yield, but I would need a lot of BTC Yield to rationalize paying such a premium. To be exact your BTC/share metric would need to increase by 5 times for a total BTC Yield of 400%. Now you may be thinking that is a lot of BTC Yield, and you would be correct. That is true, but it is easier to achieve than you think, and this is because of the magic of compounding.
As you look at the data above, you will see that the BTC Yield per issuance between the multiples of 5, 10, and 20 are about factors of 2 apart just as the BTC Multiples of 5, 10, and 20 themselves are factors of 2 apart. However, you will see that the cumulative BTC Yield at the end does not follow the same pattern, the difference gets blown apart. The BTC Multiple of 10 cumulatively achieves about 5 times more BTC Yield than the BTC Multiple of 5. The Multiple of 20 achieves about 8 times more BTC Yield than the Multiple of 10. The reason for this is that the BTC Yield gets compounded with each round of share issuances. So the difference in BTC Yield between the different multiples gets exaggerated over several rounds of issuances. That is the magic of compounding, and this spread witnessed only gets wider the farther out you go.
Time to BTC Parity
To expand more on this phenomenon and to think of another way to justify a certain BTC Multiple, I would like to introduce a concept I call Time to BTC Parity. What this means is how long does the amount of Bitcoin represented by your MSTR position, which is the result of your initial purchase and the BTC Yield you benefit from MicroStrategy’s Bitcoin treasury operation, becomes equal with the amount of Bitcoin you could have purchased initially if you had just bought Bitcoin itself instead of MicroStrategy. In the example where we buy MicroStrategy at a premium of 5, we would be interested in finding out how long it would take for our BTC/share metric to increase 5 times, essentially when would the amount of Bitcoin represented by our position equals the amount of Bitcoin we bought if we just bought Bitcoin initially.
Some people may not agree with this concept because you cannot redeem or hold any of the Bitcoin yourself. This is true but being that one of the knocks on MicroStrategy is that you are paying a premium for their Bitcoin, I felt this concept is a good way to reflect the value of being able to benefit from BTC Yield, which is in my opinion, currently the main reason to invest in MicroStrategy. BTC Yield is something you cannot get from holding Bitcoin itself or an ETF, it is specific to a Bitcoin treasury company. BTC Yield is what provides the opportunity to outperform Bitcoin, and it is something that is achieved when a company is trading at a premium (BTC Multiple greater than 1) to its Bitcoin holdings. Being that different BTC Multiples affect what BTC Yield is, I believe that it is appropriate to use Time to BTC Parity to compare the performance of different BTC Multiples and how they affect BTC Yield and BTC/share over time and in a sense justify a particular premium.
BTC Yield is a measure of change of BTC/share, which happens when MicroStrategy raises capital to purchase Bitcoin. This is something that can happen multiples times as MicroStrategy can do several issuance. BTC Yield is a measure of change that can happen several times, you can model out how much BTC/share there will be relative to the start by using the equation of (1+r)^t where r is BTC Yield and t is the number of issuances. In this formula we are assuming BTC Yield to be constant, which means you are holding the BTC Multiple and Share Issuance Percentage constant. Obviously in reality this will not happen, but similar to the model on the previous page, the purpose of this is to show the relationship between these variables.
If you were to calculate the total BTC Yield you would take this equation and subtract 1 from it. To check and make sure this logic is correct let’s use the numbers from the chart above to see if it works. Let’s use the example where the BTC Multiple is 5, and as we can see the total BTC Yield after 5 issuances was 372%. The BTC Yield per issuance is 36.36%. If you do the math of ((1.3636)^5)-1 then you would get just about 372%. So, the math checks out. As we have gone over, the BTC Yield compounds with each issuance as the cumulative BTC Yield is about 10 times the BTC Yield of a single issuance though we only did 5 issuances. If you were to calculate how much BTC/share there is at the end relative to the start you take the -1 off the end of the equation meaning the amount of BTC/share you would have at the end relative to the beginning is 4.72. If you look at the numbers from the chart, we find that we start with .0016 BTC/share and end with .007544. .007544/.0016 = 4.72. The numbers match up again.
