A Thorough Analysis of the Bitcoin Strategy of Strategy Company Led by Sailor = VanEck

## Positioning as a Bitcoin investment merchandise

On the 22nd, major asset management firm VanEck released a report analyzing the Bitcoin strategy of U.S. company MicroStrategy. The company’s stock (MSTR) is defined as a “leveraged Bitcoin investment merchandise,” explaining its benefits and risks.

Michael Saylor’s Strategy Company adopted a bold financial strategy in 2020 by investing a large portion of its cash reserves into the cryptocurrency Bitcoin. They have continuously purchased Bitcoin and currently hold 576,230 BTC (over 2.7% of the total Bitcoin supply of 21 million). The market capitalization has reached over $64 billion (approximately 9.2 trillion yen).

The strategy of Strategy Corporation is to maximize the stock price by increasing the “backing” of BTC per ordinary share.

First, raise funds through the issuance of bonds and stocks, and increase the amount of BTC held per share (“Bitcoin yield”) by purchasing additional Bitcoin. During the upward phase of Bitcoin prices, take advantage of the timing when investor appetite increases to raise funds through new bond issuance. Repeat further Bitcoin purchases and leverage enhancement.

As a result, MSTR stock provides accelerated exposure to Bitcoin, in line with the rise in Bitcoin prices. VanEck assesses that the price dynamics of MSTR stock are similar to Bitcoin call options.

Reason for premium occurrence

The stock price of Strategy Inc. is trading at a premium above the value of the Bitcoin held by the company (net asset value, NAV) by 112%.

VanEck cited the following four factors supporting the premium.

• Market expectations regarding future BTC holdings: The company continues to purchase Bitcoin, and there is a perception that the BTC price will also rise.
• Regulatory Premium: The existence of a class of investors who cannot directly purchase Bitcoin due to regulatory constraints. The company’s publicly traded stock functions as an attractive alternative for exposure to Bitcoin.
• Leverage Effect: Investor confidence in Mr. Saylor’s exceptional leverage utilization ability
• Speculative Positioning: Effective use of volatility and capital structure

VanEck claims that the “Crypto Reactor” is driven by the strategy of the premium.

This premium enhances the value of MSTR’s stock through a recursive loop that attracts investor capital due to volatility and exposure to Bitcoin, enabling further accumulation of BTC that amplifies the premium.

Main Risks in Bitcoin Strategy

VanEck highly appreciates the Bitcoin strategy of Strategy Company, while also pointing out the main risks in its strategic model.

1. Bitcoin price decline: The business model assumes an increase in BTC price.
2. Decrease in the volatility of BTC or MSTR: Diminished investor interest in MSTR’s convertible bonds and preferred stock.
3. The sharp decline in MSTR’s NAV premium
4. Deterioration of core business: The software business continues to contribute to cash flow.
5. Regulatory changes enabling leveraged BTC merchandise
6. Adoption of Bitcoin strategies by other companies: Intensification of competition. Small-scale emerging companies can achieve high BTC yields and BTC levels per share with limited capital.
7. Forced liquidation for debt repayment
8. Decrease in demand for strategy stocks
9. Dilution of BTC holdings per share
10. Instability of Capital Markets
11. Rise in interest rates: Increase in bond issuance costs, decline in investor appetite for convertible bonds, limitations on fundraising capabilities.

Is there value in premium?

MicroStrategist, which reports on the trends of companies adopting Bitcoin financial strategies, has released insights on the stock price premium (mNAV) indicated by the multiple of net asset value (NAV). They provided the “Days to Cover” metric as a criterion to determine whether the premium is justified.

This indicator, proposed by Adam Back, evaluates “how long it would take for this company to acquire the estimated BTC from its market capitalization at the current Bitcoin accumulation rate.”

For example, if a company’s current mNAV is 4.26 and the daily return is 0.88% while stacking BTC, it will take 165 days to acquire 4.26 times the current amount of Bitcoin held.

Source: VanEck

Based on the cover days derived from the 100-day BTC yield, when comparing companies that adopt Bitcoin strategies such as Strategy Inc., Metaplanet, and ALTBG, it was found that Strategy Inc. with an mNAV of 2.1 had 626 days, Metaplanet with 5.08 had 110 days, and ALTBG with 9.4 had 152 days.

Metaplanet and ALTBG have a small amount of BTC holdings, but they are rapidly increasing their compound interest effect, which is reflected in the short coverage days.

The Strategy Company has a track record of four years and is trusted by investors, but it has become clear that small and medium-sized enterprises are catching up to the company due to higher BTC yields and faster compounding effects.