Key takeaways

  • MicroStrategy has adopted a bold strategy of using debt, primarily through convertible notes and bonds, to fund its massive Bitcoin purchases. 
  • MicroStrategy has raised billions at favorable rates, allowing it to acquire Bitcoin without significantly affecting its financial liabilities or diluting shareholder equity.
  • While the strategy has worked during Bitcoin price surges, it carries significant risk. A sharp decline in Bitcoin’s value or rising interest rates could lead to financial challenges.
  • CEO Michael Saylor’s deep belief in Bitcoin as a superior asset class is driving the company’s strategy. 

MicroStrategy, founded in 1989 by Michael Saylor and Sanju Bansal, is primarily known for its enterprise analytics and cloud-based solutions. Headquartered in Virginia with almost 2,000 employees, the company has provided software services to businesses for decades. 

However, since 2020, it has become more widely recognized for its ambitious Bitcoin strategy, where it has accumulated vast amounts of Bitcoin (BTC) using debt financing.

This strategy is built around the belief that Bitcoin will serve as a long-term hedge against inflation, a view championed by its CEO, Michael Saylor.

As of September 2024, MicroStrategy holds 252,220 BTC, valued at over $15 billion, having acquired this massive holding through a combination of equity sales and over $4 billion in debt. 

Saylor has been one of the most vocal proponents of Bitcoin, seeing it as a revolutionary asset class. He envisions Bitcoin growing in value significantly over the next few decades, predicting that it could reach astronomical levels, with the goal of turning MicroStrategy into a “Bitcoin bank,” offering financial instruments built around Bitcoin.

Let’s dive deeper into how MicroStrategy uses debt to fuel its Bitcoin buying spree.

MicroStrategy’s debt-driven Bitcoin strategy

MicroStrategy has crafted a unique approach to amassing Bitcoin by leveraging significant amounts of debt. Rather than relying on operational cash flow or sales of company assets, it issues convertible notes and bonds, financial instruments that allow the company to raise large sums of money from institutional investors. The proceeds are then used almost exclusively to acquire BTC, making the company one of the largest holders of the cryptocurrency globally.

Timeline of significant debt-financed Bitcoin purchases

  • August 2020: MicroStrategy makes its first significant move into Bitcoin, purchasing 21,454 BTC for $250 million, funded by existing cash reserves. This initial step sets the tone for its future strategy.
  • December 2020: The company raises $650 million through convertible notes, marking its first instance of debt financing to buy Bitcoin. These notes are sold to qualified institutional buyers, with the proceeds entirely dedicated to purchasing Bitcoin.
  • February 2021: MicroStrategy raises another $1.05 billion by issuing additional convertible notes. The company then uses this capital to buy around 19,452 BTC, continuing to scale its Bitcoin holdings.
  • 2024: MicroStrategy continues this aggressive strategy, raising $700 million in March and June, followed by another $700 million in September through convertible note sales. This latest offering helps refinance $500 million in debt and finance more Bitcoin purchases.

MicroStrategy's Bitcoin holdings over time

Different financing methods used by MicroStrategy

MicroStrategy primarily employs two key methods of debt financing to accumulate Bitcoin:

  1. Convertible notes: These are a form of debt that can be converted into equity (shares of MicroStrategy) at a future date, typically if the company’s stock price rises above a certain threshold. These notes generally come with low interest rates, making them an attractive way for MicroStrategy to raise capital. The first such issuance in December 2020 raised $650 million, with subsequent offerings reaching billions.
  2. Senior secured notes: MicroStrategy has also used senior secured notes, which differ from convertible notes in that they are typically backed by the company’s assets and offer higher interest rates. These were first used in June 2021 when the company issued $500 million in senior secured notes to expand its Bitcoin holdings.

Convertible notes vs. senior secured notes

How does MicroStrategy buy its Bitcoin?

Once MicroStrategy raises funds through debt instruments such as convertible notes and senior secured bonds, it typically uses over-the-counter (OTC) trading desks to execute large BTC purchases. 

