The market's attention and feedback, in turn, drive the success of the strategy. This "reflexivity" may bring longer-term development potential to the Bitcoin reserve strategy.

Author: JAY

Translation: Deep Tide TechFlow

Since October 2024, the stock price of Strategy (MSTR) has experienced dramatic fluctuations. It soared from $188 to $540, achieving nearly a threefold increase, but then fell back and stabilized in the low range of $300.

Behind this stock price trend are a series of significant initiatives driven by the company's founder, Michael Saylor, including renaming the company to Strategy, purchasing over 506,000 Bitcoin (BTC), and issuing two new preferred stocks, STRK and STRF.

However, there are many inaccurate interpretations in the market regarding how Strategy operates. To help investors more clearly assess whether Saylor's Bitcoin reserve strategy is sustainable, we attempt to simplify its core logic.

Saylor's Bitcoin Reserve Strategy: Two Core Points

Saylor's financial strategy can be summarized in the following two points:

1. Sell* stock options* and receive one-time gains

Strategy sells purchase or conversion options for MSTR stock, setting the exercise price in the range of 30% to 300% of the current stock price, and collects all gains in advance through structured transactions. This is mainly achieved by issuing convertible bonds and preferred stocks STRK and STRF.

2. Issue more stock at the right time

Utilizing the ATM (At-the-Market) mechanism, issue more MSTR stock when market conditions are favorable to further raise funds.

It is important to note that Saylor has not explicitly planned to repay the principal of these options or bonds. His core goal is to maintain the long-term operation of the financing plan while paying interest until the stock price of MSTR rises to the relevant exercise price.

The core advantage of this strategy lies in its highly flexible financing method. Using this strategy, Saylor can choose the best fundraising tool based on market conditions:

• When implied volatility** is high**, issue convertible bonds;

• When the net asset value (NAV) of MSTR stock is at a premium, issue more stock through the ATM mechanism;

• When neither of the above conditions is met, issue more preferred stocks (such as STRK or STRF).

The outside world may often have concerns about the high leverage risk of this strategy, but data shows that such concerns are unfounded. Here are the key financial data for MSTR:

• Market capitalization: $85 billion;

• Market value of Bitcoin holdings: approximately $44 billion (506,000 BTC);

• Total debt: $8.2 billion, with an annual interest rate of only 0.421%, resulting in annual interest expenses of about $34 million;

• Preferred stock** dividend expenses**: $58.4 million per year for STRK, $85 million per year for STRF.

Through ratio analysis of this data, it can be found that Saylor's use of leverage is actually very limited, and the cost of debt is extremely low.

Bitcoin Reserve Strategy vs. Traditional Banking Model

Strategy's Bitcoin reserve strategy can be compared to the operational model of traditional banks to some extent. The core operational logic of both is as follows:

• Traditional Banking Model

    Banks amplify leverage further through a fractional reserve system to increase returns, but this model can occasionally lead to bank failures.

  • Accept customer deposits;

  • Use deposit funds to purchase "safe" government-backed debt (such as treasury bonds, mortgage-backed securities, etc.);

  • Pay depositors interest that is lower than the returns on debt investments.

• Bitcoin Reserve Strategy

    Unlike traditional banks, Strategy's Bitcoin reserve strategy does not use excessive leverage, as the government will not provide similar bailouts for issues that arise.

  • Raise funds (similar to banks accepting deposits);

  • Use the raised funds to purchase Bitcoin (instead of government-backed debt);

  • Pay investors returns on MSTR stock and regular interest or dividends.

Despite the different operational methods, the core goal of both models is to achieve profitability through fund management. Banks rely on the net interest margin (the difference between the returns on debt investments and the interest on deposits), allowing investors to benefit from a portion of the debt interest passed through the bank. In contrast, Bitcoin reserve companies rely on the capital appreciation of Bitcoin, allowing investors to benefit from the volatility of Bitcoin prices (more detailed information can be referenced to understand how this trading works and why this model is advantageous for convertible bond buyers). This appreciation mainly comes from the rise in Bitcoin prices or the depreciation of the dollar relative to Bitcoin.

Future Potential of the Bitcoin Reserve Strategy

Michael Saylor is one of the staunchest advocates of the Bitcoin reserve strategy. His asset management model has successfully attracted many companies to follow suit and has prompted the U.S. government to begin exploring similar reserve strategies. The continuous rise in MSTR and Bitcoin prices has become the best "advertisement" for this strategy, further promoting market recognition of the Bitcoin reserve concept.

Although there are still few who truly understand and accept Saylor's strategy, as Bitcoin and MSTR develop, the market influence and sustainability of this strategy are strengthening. The market's attention and feedback, in turn, drive the success of the strategy. This "reflexivity" may bring longer-term development potential to the Bitcoin reserve strategy.

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