MicroStrategy "infinite money glitch" explained

A deep dive into MSTR unsual strategy

You probably heard of MSTR 0.00%↑ “infinite money glitch”, or “bitcoin yield” , or “leverage play on BTC”, in this post I’ll explain exactly what these terms mean as well as quantify them to figure out the future possible price of MicroStrategy.

Leverage on BTC

First let’s see how “leverage on BTC” works.
Imagine you have a company that does nothing. No profits, no losses.
You put in $10 in your company.
So if you were to sell your company, it would be worth $10.
You invest these $10 in Bitcoin, Bitcoin doubles, you now have $20 on the balance sheet of your company.
Your company is now worth $20
Bitcoin double, your company price doubled.

Now before buying BTC with your $10, you first ask a bank for a $10 loan.
You have a $10 company as a collateral, so they agree. (maybe it’s not 1 to 1, but let’s run with this for the sake of the example)
Your company is still worth $10 detailed as follow:
$10 you put + $10 from the bank - $10 you owe.
Now you invest the $20 in Bitcoin, and Bitcoin doubles.
Your company is now worth:
$40 of BTC - $10 debt = $30.
Bitcoin doubled, your company price tripled.

Having debt created a leverage on the asset your purchased.
It is a risky strategy, as if the trade goes the wrong way, the company can go bankrupt very fast.
This is what Microstrategy did with Bitcoin.
They took on $3.8B of debt that they used to buy Bitcoin.

The last piece of the leverage puzzle is also the fact that the leverage reduces as Bitcoin goes up.
If Bitcoin doubles again, my company is now worth:
$80 of BTC - $10 debt = $70.
Bitcoin doubled, Your company didn’t triple this time.

If they don’t take more debt, the higher Bitcoin goes up, the leverage of MSTR against Bitcoin will tend to 1.

Infinite money glitch

“Infinite money glitch” is simply a cool term for the fact that increasing the number of shares in a company to buy an appreciating(or flat) asset does not devalue the company.

Let’s take the example of your $10 company. Now it does something that generates $1 per year. If you give a PE ratio of 10 to the earnings of my company, it would be worth:
$10 you put + $10 of business value = $20
You decide to welcome a friend in the business.
So you decide to create a second share of your company, and sell it to your friend for $20.
The company is now as follow:
the $10 you first put in + the $20 your friend put in + the business value of $10 = $40

And each share correspond to $15 of cash and $5 of business.
Usually the cash received by the company is invested in order to expand the business.
But in this case, the only thing that happened is that the first investor got less of the business and more cash compared to before the dilution.
And the second investor bought in new shares at $5 ($20 - $15 on the balance sheet per share), which is what the business was valued at.

So if you repeat this operations, the shares represent a smaller and smaller part of the business, and a bigger part of the asset value on the balance sheet of the company.

The only limit to the repetition of these steps is that you need to find a larger pool of investors willing to buy your business at the same valuation as others.
And that some original investors might feel like the “cash” on the balance sheet of the company, would be better in their own bank account, or placed on better investment and would start selling out of the company.

So as long as new investors are willing to pay for shares at the existing valuation of the company and willing to own a higher ratio of the balance sheet vs the business, the dilution of shares does not impact the price of the company.

So why would investors be happy with owning a smaller piece of a business, and willing to let their cash be handled by Microstrategy ?
Short answer: Bitcoin.
Microstrategy made the bet of investing all the cash of the balance sheet in Bitcoin.
So the cash is not invested to grow the business, but to buy the “hardest asset ever created” under the assumption that it will grow and overperform most investments anyway.

For investors it looks like buying a share is: Paying Cash for Buying Bitcoin + a small part of the existing business.
We shall see in detail the valuation of the business implied by the current share price.

Microstrategy’s Bitcoin yield

Bitcoin yield is a term used to show how much more Bitcoin is there per share compared to before.

