There's Nothing Micro About Microstrategy's Strategy

It's easy to see Microstrategy as a simple proxy for bitcoin exposure, but the truth is a little more interesting than that.

How will the flywheel effect drive MSTR stock?

Ever Since Michael Saylor started buying bitcoin for Microstrategy's treasury in September 2020, he has relentlessly been pushing the company's role as a pioneer in the digital asset space.

One element of that is simply buying and holding large quantities of bitcoin. After more than three years of accumulation, Microstrategy controls 190,000 BTC, worth $10 billion at current prices ($52,000 at the time of writing).

MSTR's market cap is around $13 billion. The company's shares have been soaring in recent weeks as the price of bitcoin rises. But investors are figuring out there's more to it than just being a proxy for bitcoin exposure.

Bitcoin Holder, Developer, Fiat Killer

Saylor recently announced that Microstrategy would become a Bitcoin development company, building software that would support and help grow the Bitcoin ecosystem, and generate further revenues for shareholders. This will include products for both the base layer and Layer-2s, he said.

Microstrategy Commits To Becoming “World’s First Bitcoin Development Company”
Not content with owning almost 1% of all BTC in existence, Microstrategy will now devote itself to developing Bitcoin software products.

But there's something else that Microstrategy does that is a key part of its strategy to drive bitcoin adoption and price.

Saylor is in a unique position. Since Microstrategy is an operational company, he is able to make decisions about how it goes about its business, in a way that the ETFs (which are merely passive holder of BTC) cannot.

When the value of MSTR shares significantly exceeds the NAV of the company, including all of the bitcoins it holds, Saylor can dilute the shares by creating and selling more, then using the money to buy more bitcoin. The result is that the company accumulates more coins, and actually ends up with more BTC per MSTR share. As MSTR stock hits a two-year high, and keeps growing even faster than BTC, we can assume that's exactly what he'll do.

Flywheel Effect

There's something else, though, that traders may be starting to understand.

A huge amount of money is passively invested into index funds. That is, institutions and retail allocate money to ETFs and other funds that track the S&P 500 and other popular indexes.

Microstrategy is now large enough to qualify for entry into the S&P 500. The index is updated quarterly, on the third Friday of March, June, September, and December. If MSTR still has sufficient market cap (around $7 billion should do it) in another month, then a significant amount of money will be thrown at it simply because it is included in that list.

At that point, things could start to get Interesting.

MSTR shares will be bought by funds that allocate to the S&P (and there is a lot of money that takes this approach). Those buys will push up the price of MSTR, without actually changing anything about the company, including its bitcoin holdings. Thus Saylor dilutes the shares and buys more BTC, increasing its holdings and bringing the NAV into line with the market cap.

In doing so, he also creates more demand for bitcoin. As the price of bitcoin increases, so does the market cap of Microstrategy. It climbs the S&P 500 rankings, and more capital is allocated, creating a feedback loop where MSTR eats bitcoins and dumps fiat.

Where does this end? We can't know, but in the fourth week of March we might just get to find out how it starts.


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