OTC desks are critical for large-scale buyers like MicroStrategy because they allow the company to purchase large amounts of Bitcoin without triggering massive price swings that could occur on public exchanges. OTC desks facilitate transactions between institutional buyers and sellers, ensuring the purchase remains discreet and doesn’t disrupt the market.

For example, when MicroStrategy raised $650 million through its first convertible notes in 2020, it worked closely with Coinbase’s institutional service to buy Bitcoin over time to avoid sudden market impacts. The use of OTC desks helps them accumulate large amounts of BTC at more favorable prices compared to open-market purchases.

Where does MicroStrategy store its Bitcoin?

Once the Bitcoin is acquired, MicroStrategy stores it securely through trusted custodial services. While the exact custodians haven’t always been publicly named, it’s been confirmed that it uses industry-standard practices for security. 

Cold storage — a method of keeping private keys offline and away from potential hackers — is the primary way the company stores its Bitcoin. This form of storage reduces the risk of cyberattacks and ensures long-term security.

Why MicroStrategy uses debt for Bitcoin

MicroStrategy’s decision to use debt rather than cash reserves or equity to fund its Bitcoin acquisitions is rooted in both financial and strategic reasons. There are three main reasons behind it:

Leveraging low interest rates

One of the primary reasons MicroStrategy opts for debt over cash or equity is the historically low interest rates that have persisted over the past few years. By issuing convertible notes or senior secured bonds with low interest rates, MicroStrategy can raise large amounts of capital relatively cheaply.

Indeed, debt financing at such low rates allows MicroStrategy to borrow capital without significantly increasing its financial liabilities in the short term. These low-cost borrowings are then converted into Bitcoin, which Saylor and the company see as a superior long-term store of value compared to holding fiat currency or relying on cash reserves.

Did you know? In December 2020, MicroStrategy issued $650 million in convertible notes at a 0.75% interest rate, a very favorable rate for borrowing.

Preserving cash flow and protecting equity

By using debt, MicroStrategy is able to preserve its operational cash flow to run the business and continue to invest in its core services, such as enterprise analytics and software solutions. If it were to use its cash reserves to fund BTC purchases, it could strain its liquidity, leaving it less flexible for future business needs.

Issuing debt instead of selling equity also helps protect the value of existing shareholders’ stakes in the company. Selling equity would dilute existing shares and could signal a lack of confidence in the company’s traditional business operations. 

Debt financing, on the other hand, allows MicroStrategy to fund its Bitcoin strategy without affecting shareholder ownership while also benefiting from any potential future appreciation of Bitcoin.

Michael Saylor’s belief in Bitcoin as a superior asset

At the heart of MicroStrategy’s debt-driven Bitcoin strategy is Saylor’s deep conviction that Bitcoin is a superior asset compared to fiat currencies, cash reserves and other traditional investments. Saylor has publicly stated that he views Bitcoin as “digital gold,” a hedge against inflation and a store of value in a world where fiat currencies are consistently losing purchasing power due to government monetary policies.

Saylor believes that over time, Bitcoin will appreciate significantly in value, far outpacing the cost of borrowing through debt. This long-term vision is what drives MicroStrategy to continuously issue debt and use the proceeds to buy more Bitcoin.

Risk factors: Is the strategy sustainable?

MicroStrategy’s heavy reliance on debt to purchase Bitcoin exposes the company to a range of risks.

The major risks facing MicroStrategy’s leverage of debt to buy Bitcoin

First and foremost, Bitcoin is a highly volatile asset, with prices capable of swinging dramatically within short periods. While the strategy has paid off when Bitcoin prices soared, any significant downturn in Bitcoin’s value can lead to large impairment losses, affecting MicroStrategy’s balance sheet.

Additionally, the continued issuance of debt increases the company’s financial obligations. As of October 2024, MicroStrategy has accumulated over $4 billion in debt through convertible notes and senior secured bonds.

Moreover, the company’s debt repayments are fixed, meaning that a sharp decline in Bitcoin’s value would reduce the value of their holdings without diminishing their debt obligations. This mismatch could lead to liquidity issues, forcing the company to either sell BTC at a loss or seek refinancing under less favorable terms.

