22nd November 2024
Every big market trend needs its own buzzwords to attract investors and justify its hype. For the bitcoin frenzy, one such term is “BTC yield.”
MicroStrategy, a company that used to focus on software, introduced this unique concept to investors back in August. If you’re unfamiliar, BTC stands for bitcoin. Normally, “yield” refers to things like the dividend a company pays relative to its stock price or the interest a lender earns on loans or bonds. However, this is something entirely different.
MSTR sells at a 3x or 4x premium to its BTC. Keep in mind that MSTR already owns ~2% of the non-lost (like Satoshi’s) BTC, so their heaving buying pushes the price of BTC up. So MSTR sells stock and buys BTC. BTC price goes up a lot. MSTR goes up at 3x or 4x the rate of BTC. Rinse, repeat, and do it again, and again! To infinity and beyond! MSTR market cap is already > $100B. It puts GME to shame as a Meme stock!
MSTR is only financial engineering on BTC. If you want to buy BTC just buy it at Coinbase etc or the BTC ETF like IBIT. Then you have 100% pure and tax friendly exposure to Bitcoin. MSTR is financial engineering and now Saylor also came up with a new “KPI, their “BTC yield”. The BTC itself isn’t generating any yield as they don’t use them for staking. As long as the Bitcoin keeps rising or at least stays flat and you keep buying BTC with 50% debt @ 0% coupon then you have a positive return on the equity as you are 2x levered. It’s not a ponzi but just simple financial engineering like they did in 2005-2007 before the GFC.
MicroStrategy has become known for making a bold—and some would say risky—bet on bitcoin. Since 2020, the company has been buying and holding massive amounts of the cryptocurrency. Its co-founder and executive chairman, Michael Saylor, has turned into a passionate advocate for bitcoin. The company has been funding these purchases by selling its stock in ongoing offerings. This creates a cycle: the company’s market value rises, which allows it to sell more stock, buy more bitcoin, and repeat the process.
But MicroStrategy’s BTC yield isn’
t a yield in the traditional sense. Instead, it measures the percentage change in how many bitcoins the company owns per share of its stock over a given period. For example, as of November 17, MicroStrategy owned 1.29 bitcoins for every 1,000 shares of its stock, a 41.8% increase from December 31, when it owned 0.91 bitcoins per 1,000 shares. This increase is what the company refers to as its year-to-date BTC yield.
MicroStrategy tracks this metric over different timeframes—quarterly, yearly, or any other period. And recently, the BTC yield has been skyrocketing. On November 11, the company announced a 26.4% BTC yield year-to-date, up from 17.8% at the end of September. When the company first introduced this metric, it said it aimed for a long-term annual BTC yield of 4% to 8%, starting next year. Clearly, it’s already far exceeding those targets.
Saylor is taking 0% coupon margin loans without any collateral and does the carry trade thereafter creating a “positive carry” for the shareholder which he calls a “BTC yield”. It works well as long as the BTC price is rising but there are similarities to GBTC in 2021, like Grayscale MSTR won’t be able to sell their BTC. for Grayscale it was due to the Trust structure and for MSTR it’s because of potential hefty tax bills being a C-corp.
What’s truly striking is how the stock market values MicroStrategy. Each bitcoin the company owns is effectively valued at nearly four times what a regular investor would pay for one. As of the latest count, MicroStrategy held 331,200 bitcoins, worth about $31.2 billion, with $4.2 billion in net debt. Its bitcoin purchases cost about $16.5 billion. But here’s the kicker: the company’s market value has soared to $106 billion—thanks to a staggering 650% increase in its share price this year.
This is the phenomenon behind the soaring BTC yield. MicroStrategy has been highly successful at selling its stock at inflated prices to buy more bitcoin. Bitcoin itself keeps rising in value, but not nearly as fast as the company’s stock price. As long as investors are willing to pay, MicroStrategy seems poised to keep selling shares and buying bitcoin. In fact, the company recently announced plans to raise $42 billion over the next three years—half through equity sales and half through debt—to fuel its bitcoin buying spree.
MicroStrategy says it uses BTC yield as a way to measure the success of its bitcoin strategy. In hindsight, it has indeed been a useful indicator—the company’s stock price has risen even faster than bitcoin, proving the strategy has worked so far.
But this metric doesn’t say anything about how sustainable the strategy is or what the company’s bitcoin holdings are actually worth. Imagine if bitcoin’s price crashed, but MicroStrategy didn’t buy or sell any new shares or bitcoins. The BTC yield would remain at zero since the number of bitcoins per share wouldn’t change. However, the company’s stock price would almost certainly take a massive hit.
If you believe bitcoin’s value will keep climbing, it may be better to just buy bitcoin directly at market price. Predicting its future might be a gamble, but at least you’re paying what it’s worth. Betting on MicroStrategy’s stock, however, means hoping that the already inflated market valuation becomes even more irrational.
And one last thing: don’t expect any actual yield from this stock—it doesn’t pay dividends.
Sure, the fast growth and expanded multiple should command caution but his strategy is unlike anything we’ve seen in capital markets. (For the record, I bought a little MSTR a few years ago and have seen its price explode. I’m not adding to my position but am curiously watching it.) He selling ATM shares to buy more bitcoin. This dilutes my shares but my BTC per share is increasing so that is a net positive. This doesn’t put any extra pressure on the balance sheet. He’s taking on debt at 0% to pay down higher interest rate debt and buy more BTC. Essentially swap $dollars (strong history of deprecation) for Bitcoin (Strong, although short, history of appreciation). If Bitcoin crashes, the BTC per share should remain unchanged and given then favorable financing terms, the 0% debt should be easy to manage. I believe this makes the company less risky compared to what most people realize. I’m not saying there isn’t risk and the valuation does scare me a little, but I still believe it’s pretty closed minded to write this off as bad strategy without understanding some of the underlying mechanics. Time will tell.
