MicroStrategy - why an analytics software vendor needs so many bitcoins

14.05.2021 | auglovoi

MicroStrategy, a public company whose shares are traded on the Nasdaq, a high-tech exchange in the United States, began massively buying bitcoins last year. At first, the provider of analytical software spent its own free liquidity on operations with the first cryptocurrency, and later began raising and borrowed capital. The latter, by the way, was obtained by selling off debt securities in less than a day. Many considered this move by CEO Michael Saylor to be quite far-sighted, because bitcoin value growth in the future is imminent due to the limited supply, unless, of course, the first cryptocurrency loses its attractiveness, but it may not be that simple. To understand why MicroStrategy needs so many crypto-assets, it is worth looking at the situation from all angles.

Who are the institutional investors

Most analysts are now betting on bitcoin precisely because of the so-called “institutional” investors. Speaking about this group of companies, as a rule, such names as MicroStrategy, Tesla and Square sound more often. The term itself is more of a collective term and comes from the United States, where the Securities and Exchange Commission defines a group of investors operating exclusively in securities as “qualified institutional investors”. The U.S. Internal Revenue Service has a somewhat broader notion and considers all sources of income of a company. Among experts and laymen, on the other hand, “institutional” is most often defined as:

• conventional banks,
• insurance companies,
• pension and hedge funds,
• investment managers and advisors.

The activities of all of the above companies are related exclusively to finance and investments, and none of the large companies whose assets contain a significant portion of the first cryptocurrency fit into these categories. However, the Securities Commission may also classify operating companies in this category if they invest available free liquidity and cash reserves in securities and digital assets. Tesla is an excellent fit for this criterion, but an analytical software vendor that bought digital gold with borrowed funds can be formally called an institutional investor with a great deal of stretch.

Who are MicroStrategy

MicroStrategy is a provider of analytical software from the United States. As is clear from its core business, the company sells analytical software tools for major financial players. MicroStrategy got its start in 1998.

During the rise of information technology, the company’s shares, which are traded on the high-tech exchange Nasdaq, soared in price to $3,300, but later the value of the securities collapsed more than 30 times, and for a long time traded in the range between $100 and $200.

If you look at the company through the prism of financial statements, you are unlikely to find anything outstanding. The operating and investment activity of MicroStrategy can be considered average by the standards of the American market, and many more tech companies showed much better results.

The main person who managed to bring the company to the first pages of the industry news agencies is the CEO Michael Saylor. It was he who decided that the best defense against inflation, when the United States Federal Reserve was printing money nonstop, handing it over to the government to hand out to the public in order to overcome the crisis caused by the coronavirus, was cryptocurrency. His choice fell on bitcoin, which is not only the first of its kind, but is also recognized as a benchmark comparable to the digital equivalent of gold.

Current status of the company

You can find out the company’s current state of affairs from report filed with the Securities and Exchange Commission. It shows that the company has only $53 million of its own funds, including cash and digital assets, while it only owns more than $4 billion in bitcoins, which is more than 95% of MicroSrtategy’s capitalization. To be fair, though, it only took just over two billion dollars to buy the first cryptocurrency.

And the answer to the question of where the difference came from is very simple. All along, the company has been issuing convertible senior notes in varying amounts, from $100 million at a time, to a billion dollars. Unlike corporate convertible notes, which give you the right to receive either debt or securities at par at the end of the settlement period, the debt securities issued by MicroStrategy had essentially no collateral. The purchased cryptocurrency could not be recognized as a collateralized debt asset.

Settlement on the notes sold will take place on December 15, 2025, all the while a three-quarter percent rate on the debt will be in effect. Beginning in 2023, security holders will be able to convert the obligations into assets other than cash, but the rules for settlement in this case are not available to the general public and remain unknown.

Who could benefit in the end from all of MicroStrategy’s manipulation of cryptocurrencies

According to the company, it will be possible to convert all issued debentures into money or shares, but it is up to MicroStrategy to decide what exactly they will be converted into, and it is not only possible to do both, but a combination of both. And this is what gives room for the application of various schemes.

So there is an opportunity to pay off the borrowers in the way that is most profitable for the company at the time of settlement. For example, if the stock market share prices drop substantially again, buyers of notes may receive them, otherwise they can pay in cash. Some of the largest investment companies, Morgan Stanley and Citadel, decided to take advantage of the win-win situation by increasing their investment in the software provider. Thus, we can say that the current state of affairs will leave shareholders in any case, because none of the cited investors are not actively interested in the cryptocurrency market.

Although it is too early to make final conclusions - the world of finance is quite complicated and having information only from public sources it is difficult to talk about the full picture, but it is already safe to say that MicroStrategy will continue to buy cryptocurrencies, at least until the end of next year, when convertible note holders will not have the opportunity to exchange debt.