By Jake Piazza@CNBC
Compiled by: Qin Jin Carbon Chain Value
MicroStrateg was founded nearly 35 years ago, and for much of its history it was a little-known software company focused on business intelligence.
But in 2023, the company's stock soared 337%, making it one of the biggest gains among U.S. companies valued at $5 billion or more, outpacing Nvidia's 234% gain and Meta's 194% surge.
Unlike its tech peers, which rely on revenue growth and market share gains to drive stock prices, MicroStrategy's investor appeal comes almost entirely from Bitcoin.
The company began buying cryptocurrencies in mid-2020 and as of late Friday had accumulated approximately 174,530 Bitcoins worth approximately $7.65 billion.
Wall Street is obsessed with the story, with the company's stock rising about twice as much as Bitcoin this year.
Joseph Vafi, an analyst at Canaccord Genuity, said: "This is really Bitcoin. All other things are healthy and doing well and they are not ignoring it. It is doing well and at the same time Leading the way in industry software. But that’s basically something we don’t have to worry about.”
MicroStrategy has a market capitalization of $8.5 billion, meaning 90% of its valuation is directly tied to its Bitcoin holdings. When Bitcoin plummets or surges, so does MicroStrategy. In 2022, Bitcoin fell by 64% and micro-strategy fell by 74%. Even after this year’s big gains, MicroStrategy’s shares are still below their 2021 cryptocurrency peak highs.
The Bitcoin strategy dates back to July 2020, when the company said it would begin investing some of its cash into alternative assets, including digital currencies. At the time, MicroStrategy had a market capitalization of about $1.1 billion, and its software business had been shrinking since 2015. Annual revenue is less than $500 million and profits are minimal.
Bitcoin Owned by MicroStrategy
Number of Bitcoins owned per quarter
Halfway through 2020, MicroStrategy had just over $530 million in cash and short-term investments on its balance sheet. Co-founder Michael Saylor, who was CEO at the time, saw the money sitting mostly idle due to low interest rates and wanted to put it to work.
So, he must decide whether stocks, precious metals, or Bitcoin are the best uses for his money.
"We decided to buy Bitcoin because Bitcoin represents a form of digital gold," Saylor said on the company's first earnings call since announcing its strategy. It is stronger than gold. It's smarter, stronger, and faster than gold.
Thaler’s decision creates a way for investors to hold a stake in Bitcoin through daily stock purchases without having to buy Bitcoin directly. Saylor, who stepped down as CEO last year to become executive chairman, told CNBC’s Morgan Brennan last week that he expects Bitcoin’s bull run to continue next year. He said that 99.9% of the world's funds are invested in real estate, stocks, bonds and commodities, and only 0.1% of the funds are allocated to Bitcoin.
Sailer said: As people understand digital assets, they realize that more and more capital should be allocated to this digital asset, so their investment ratio increases from 0.1% to 0.2%. Thaler co-authored a book about Bitcoin last year called "What is Money?" 》
New uses for cash
MicroStrategy isn't the first firm to put some of its cash into alternative investments, nor is it the last to find ways to use that money to generate outsized returns. Earlier this month, GameStop CEO Ryan Cohen allowed the company to use cash to purchase shares.
But MicroStrategy is unique in that it is viewed almost entirely as a Bitcoin holding company.
"Michael Thaler is a visionary," Vafi said. He saw this as an opportunity to really take advantage of the fact that they had a lot of cash and a perfect balance sheet, and started this Bitcoin financial experiment. And it worked well, so they continued down that path. "
In analyzing why MicroStrategy's shares have outperformed Bitcoin so significantly this year, Wafi described it as a "scarcity premium" because equity investors have limited access to the market.
That could change in the new year, as investors prepare for a surge in Bitcoin exchange-traded funds (ETFs). There are currently Bitcoin futures ETFs, which consist of contracts to buy and sell Bitcoin, but not the cryptocurrency itself. Investors can also purchase the Grayscale Bitcoin Trust. The fund owns Bitcoin, which trades over the counter rather than on major exchanges.
Grayscale sued the SEC last year after regulators rejected its application to create a spot Bitcoin ETF on investor protection grounds. In August this year, an appeals court ruled in favor of Grayscale, a ruling that many in the industry believed paved the way for a new wave of ETFs. Asset managers including BlackRock, Fidelity and Invesco have applied to the U.S. Securities and Exchange Commission (SEC) to launch their own products.
Vafi said the prospect of competition poses little threat to MicroStrategy.
“To some extent, I think this is a very advanced issue,” he said. If a Bitcoin ETF is approved, the price of Bitcoin could go higher, possibly materially higher.
MicroStrategy proposes more than just bets on where Bitcoin will go. While the ETF is passively managed, MicroStrategy can choose to put its Bitcoin holdings to use, such as using them as collateral, creating additional business opportunities.
Shirish Jajodia, MicroStrategy’s vice president of finance and investor relations, told CNBC in an email: “The continued maturation of the Bitcoin regulatory environment and the increase in institutional demand we are currently seeing make MicroStrategy ready to Encouraged. We do believe this will have a positive impact on mainstream investor as well as corporate adoption of Bitcoin.”
MicroStrategy's software business is also a strength, Thaler said on the company's recent earnings call. He said it was a proven cash flow generator that enabled the company to purchase more Bitcoin.
It's been a tough year for many investors shorting microstrategy companies.
According to data from S3 Partners, short sellers of crypto company stocks lost $6.1 billion for the year through early December, with Coinbase’s rise hurting them the most. The company said short sellers spent $2.19 billion covering their bets in the first three quarters of this year, mostly buying Coinbase and MicroStrategy.
Short sellers have lost $4 billion on Coinbase and $1.4 billion on MicroStrategy this year, according to data provided by S3 Partners last week. About 23% of MicroStrategy’s shares sold to the public are shorted, S3 said, the second highest among cryptocurrency companies after Bitcoin miner Marathon Digital. The average gain for U.S. stocks was 5%.
MicroStrategy shows no signs of slowing down in its rush to buy Bitcoin. The company said that even as Bitcoin prices continued to rise, it purchased approximately 16,130 Bitcoins in November for more than $593 million. That’s more Bitcoin than the company has purchased in any full quarter since the first three months of 2021.
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