The Bitcoin Business Newsletter | A MicroStrategy Case-Study – Part I
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Key insight
This week, we are excited to introduce part of a case study by our main writer Adrian. The study examines MicroStrategy and their Bitcoin accumulation strategy.
The MicroStrategy business model inspired by Michael Saylor’s legendary vision is nothing short of extraordinary. Never before since the inception of Capitalism itself was business strategy reinvented this deep. While it's no surprise to an esoteric minority that adding bitcoin to the balance sheet creates shareholder value, this pioneering business methodology for acquiring capital remains largely under-appreciated. Because bitcoin isn't a conventional asset for corporate treasurers and a deeper understanding of it is needed before taking action, most leaders of large, publicly traded companies have yet to embrace it.
Staying ahead of the competition is paramount in business survival. Therefore, it's essential to adapt the balance sheet to the complexities of the 21st century. This critical portfolio component can be a valuable hedge against growing fiscal deficits, currency debasement, and geopolitical risks. As corporate treasurers face new economic challenges, bitcoin's unique properties have emerged as a potential solution.
Traditionally, corporate treasuries have managed cash conservatively, allocating most capital to assets perceived as low-risk—such as bank deposits, money market funds, treasury bills, commercial paper, and repurchase agreements. However, uncertain economic factors—including inflation, fluctuating interest rates, and heightened geopolitical risks—are prompting corporations to reconsider the viability of these strategies.
Over the past four years since 2020 under Michael Saylor's visionary leadership, MicroStrategy has seen its valuation skyrocket by more than thirtyfold. While BlackRock's initial bitcoin offerings didn't launch until 2022, the preceding years were crucial for the company, marked by intensive research, market observation, and active client engagement which eventually resulted in an optimal 84% portfolio allocation to bitcoin. Bitcoin's 15-year journey has been nothing short of historic—evolving from an unknown digital currency to a globally recognized asset held by a growing number of individuals and institutions worldwide.
Without the birth of double-entry bookkeeping, there is no sparking up a revolution of capitalistic enterprises to account for each asset and its liability. In fact, the main feature of Capitalism as a business model system was the use of accumulated capital to enlarge productive capacity rather than to invest in economically unproductive enterprises, such as pyramids and cathedrals. Here is yet again a reformation of Capitalism in a way of redirecting accumulated value from unproductive and actually depreciating assets or holdings towards enlarging productive capacity.
Adding bitcoin to the balance sheet not only enhances the sustainability of your cash reserves but also allows your company to become a sovereign corporate entity, rather than relying solely on third-party financial intermediaries. Bitcoin enables the use of triple-entry bookkeeping for your company, a method also known as momentum accounting developed by Yuji Ijiri. This accounting approach is ideal as it creates an immutable record of all transactions within the system. This record can be accessed using reporting tools, providing a flawless audit trail automatically and without the need for trust. These advancements herald the dawn of decentralized finance and represent a significant technological milestone for our generation. Acquiring bitcoin on the balance sheet means not only obtaining the scarcest asset Earth has ever seen but also securing a stake in the future of the business accounting revolution.
The first part of this case study will dive into the benefits of this corporate strategy. The second section will focus on the potential downturns. The third part will dig into the actual methodology of adopting the flywheel strategic reserve. Finally, the fourth section will explore how Sovreign, striving for excellence in this field becomes a global leader in helping to apply the method to your company.
I - The unmatched advantages of the flywheel strategic reserve
Adopting the corporate bitcoin standard involves acquiring substantial bitcoin holdings for the company's treasury. MicroStrategy pioneered this approach in six steps, applicable to any company worldwide where regulations and accounting practices permit. First, the company issues convertible debt to purchase bitcoin. As bitcoin's price rises—due to the game theory of a finite global monetary asset—the value of these purchases increases the company's market cap. Subsequently, as the company's market valuation grows, it can issue more debt by offering new shares, enabling further bitcoin acquisitions.
In essence, the new corporate flywheel model revolutionizing the business world is raising capital to benefit shareholders by issuing stock to buy bitcoin and repeating this process as often as feasible without incurring unbearable risk. The issuance of convertible debt is particularly attractive due to its significantly more favorable interest rates compared to other forms of debt issuance. Convertible debt is a financial instrument that allows a company to raise capital without immediate ownership dilution. In exchange for lending capital, the lender receives a predetermined number of shares at a premium to the current share price. This provides the company with fresh capital to acquire bitcoin— the scarcest asset in history—which, by its inherent nature, is likely to increase in value by the maturity date of the initially issued convertible debt.
Ignoring this playbook could be detrimental to your company as competitors adopt this corporate treasury strategy first. If the world's top companies followed MicroStrategy's 2020 approach, bitcoin availability would be scarce, given that MSTR's holdings already account for 1.2% of all bitcoin in existence and future supply. This game-theoretic model suggests that bitcoin's market cap will inevitably increase significantly as businesses worldwide adopt a bitcoin strategic reserve. Moreover, sovereign wealth funds and central banks may apply a similar strategy, coupled with the debasement of their own currencies, further driving bitcoin's price appreciation. Typically, convertible debt is issued with an attractive interest rate just a few percentage points above the current share price. In contrast, raising capital through traditional market methods usually incurs interest rates between 8 to 12 percentage points.
Another key feature of the MicroStrategy flywheel is that the company's convertible debt is issued against the share value, which already trades at a premium to the company's net asset value. This structure allows any publicly listed company to raise capital at a premium to its share value, creating a "double premium" effect. This approach mitigates the risk of a liquidity crisis and provides a deeper pool of liquidity for bitcoin purchases. Bitcoin offers unparalleled liquidity, with markets operating 24/7, 365 days a year. By raising capital in this manner to acquire more of this pristine asset, companies can access liquidity at any time, reducing the risk of capital illiquidity. Moreover, this strategy minimizes the dilution of issued capital, as lenders are typically repaid within a few years.
This strategy ensures the digital gold asset has room and time to grow securely while you manage to pay the 0-2% interest on issued capital with current revenue, avoiding the need to sell bitcoin at a discount. With a compound annual growth rate of 104% between 2011 and 2024, issuing conservative amounts of debt at 0 to 2% rates with long-term maturity dates—such as 10 or 20 years—is a clear opportunity for businesses today. Now that an uncorrelated and unique diversifying asset has emerged, which the traditional financial landscape allows companies to publicly disclose ownership of (provided taxes and compliance are respected), it's only a matter of time before businesses worldwide adopt this playbook.
Another key benefit of adding bitcoin to your company's treasury is the potential for significant investor and shareholder profits. The issued convertible debt offers investors a fixed return through interest payments, while the added benefit of capital appreciation—through both equity conversion and bitcoin holdings—attracts new investors and encourages existing ones to lend more. By the time you repay the promised premium on your shares to shareholders, you're likely to have generated extra income far exceeding the initial promised rate. Even if bitcoin's compound annual growth rate (CAGR) decreases substantially in the coming years or decades due to rapid adoption, the window of opportunity won't close entirely. This is because there's unlikely to be a second-best finite asset class with a greater capacity to surpass bitcoin.
The rest of this case study will be available in our free eBook, which is coming soon. Stay tuned.
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