MicroStrategy: The Bitcoin "Shadow Stock" and Its ATM Financing Path

MicroStrategy: The Bitcoin "Shadow Stock" and Its ATM Financing PathMicroStrategy, once a victim of the 2000 dot-com bubble, saw its stock price plummet from $300 to $0.42

MicroStrategy: The Bitcoin "Shadow Stock" and Its ATM Financing Path

MicroStrategy, once a victim of the 2000 dot-com bubble, saw its stock price plummet from $300 to $0.42. However, in 2020, company founder Michael Saylor made a life-changing decision, transforming the company into a cryptocurrency investment platform and investing all its funds in Bitcoin, calling it "the most valuable asset in the world." As Bitcoin has rebounded, MicroStrategy has returned to its peak, becoming a "Bitcoin shadow stock." This year, MicroStrategy's market capitalization once reached nearly $70 billion, its stock price soared sixfold in a year, and nearly 20 times in the past five years. The current stock price is $328. MicroStrategy has been aggressively buying Bitcoin through equity and debt financing, and its "fortune" has been realized through Bitcoin's appreciation, which is also the core reason for the company's soaring stock price. Behind MicroStrategy's wealth-making myth lies its unique equity financing method ATM (At-the-market offerings).

ATM, or at-the-market offering/issuance, refers to a listed company selling newly issued shares or shares it already owns to the secondary trading market at the prevailing market price through designated brokers. Recently, MicroStrategy has made a bold plan to collect ammunition for its "Bitcoin buying spree" by increasing its financing. This plan called "21/21," aims to raise $42 billion over the next three years through $21 billion in equity and $21 billion in debt. At current prices, this means the company will purchase nearly 600,000 Bitcoins, about 3% of the total Bitcoin supply. The $21 billion equity financing in this plan is to be completed through ATM, and over $3.5 billion has already been raised.

So, what are the characteristics of the ATM mechanism and can it help MicroStrategy reach new heights?

The ATM Mechanism Behind the Soaring Stock Price

MicroStrategy is the company with the largest Bitcoin holdings among US-listed companies, and its stock price is deeply tied to Bitcoin. The company initially bought Bitcoin using cash flow, and later used ATM and other financing methods to raise funds, leveraging its purchases. Under this operation, MicroStrategy's stock price increase has been even more dramatic than Bitcoin's.

MicroStrategy employs a so-called "at-the-market offering (ATM)" approach, where it hires banks to sell its shares, allowing the company to sell shares without filing additional regulatory documents. This model offers all investors an equal opportunity to participate in the purchase of shares, without favoring institutional investors, which aligns with the decentralized spirit of cryptocurrency. The ATM model also offers flexible financing, avoiding the significant price discounts that occur in traditional financing, which is particularly suitable for highly volatile stocks like MicroStrategy. Meanwhile, MicroStrategy's high trading volume makes it possible to sell large amounts of shares, with its stock market capitalization at a 2.8 times premium to its Bitcoin holdings, creating arbitrage opportunities in financing.

MicroStrategy utilizes the ATM model to raise funds, leveraging the high volatility of the stock and Bitcoin markets to maximize its Bitcoin holdings while maintaining a high valuation for its stock. However, the success of this strategy is highly dependent on the continued rise in Bitcoin prices, so the potential risks of market fluctuations cannot be ignored.

The Financial Times has analyzed the characteristics of the ATM equity financing mechanism, specifically:

1. Flexibility of ATM stock issuance/issuance

ATM stock issuance allows companies to gradually introduce new shares to the market, rather than through traditional methods of large-scale issuance at once. This flexibility is particularly suitable for highly volatile companies like MicroStrategy, as it allows them to raise funds flexibly during price peaks, avoiding the problem of significant price discounts caused by large-scale issuance.

2. Aligns with the decentralized spirit of cryptocurrency

"Everyone can participate." ATM issuance provides all investors with an equal opportunity to participate in the purchase of shares, without favoring institutional investors. This model, which minimizes intermediary intervention, aligns with the decentralized philosophy advocated by cryptocurrency. Additionally, the use of ATMs eliminates the time and effort that management has to spend meeting with fund managers or attending roadshows to raise funds.

3. Suitable for capital-intensive industries

The ATM model is popular in capital-intensive industries such as real estate investment trusts, life sciences, and energy. MicroStrategy's use of ATM to raise funds demonstrates the versatility of this tool.

4. High liquidity supports ATM operations

MicroStrategy's shares are highly liquid, allowing it to sell large volumes of shares through the ATM without putting undue pressure on the stock price. The company can gradually sell shares based on market conditions, and even sell large blocks of shares when fund managers bid, with management having complete control over this process.

5. ATM provides arbitrage opportunities

Due to its highly leveraged balance sheet, MicroStrategy's stock market capitalization is at a 2.8 times premium to the value of its Bitcoin holdings. The funds obtained from selling shares through ATM can be used to purchase more Bitcoin. This means that issuing more shares actually increases the amount of Bitcoin represented by each share, creating an arbitrage effect.

Risks Emerge When Bitcoin Prices Decline

While the current ATM operation is benefiting from Bitcoin's rise, the article mentions two potential risks:

1. If Bitcoin prices decline, the premium of the stock's value relative to its net assets (Bitcoin) may shrink or even become a discount.

2. Continued share issuance may gradually erode the premium, leading to a decline in the stock price to the actual value of Bitcoin.

In conclusion, the ATM mechanism provides MicroStrategy with a flexible financing method, allowing it to make highly leveraged bets in the Bitcoin market and drive its stock price to soar. However, this strategy also carries potential risks, especially during a decline in Bitcoin prices. Whether MicroStrategy can continue to utilize the ATM mechanism to achieve "wealth" in the future, requires continued market recognition of its strategy and continued upward momentum in Bitcoin prices.