With the unveiling of the “21/21 Plan” to increase its Bitcoin holdings, analysts at asset manager CoinShares have been busy analyzing how cryptocurrency has taken over MicroStrategy, becoming its core business model.
MicroStrategy has announced its bold “21/21 Plan,” aiming to raise $42.000 billion over the next three years to invest in Bitcoin and increase its holdings of the cryptocurrency. As reported by this outlet, this aggressive investment plan is divided into $21.000 billion in equity sales and $21.000 billion in fixed-income securities capital.
Following the unveiling of this plan, CoinShares analysts said in a recently published report that Bitcoin has displaced the company's enterprise software development business model, turning it into a “bitcoin holding company”.
MicroStrategy seeks to consolidate itself in the Bitcoin market
El report, Titulado “MicroStrategy's 21/21 Plan: Doubling Down on the Bitcoin Strategy”, which was published by Alexandre Schmidt earlier this week, detailed that MicroStrategy has been steadily and aggressively acquiring bitcoins since August 2020, when it made its first investment in the digital asset. Since then, it has accumulated 252.220 BTC to date, which is worth over $19.000 billion at the time of writing.
The business intelligence company led by Michael Saylor is thus seeking to establish itself as a major player in the Bitcoin market. With its 21/21 plan, MicroStrategy is seeking new funds to acquire more of this cryptocurrency and significantly increase its reserves, thereby further consolidating its position as the largest corporate holder of Bitcoin.
On this, Schmidt said that MicroStrategy chose Bitcoin as a store of value asset because it is widely considered a commodity and not a security, which would be subject to Securities and Exchange Commission (SEC) compliance regulations. He further said that the typical volatility in Bitcoin's price has increased the attractiveness of the company's convertible notes, which has been a success for its development, growth and market positioning.
“In August 2020, a relatively small and unknown business intelligence company took a bold step and decided to invest its entire treasury reserves into bitcoin. Four years and more than 250.000 bitcoins later, MicroStrategy has become the largest corporate holder of bitcoin in the world, with a market capitalization that has increased 50-fold and will exceed $50.000 billion by October 2024.”, the analyst commented.
MicroStrategy's innovative approach to Bitcoin
MicroStrategy’s strategy is focused on using Bitcoin as a reserve asset, allowing it to avoid the regulatory constraints faced by companies holding securities. This decision, the report details, has resulted in a significant increase in the company’s valuation, which has achieved a premium of almost 200% on the value of its bitcoin holdings.
With an average acquisition cost of $39.394 per BTC, the company has managed to capitalize on the volatility of the cryptocurrency market, increasing the attractiveness of its convertible bonds among investors.
MicroStrategy’s early success has been based on its ability to issue debt at extremely low interest rates. To date, the company has raised more than $4.200 billion through convertible bonds, with an average coupon rate of just 0,81%.
However, in addition to highlighting the potential of MicroStrategy's strategy to finance the purchase of bitcoins, CoinShares also analyzed the current financial landscape, which is changing, and which could immerse the company in new challenges in its search for more financing.
The risks of MicroStrategy's financing plan
MicroStrategy’s “21/21 Plan,” while ambitious, is dependent on favorable financing conditions and continued interest in its convertible notes, Schmidt said. If demand for these instruments declines or if interest rates rise, MicroStrategy’s ability to acquire bitcoin without diluting shareholders’ stake will be compromised. In 2021, the company was able to issue debt at near-zero coupon rates, but the current environment suggests this may not be sustainable.
Additionally, the analyst noted that there is significant risk associated with MicroStrategy's Bitcoin holdings. If the company decides to sell some of its bitcoins, it could see a drastic decline in its market valuation, thereby affecting its ability to fund future acquisitions. Bitcoin sales could also trigger significant tax events for the company, given the $7.700 billion increase in capital appreciation since it began accumulating bitcoins.
The dependence of the software business
Another critical aspect of MicroStrategy’s plan is its reliance on its software business to generate cash flow. While its software business has been instrumental in funding its bitcoin acquisitions, its ability to generate cash has declined recently. If cash flow from its legacy operations is not sufficient to cover interest payments on its debt, the company could be forced to look for alternatives to use its vast stash of bitcoin.
Schmidt said one option could be to put its bitcoin holdings to work through lending or the use of derivatives, which could allow MicroStrategy to generate additional revenue and help cover debt payments.
MicroStrategy's future in the crypto space
MicroStrategy’s decision to carry out a 10-for-1 stock split in August 2024 has also played a major role in its strategy. This move has reduced its share price, making it more accessible to a broader investing audience, increasing interest in the company and its approach to Bitcoin.
As MicroStrategy continues to expand its position in the Bitcoin market, investors and analysts will be closely watching how it handles the challenges ahead. The combination of market conditions, funding capacity, and management of its Bitcoin assets will be critical factors determining the success of its “21/21 Plan.”
In conclusion, the report analyzed the leadership role that MicroStrategy has taken in the cryptocurrency space, highlighting that its path to expanding its bitcoin holdings is fraught with risks and challenges.
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