Strategy (NASDAQ: MSTR), the SaaS-based commercial intelligence company, formerly known as microstrategy which has been the pioneer of a Bitcoin Treasury strategy, is currently negotiating market capitalization of $ 73 billion, ~ 1.6x the value of its underlying bitcoin holdings. This so-called “Prime MSTR” caused a lot of misunderstandings, healthy skepticism and even consternation, but with a decade of experience in deep actions, we think there are three reasons why the MSTR premium is justified. These are particularly valid during periods of rise in expectations of Bitcoin prices, as we are currently.
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Graphic: the MSTR premium in Nav
Source: mstr-tracker.com, GSR
First, the strategy takes a lever by issuing equity and debt to invest the product in Bitcoin, which earns the difference between the return to bitcoin and its cost of capital (i.e. “transport”). Above all, the strategy wins this transport not only this year, but also in the coming years, and investors simply present the value of this expected future and include it in the market capitalization of MSTR.
In fact, this is a major reason why the MSTR premium will fluctuate expectations of the market for future Bitcoin yields. Nevertheless, the first reason why MSTR is negotiated to a bonus of his BTC assets is that investors draw the future BTC transport to the present day.
Second, the strategy monetizes the intelligent capital of capital markets for the benefit of shareholders. It accumulates the value via a convertible debt emission, where it is not only paid to offer Bitcoin type yields on the bond market, but also for the volatility inherent in its shares as convertible bond-fittings earn more money with a more volatile underlying asset. In addition, MSTR issues equity, mainly through money’s emission programs, to a bonus of accounting value, which is by definition accretive to shareholders. In fact, the emission of equity twice the accounting value is equivalent to selling $ 1 for $ 2, or conversely, the purchase of BTC at 50% discount. This is how the strategy was able to generate a 74% increase in the amount of its Bitcoin held by Action last year, which is equivalent to 140,630 BTC, or $ 14 billion in value for shareholders.
Finally, the whole construction takes advantage of Bitcoin and Crypto nascence, the fact that cryptocurrencies are in secular expansion and that the price of bitcoin has tended to increase over time.
For those who are not yet convinced, we offer the following reflection experience: if I had a magic bank account with 100 USD which paid you an interest rate of 69%, how much money do you pay me for that? Although the answer can vary from person to person, it is probably much more than $ 100, which means that the bank account would be negotiated to a premium at its underlying USD (that is to say NAV).
This is exactly what is happening with the MSTR, because it increased its BTC by action at an annual rate of 69% since it started to invest in Bitcoin in August 2020. This increase in BTC by action (that is to say the yield in kind) is higher during the bull and lower during the lower markets, but it generally increased over time. And although there is no guarantee that the strategy will continue to increase its BTC by action in the future, MSTR guides an increase of 15% + this year and from 6 to 10% in each of the following two years.
The risks abound, of course – MSTR investors take a basic risk at the price of the BTC and the stock tends to move more than Bitcoin in both directions. Likewise, the premium can rise or decrease in the future, and the stock will probably be negotiated to a discount (that is to say below the value of its Bitcoin holders) during the bear markets. But the premium exists because investors think that the MSTR will continue to increase the amount of its bitcoin per share in the future, and they are ready to pay for this now.
Graphic: the increase in Bitcoin MSTR per action (that is, bitcoin yield)
Source: mstr-tracker.com, GSR