Remember with Time to BTC Parity we are interested in the point where the amount of BTC represented by your position equals the amount of Bitcoin you could have bought if you had just bought Bitcoin itself. In this example where the BTC Multiple is 5, you are interested when the amount of Bitcoin represented by your shares is equal to 5 times the amount from when you started. We have found that after 5 issuances that you get to 4.72, which is close. Let’s extend it out another issuance, (1.3636)^6, which results in 6.43. So, after 6 issuances you would have 6.43 times the amount of Bitcoin represented by your position versus when you started. So, you reach BTC Parity between the 5th and 6th issuance. Since issuance is a single event, it has to be an integer, so in practice you would reach BTC Parity at the 6th issuance and not between the 5th and 6th. For the sake of argument and intellectual exploration let’s set up an equation to find out the number of issuances it would take to reach BTC Parity at different BTC Yields, which are established through different BTC Multiples and Share Issuance Percentages.
Being that we are interest in the point where the amount of BTC/share relative to the beginning amount is equal to the BTC Multiple, we can setup the equation to be (1+r)^t=M. We can also come to this by combining the formula for compound interest and the logic of Time to BTC Parity, which is outlined below. Below is the formula for compound interest.
Being that BTC Yield only occurs once during each issuance we can get rid of the variable n, which tells us the number of times the rate of change is applied per period. A is the ending amount and P is the initial amount, and we are interested in seeing when the initial BTC/Share increases by a factor that is equal to the BTC Multiple. We can use the logic to deduce that BTC Multiple (M) = A/P. So if you divide each side of the equation by P, you can then substitute BTC Multiple, M, in on the left side of the equation. Below is the resulting equation.
From here we simply solve for t
Here is the equation to solve for the number of issuances needed. Keep in mind the number of issuances is something that can happen over any time period whether it be days, weeks, months, years, etc. Because of that it makes sense to use a reasonable Share Issuance Percentage that would be somewhat realistic. For example, assuming a 10% Share Issuance Percentage that happened each day over consecutive days is probably not realistic. Of course everyone has their own opinion, so use your own numbers and time reference that makes sense to you.
Now that we have this equation and know how to view and interpret it lets run some numbers to see how long it takes to reach BTC Parity. Below are a few charts showing Time to BTC Parity among 3 different Share Issuance Percentages for BTC Multiples of 1 through 20. The Time to BTC Parity Column tells us the number of issuances till BTC Parity, and based on that we are issuing anywhere from 5-20% of shares relative to the starting amount of shares, I am assuming each issuance happens once per year, so the Time to BTC Parity column tells you how many years it would take to reach BTC Parity.
As you can see from the charts as the BTC Multiple and Share Issuance Percentages goes up the Time to BTC Parity goes down. It makes sense that as the Share Issuance Percentage goes up the Time to BTC Parity will go down because they are able to buy more Bitcoin and achieve more BTC Yield. What I was surprised about was how the higher BTC Multiple resulted in less Time to BTC Parity. That went against what I was thinking. I figured because you are starting more in the hole when buying in at a higher BTC Multiple that it would think it would take longer to reach BTC Parity. As it has shown that is not the case, and it really exemplifies how powerful BTC Yield and compounding is. Not only do you reach BTC Parity quicker the higher the BTC Multiple is, but once you did hit parity all the BTC Yield after will be much more the higher the BTC Multiple is. To explore this phenomenon as well as make sure our calculations are right above lets run a simulation to show how the BTC Exposure changes through several share issuances across different BTC Multiples.
For this simulation we will say that the share issuance is 10%, and I am going to be assuming a time period of 1 year per issuance. I believe this to be conservative for a couple of reasons. One is that I believe that expecting Saylor and his team to issue 10% new amount of shares per year is reasonable and will most likely underestimate what they will do. Given that they have issued more than that in just the 4th quarter of 2024 alone and have set a shareholder vote to increase the amount of possible shares from about 300 million to 10 billion means they will probably issue more than 10% per year. Also, I am assuming a one lump sum buy. In practice they would conduct this share issuance over smaller purchases throughout the year. This would lead to compounding, which we have already determined leads to more BTC Yield versus a one lump sum buy. My lump sum buy once per year only results in compounding once per year instead of multiple times per year, which undercuts the BTC Yield one would see in practice.
