Understanding the Premium on MicroStrategy's Bitcoin Holdings
The premium given to MicroStrategy’s massive bitcoin holdings will persist as long as investors believe the company will continue to increase its bitcoin holdings per share. This "MSTR premium" has sparked debate, but with a decade of equities experience, we argue it’s justified—especially during periods of rising bitcoin price expectations.
Why the MSTR Premium Exists
- Future Carry Valuation:
MicroStrategy leverages equity and debt to invest in bitcoin, earning the difference between bitcoin’s returns and its cost of capital ("carry"). Investors value this future carry today, embedding it into MSTR’s market cap. This premium fluctuates with bitcoin’s expected returns but remains a key driver. - Intelligent Capital Markets Execution:
The company accretes value through convertible debt and equity issuance, often at premiums to book value. For example, issuing equity at twice book value effectively buys bitcoin at a 50% discount. Last year, this strategy increased bitcoin per share by 74%, creating $14 billion in shareholder value. - Bitcoin’s Secular Growth:
The strategy capitalizes on bitcoin’s nascent, expanding market and its historical price appreciation. This long-term trend supports the premium, as investors bet on continued growth.
Thought Experiment: Valuing Future Yield
Imagine a magic bank account with $100 that pays 69% annual interest. You’d likely pay more than $100 for it—similar to how MSTR trades at a premium due to its 69% annual increase in BTC per share since 2020. While yields vary with market cycles, the trend remains upward.
Risks to Consider
- Basis Risk: MSTR’s stock is more volatile than bitcoin itself, amplifying gains and losses.
- Premium Fluctuations: The premium may shrink or even reverse during bear markets.
- Future Uncertainty: While MicroStrategy guides for 15%+ growth in BTC per share this year, there’s no guarantee.
FAQ Section
Q: Why does MicroStrategy trade at a premium to its bitcoin holdings?
A: Investors pay for expected future increases in bitcoin per share, driven by carry, capital markets execution, and bitcoin’s growth.
Q: Is the premium sustainable?
A: It depends on bitcoin’s price trajectory and MicroStrategy’s ability to continue accretive strategies. Historical trends suggest resilience.
Q: What are the risks of investing in MSTR?
A: Volatility, basis risk, and potential premium erosion during downturns are key risks.
Conclusion
👉 Explore how MicroStrategy’s bitcoin strategy compares to other crypto investments. The MSTR premium reflects confidence in the company’s ability to grow its bitcoin holdings strategically. While risks exist, the premium is a bet on bitcoin’s future—and MicroStrategy’s execution.
For deeper insights, check out our analysis on leveraging crypto trends 👉 here.
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