"MSTR's Bitcoin Bet: Justifying the $73B Premium"

In Defense of the ‘MSTR Premium’

Strategy, a SaaS-based business intelligence company, has pioneered a bitcoin treasury strategy and is currently trading at a $73 billion market cap, approximately 1.6 times the value of its underlying bitcoin holdings. This so-called “MSTR premium” has sparked debate and skepticism, but with a decade of deep equities experience, we believe there are three reasons why the MSTR premium is justified, particularly during periods of rising bitcoin price expectations.

The first reason MSTR trades at a premium to its BTC holdings is that investors pull future BTC carry to the present. Strategy takes on leverage by issuing equity and debt to invest the proceeds into bitcoin, earning the difference between the return on bitcoin and its cost of capital. This carry is not just earned this year but also in future years, and investors present-value this expected future carry and include it in MSTR’s market cap.

Second, Strategy monetizes intelligent capital markets issuance for the benefit of shareholders. It accretes value via convertible debt issuance, where it not only gets paid to offer bitcoin-like returns to the bond market but also for the volatility inherent in its stock as convertible bond arbitrageurs make more money with a more volatile underlying asset. Additionally, MSTR issues equity, mostly through at-the-money equity issuance programs, at a premium to book value, which is accretive to shareholders. This strategy allowed MSTR to generate a 74% increase in the amount of its bitcoin held per share last year, equivalent to 140,630 BTC, or $14 billion of value for shareholders.

Lastly, the entire construct takes advantage of bitcoin and crypto’s nascency, the fact that cryptocurrencies are in secular expansion, and that bitcoin’s price has tended to rise over time. This is similar to a thought experiment: if you had a magic bank account with $100 USD in it that paid you a 69% interest rate, you would likely pay much more than $100 for that account, meaning it would trade at a premium to its underlying USD. This is what is happening with MSTR, as it has increased its BTC per share at a 69% annual rate since it began investing in bitcoin in August 2020.

Risks abound, of course