Will MicroStrategy stop buying Bitcoin?

MicroStrategy to halt Bitcoin purchases?

Author: BEN STRACK, BlockWorks; Translation: Song Xue, LianGuai

MicroStrategy currently holds approximately 0.75% of the market’s circulating supply of Bitcoin and shows no intention of slowing down its purchasing speed.

An analyst said that the company’s Bitcoin (BTC) buying and holding strategy is not without risks, but another industry observer said that the company may only stop buying or even sell when absolutely necessary.

MicroStrategy owns 152,800 BTC, purchased at a price of $4.53 billion, or $29,672 per Bitcoin. The company’s holdings have been steadily increasing, and it continues to buy regardless of whether it is a bull or bear market.

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Lance Vitanza, Managing Director of TD Cowen Stock Research, said, “I don’t think they will stop.”

No end in sight

The business intelligence software company operated by Bitcoin bull Michael Saylor launched its Bitcoin acquisition strategy in August 2020.

Recently, the company purchased 12,333 Bitcoins at a price of $347 million between April 29 and June 27, the largest purchase since June 2021. Subsequently, the company purchased an additional 467 Bitcoins in July.

The executives made it clear during the earnings conference call that the company plans to continue accumulating Bitcoin over time using excess cash and net proceeds from capital market transactions, including the issuance of convertible notes.

Matthew Weller, Global Research Director at StoneX, said that the company is known for its “hybrid corporate strategy,” which converts the profits of its core software intelligence business into BTC, which it sees as an excellent store of value.

Weller said, “Since they have come this far down this road, it is difficult to see MicroStrategy stopping its Bitcoin buying spree.”

Vitanza said he expects the company to limit its Bitcoin purchases when market conditions are attractive based on the price of BTC and the price of MicroStrategy’s securities (debt or equity) issuance.

As of Wednesday’s close, the company’s stock price was $377.84, up 160% from the same period last year. At that time, the price of BTC was $29,390, up 77% from the beginning of 2023.

Vitanza believes that the amount of Bitcoin purchased by MicroStrategy largely depends on the relationship between these two prices.

“I believe the company has a very specific model and inserts that algorithm,” Vitanza said. “This is not to say that they just wake up in the morning and sit there and say, ‘Hey, you know, the stock price is $390, and the Bitcoin price is $30,000’ – it feels like a good combination.”

MicroStrategy stated in a filing submitted on August 1 that it has entered into sales agreements with Cowen and Company, Canaccord Genuity, and Berenberg Capital Markets to sell up to $750 million worth of stocks to one or more entities.

During last week’s earnings conference call, Chief Financial Officer Andrew Kang stated that MicroStrategy can use the proceeds for “general corporate purposes,” including purchasing more Bitcoin or repurchasing or repaying its outstanding debt.

Kang noted that the company terminated its previously announced $625 million at-the-market (ATM) equity offering, which had approximately $290 million in remaining capacity, in favor of the $750 million facility.

“They looked at it and said $290 million isn’t enough, so that told us something,” Vitanza said. “I originally thought they would use the old facility until it got close to zero. But them [wanting] to size this thing larger tells me they’ll be buying in the near term, or they already have.”

An analyst from Berenberg Capital Markets stated in a research report on August 1 that they “expect MicroStrategy to hold 156,800 BTC by April 2024, an increase of 4,000 BTC from today.”

What are the risks and when can they sell?

Vitanza remarked that MicroStrategy does not buy Bitcoin based on six-month price forecasts.

Instead, he said, “The strategy is based on the idea that over the years, Bitcoin will become an increasingly accepted form of currency while fiat currencies continue to devalue.”

“I don’t think they’re going to sell it just for realized gains,” Vitanza said. “What are they going to do with that money? They’re going to convert it to fiat, and fiat is going to devalue at a 10% annual rate.”

TD Cowen’s Managing Director of Research stated that MicroStrategy only sells Bitcoin when it needs operating capital, to pay taxes, or to repay USD-denominated debt. The company’s outstanding debt and convertible notes total $2.2 billion.

Vitanza stated that approximately half of that debt will come due by 2025.

“If the funding markets are terrible and the company has no cash, then they could be forced to sell Bitcoin to generate the USD needed to pay off the debt,” he said. “I don’t see that as very likely, but I think that’s the only scenario.”

Regarding the risks for MicroStrategy, Vitanza said buying too much Bitcoin is not one of them. However, buying Bitcoin in a manner that investors perceive as imprudent could lead some to seek other tools to gain Bitcoin exposure.

Another potential avenue could be through a spot Bitcoin ETF—the U.S. Securities and Exchange Commission has not yet allowed such a product to launch, but some believe it could be introduced in the coming months after filings by companies like BlackRock and Fidelity.

Weller said that after about a decade of attempts by issuers, the prospect of such funds going public could bring “enormous risks” to MicroStrategy.

“Many investors buy MicroStrategy stocks to gain exposure to Bitcoin,” he said. “But if a simple, low-cost alternative emerges, the current investors’ demand for it may dry up, forcing this overvalued, slow-growth operating company to manage an awkward and unstable balance sheet.”

Saylor said during the company’s August 1 earnings conference call that a spot Bitcoin ETF, if approved, “will not provide the same leverage return” as MicroStrategy.

However, he acknowledged that some institutional investors may choose a Bitcoin ETF to enter this field.

“MicroStrategy is not the right choice for them, as they essentially just need to be able to buy an unlimited amount of Bitcoin without having to worry about tracking the price of Bitcoin and being clear and transparent,” Saylor said. “So I think this will expand the cake… MicroStrategy will continue to thoughtfully and responsibly manage our business to find ways to gain incremental Bitcoin for our investors.”

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