For investors seeking exposure to Bitcoin (BTC), buying MicroStrategy (MSTR) stock can be a compelling alternative. My bullish outlook on MSTR stems from the company’s ability to consistently outperform Bitcoin itself, delivering exceptional returns for those willing to tolerate the higher risk and volatility.
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While Bitcoin is nearing its all-time high of $100,000 after surging more than 162% over the past twelve months, MicroStrategy has achieved an even more impressive performance, with its stock soaring 711% in the same period.
MicroStrategy’s appeal lies in more than just its massive Bitcoin holdings, which account for approximately 1.3% of all Bitcoin in circulation. Since 2020, the company has executed a unique strategy of leveraging its balance sheet through bond issuances, akin to how banks generate returns. This approach amplifies gains during bullish periods for Bitcoin, making MSTR an attractive, albeit high-risk, vehicle for investors seeking to capitalize on cryptocurrency growth.
In this article, I’ll examine MicroStrategy’s journey to becoming a Bitcoin titan and explore whether buying its shares now is a better investment than purchasing Bitcoin itself.
MicroStrategy: Transforming into a Bitcoin Vault
MicroStrategy’s bullish investment thesis is often seen as a leveraged bet on Bitcoin’s price. Originally a software company, MicroStrategy has significantly expanded its balance sheet through aggressive Bitcoin acquisitions since 2020. This strategy aligns with the views of its Executive Chairman, Michael Saylor, a staunch Bitcoin advocate.
The company’s Bitcoin buying strategy has primarily involved debt issuance, mainly through convertible bonds, capitalizing on the cryptocurrency’s high volatility. These bonds allow investors to convert their holdings into MicroStrategy shares at a later date. This approach enables the company to raise funds without immediately diluting its existing stockholders. As Bitcoin’s price increases, MicroStrategy benefits from a positive feedback loop: higher Bitcoin prices boost its equity value, allowing the company to borrow additional funds and purchase even more Bitcoin.
The most recent bond offering occurred on November 20th, when MicroStrategy successfully priced a $2.6 billion offering, an increase from the initially planned $1.75 billion.
Currently, MicroStrategy is the largest corporate holder of Bitcoin, with approximately 331,200 bitcoins in its treasury. These were acquired at a total cost of $16.5 billion, translating to an average purchase price of around $49,874 per Bitcoin.
MSTR As a Leveraged Play on Bitcoin with Superior Returns
My bullish outlook on MicroStrategy’s ability to capitalize on Bitcoin gains is partly due to the company’s exceptional timing in executing its buying strategy amidst the cryptocurrency’s volatility. Notably, investors who purchased MicroStrategy shares instead of Bitcoin saw gains of 2,521% versus 1,156% for Bitcoin over five years.
MicroStrategy’s net asset value (NAV) in Bitcoin is 2.8x. This means that buying MicroStrategy shares implies paying a premium of 2.8 times the Bitcoin’s value. This premium reflects the added value of the company’s strategic approach and its ability to leverage Bitcoin’s price fluctuations for greater returns.
MicroStrategy’s Unique Approach: Banking on Bitcoin
Another positive aspect of MicroStrategy’s strategy is its use of convertible bonds in conjunction with Bitcoin, drawing parallels to traditional banking practices with different contexts and objectives. Similar to banks raising funds at low interest rates—via deposits or debt issuance—and reinvesting in assets offering higher returns, MicroStrategy does the same, albeit focusing exclusively on Bitcoin. The company has issued debt to acquire Bitcoin, including bonds at a 0% interest rate.
This reflects investors’ willingness to forgo immediate interest payments in exchange for the opportunity to convert the bonds into equity. Essentially, the potential for capital appreciation through the conversion feature compensates for the lack of interest income.
The key to this strategy’s success lies in Bitcoin’s appreciation, exceeding the cost of the debt. When Bitcoin rises, MicroStrategy benefits disproportionately due to the leverage embedded in its approach, creating a compounding effect on shareholder returns.
A Pioneering Strategy with High Risk and Reward
MicroStrategy has been a pioneer in this strategy since 2020 under the leadership of CEO Michael Saylor. However, the investment thesis carries significant risks. While the strategy has proven lucrative during cryptocurrency bull markets, it has faced substantial challenges during downturns.
For instance, during the crypto winter from early 2021 to early 2023, high inflation and rising interest rates increased the cost of debt issuance and refinancing. MSTR shares plummeted by as much as 86%, reaching lows of under $15 per share, reaching lows of under $15 per share, while Bitcoin was trading below $17,000.
Comparing MSTR and Bitcoin Performance
Lastly, if we consider MicroStrategy’s performance since it began its strategic Bitcoin acquisition strategy in 2020, the results have been impressive. From 2020 to 2024, MSTR delivered annualized returns of 80% with a standard deviation of 112% despite experiencing maximum drawdowns of 81%. In comparison, Bitcoin has delivered annualized returns of 60% over the same period, with a standard deviation of 69% and maximum drawdowns of 73%.
While MSTR’s returns come with significantly higher volatility, they have proven superior to Bitcoin’s over the short and long term. This outperformance hinges on MicroStrategy’s ability to execute its strategy effectively and Bitcoin’s long-term appreciation.
Is MSTR A Good Buy?
At TipRanks, MSTR stock is rated as a Strong Buy, considering eight out of eight Wall Street analysts covering the stock have a bullish stance. The average price target is $357.38, representing a -15.29% downside potential from the latest share price of $397.28.
Conclusion
MicroStrategy has demonstrated that its leveraged approach to Bitcoin can yield outsized returns compared to owning Bitcoin outright, albeit with substantially higher risk. While past performance does not guarantee future results, MSTR’s track record suggests it has been a better investment than Bitcoin alone for those willing to accept the volatility and risk associated with its strategy.