The share value is composed of:
(Assets (Bitcoin) - debt (in dollars) + business value ) / number of shares

As explained in the previous section, every dilution of shares increase the relative amount of assets against the business value.
The higher the newly issued shares are sold, the more the amount of assets will grow per share.

This increase in the amount of Bitcoin per share is the “Bitcoin yield”

Let’s take our previous example of $20 company

$10 of Bitcoin + $10 of business value = $20 for 1 share

After the dilution:

$30 of Bitcoin + $10 of business value = $40 for 2 share

So per share there is:

$15 of Bitcoin + $5 of business value.

The Bitcoin yield is:

(15-10)/10 = 0.5 = 50%

The bigger the yield, the more Bitcoin per share investor will own long term, and bigger the price appreciation of Bitcoin will have on Microstrategy shares.

Current valuation of Microstrategy

At the time of writing MSTR share are trading at $186 and Bitcoin is $60500

MSTR has a debt of $3.85 Billion
Holds 252,220 Bitcoins for a value of $15 Billion
Has 202 Million shares trading at $186 for a total market cap of $37.7 Billion

The market capitalization of MSTR before owning Bitcoin oscillated between 1 and $1.5B before.
But for our calculations we will use an overvalued valuation of $4B, which is somewhat fair considering the increased attention spent on MSTR is surely worth something.

The current valuation of MSTR based on today’s price is:

Market cap - (Bitcoin value -Debt) = $26B

That is 6.5 times the price of the already overvalued estimated price of the company !
Yes you heard right, MSTR business is overvalued by 6.5 times.

But it doesn’t mean the share price should be divided by 6.5
The fair share price of MSTR is $76
($15B of Bitcoin + the $4B of company value - the $3.85B of debt) / 202M shares = $76

How many Bitcoin can MSTR buy with the “money glitch” ?

At $76 per share, and at current market cap of $38B, MSTR would have 500 Million outstanding shares.

It means that for MSTR to trade closer to intrinsic value, MSTR could issue 300 Million shares !

Obviously such insane dilution would have trouble finding immediate buyers, but if these shares could be sold between $76 and $190
This would generate between $22B and $56B dollars.
In other terms the dilution would generate enough to buy between 365 000 and 930 000 Bitcoins !

Obviously diluting fast has a big impact on price, so you can’t just double the number of shares overnight. Over the past 1 year MSTR has issued 33% more shares.
And the same would be true for buying Bitcoin, buying 100 000 Bitcoin on a short period of time would make the price skyrocket.
So this dilution of shares to buy BTC has to happen progressively.

How much Bitcoin per share ?

Today 1 share correspond to 0.001244670351 BTC
And as long as the price of the diluted shares is sold for more than $76, the amount of Bitcoin per share will go up.

In the ideal case this could reach 0.002285132145 BTC per share.
So an increase of 83%

Does this dilution profit shareholders ?

Yes and no.
Obviously, with Microstrategy business overvalued like this, it would be better to sell the shares and buy Bitcoin.
And by diluting so much, the shares could easily go back under $100

But by doing this strategy, Microstrategy will protect the investors from a potential drop due to the reevaluation of the business value by exchanging this overvaluation with an asset (Bitcoin) that will appreciate over time.

Also if the assumption is that Bitcoin will reach, say $500k, by maximizing the amount of btc per share, in the long run, this will lead to a higher share price than not doing this dilution.
So it is the duty of Microstrategy to dilute !
If BTC went to 500k today, MSTR share would be worth $623.
If BTC went to 500k after increasing to 0.0023 btc per share, it would be worth $1145
(this also assume that the business value goes back to a normal $4B valuation)

Conclusion

Microstrategy has a duty to issue more shares and sell them when it’s business valuation is too high. By doing so, they maximize long term share holders profit.

At current price, Microstrategy could issue 300M new shares, with the potential of exchanging them up to 930 000 Bitcoins.

The intrinsic value of MSTR is about $76.