Below is a chart showing this thought exercise. The start BTC Exposure represents the amount of Bitcoin you would be exposed to through MSTR relative to buying Bitcoin itself. So, a BTC Multiple is 1, BTC Multiple of 2 is .5 because you are getting exposure to half (.5) the Bitcoin through buying MicroStrategy versus by buying Bitcoin itself, 5 is .2, 10 is .1, and so on. Green cells mark the year in which BTC Parity is achieved, and gold cells mark when the Bitcoin represented by your shares is 5 times the amount you would have had if you had bought Bitcoin initially. The gold cells essentially show the benefit of investing in MicroStrategy and having a long term view. Yes you take the hit initially on the premium, but if you are patient and have belief in Saylor and his team to continue executing on their strategy then you will benefit immensely.
As you can see the results much up what we saw in the previous chart. As you can see the higher the BTC Multiple is the quicker you achieve BTC Parity. This is true despite the fact that you start farther in the hole as your BTC Exposure is less the higher the BTC Multiple is. Again, it really shows how powerful BTC Yield and the magic of compounding is. A BTC Multiple of 2 takes 8 years to achieve BTC Parity, while a BTC Multiple of 20 takes only 3. Not only do you get there quicker, but after that the gains you experience are incredible. To reach 5 times the amount of BTC/share represented by your shares relative to buying Bitcoin initially, it takes just 5 years with a BTC Multiple of 20. A BTC Multiple of 2 takes 25, 5 takes 11, and 10 takes 7. I was pretty astonished when I first saw this behavior as it went against what I was expecting, and I find it incredibly interesting. It really shows there is no limit to this strategy as the higher BTC Multiple gives them more fire power to buy Bitcoin. Being that Bitcoin is a fixed supply they are taking more and more perpetually off the market, which helps move the price of Bitcoin up, which further increases the value of MicroStrategy’s holdings and their market cap. This allows them to buy even more Bitcoin and continue this perpetual feedback loop. This shows that with MicroStrategy it is worth it to take the hit at the beginning to achieve more Bitcoin later on and not even that much later on. To achieve BTC Parity, we are talking under a decade for any BTC Multiple of 2 or over and less than 5 years for a BTC Multiple of over 5.
Something to take note is that all of this implies the BTC Multiple to be constant over the time period in question. In practice this will not happen as this metric changes with each trading day. The BTC Multiple is ultimately down to what market participants think it should be, which change as market sentiment changes. This implies that you could possibly buy at a locally high BTC Multiple meaning the BTC Exposure you get would be less and therefore take longer to achieve BTC Parity if the average BTC Multiple over your time of holding MicroStrategy is less than what you bought it at. This is a risk that cannot entirely be avoided. The best way to get around this conundrum is to follow an investing practice that many Bitcoiners and investors in general follow, which is to dollar cost average and focus on buying dips. This is the best way to make sure you do buy not buy at a locally high BTC Multiple and instead end up getting a BTC Multiple that will be right around average of what it will be over the life of you holding your position. Of course there is no guarantee with do this, but it is the best way to ensure the third metric in determining MicroStrategy’s share price, the BTC Multiple, is constant. This way this leaves your shares to appreciate solely due to gains in BTC/share and BTC Price.
Overall, this once again shows how having a higher BTC Multiple is ultimately better as it not only allows MicroStrategy to buy more Bitcoin, but it drives more value to shareholders as well. The higher the BTC Multiple is the more BTC/share there will be and the quicker they can raise this metric. Now that we have established that a higher BTC Multiple increases BTC Yield and decreases the Time to BTC Parity, it begs the question what is the limit to MicroStrategy and the amount of Bitcoin they can buy and BTC/share they can accrue. Before we get to ahead of ourselves, let’s go over some risks first.