The company is betting that the long-term appreciation of Bitcoin will outweigh the costs of servicing this debt, but this assumption is not guaranteed.

Possible repercussions of interest rate hikes or tightening credit markets

MicroStrategy’s ability to sustain its debt-driven Bitcoin strategy also depends on broader economic conditions. Interest rate hikes or a tightening of credit markets could make it more expensive for the company to issue new debt or refinance existing debt. 

As interest rates rise, the cost of borrowing increases, potentially making MicroStrategy’s debt offerings less attractive to investors or raising the interest payments on future debt issuances.

For instance, while MicroStrategy has benefited from low interest rates (as seen in its 0.75% interest convertible notes), any shifts in the credit environment could make future debt more expensive, squeezing their finances.

Investor reactions to debt-driven Bitcoin purchases

Despite the risks, investor sentiment around MicroStrategy’s strategy has been largely positive, at least when Bitcoin is performing well. MicroStrategy’s MSTR stock has surged alongside BTC, demonstrating the close correlation between Bitcoin price movements and the company’s share value. 

In fact, MSTR’s stock has risen nearly 295% over the past year (as of September 2024), outperforming many tech stocks in a similar timeframe.

However, this close correlation also works against MicroStrategy when Bitcoin’s price falls. Investors’ confidence could quickly erode during a bear market, potentially driving down the company’s stock price and increasing the pressure on its financial stability.

Did you know? MicroStrategy reported a net loss of $102.6 million in Q2 2024 due to a significant drop in Bitcoin’s price. However, despite this temporary setback, the quick recovery in Bitcoin’s market value throughout the year led to a surge in MicroStrategy’s stock. By September 2024, MSTR stock had surged 96% due to the general upward trend in Bitcoin prices.

Future outlook for MicroStrategy’s debt strategy

MicroStrategy’s aggressive use of debt to finance its Bitcoin acquisitions sets it apart from other companies investing in cryptocurrency.

For example, companies such as Tesla and Block (formerly Square) have also invested in Bitcoin, but their strategies differ significantly from MicroStrategy’s. For instance, Tesla’s investment in Bitcoin was made using corporate cash, not debt, and has remained relatively stable. Tesla even briefly sold part of its Bitcoin holdings, showing a more flexible, risk-averse approach. Meanwhile, Block has also invested in Bitcoin using corporate funds but hasn’t pursued debt-financed strategies to accumulate more.

Indeed, while many firms have dipped their toes into Bitcoin, MicroStrategy stands out for its full-fledged commitment.

Prospects for future debt issuances

MicroStrategy has shown no signs of slowing down its debt-driven strategy. In 2024 alone, the company issued three major rounds of convertible notes, raising $700 million in March, $500 million in June and another $700 million in September.

The company continues to signal that as long as BTC remains a viable long-term asset, it will pursue additional debt issuances to further expand its holdings.

However, future issuances will depend on market conditions, particularly interest rates and investor sentiment. As long as interest rates remain relatively low, issuing debt to buy Bitcoin remains a feasible strategy. Should credit markets tighten or interest rates rise significantly, MicroStrategy may face higher borrowing costs, reducing the attractiveness of this approach.

Did you know? In August 2020, Bitcoin was trading around $11,500. Fast forward to October 2024, and Bitcoin is valued at over $60,000, representing a more than 400% increase in just four years.

Ability to handle long-term debt obligations

There’s no doubt that MicroStrategy’s ability to manage its long-term debt obligations will largely depend on Bitcoin’s performance. The company has accumulated over $4 billion in debt, much of it maturing over the next decade.

If BTC continues to appreciate over time, MicroStrategy’s assets could easily cover its debt obligations. However, if Bitcoin enters a prolonged bear market, the company could face liquidity challenges, needing to either sell Bitcoin at unfavorable prices or refinance debt under more difficult conditions.

To conclude, it’s a high-risk, high-reward strategy, relying heavily on the continued success of Bitcoin.

Written by Bradley Peak