MicroStrategy’s Magical Bitcoin Buying Machine Uses Some Wacky Math
11/21/2024 20:49
Citing “yield” as a performance measure is likely to confuse some investors already overpaying for its stock.
Every new market mania needs new metrics to attract investors and explain the reason for its existence. Here’s one for the bitcoin boom: “BTC yield.”
MicroStrategy, which once was a humdrum software firm, introduced this unusual term to its investors in August. BTC, for the uninitiated, means bitcoin. Yield typically refers to the dividend a company pays as a percentage of its stock price, or to the interest rate a lender expects to earn on a loan or bond. This isn’t either of those.
The company has attracted attention for a huge—many would say reckless—one-way bet on bitcoin, which it started buying and holding in 2020. Co-founder and Executive Chairman Michael Saylor has become a bitcoin evangelist. The company has been selling vast amounts of common stock in at-the-market offerings to fund ever-greater purchases. In a virtuous circle, its stock-market value has continued to climb, fueling more stock sales to buy more bitcoin, and so on.
The BTC yield at MicroStrategy, which calls itself a “bitcoin treasury company,” isn’t a yield as commonly understood by investors. As the company explains in its filings, it is the percentage change, from one date to another, in how many bitcoins per share MicroStrategy owns. As of Nov. 17, the company owned 1.29 bitcoins for every 1,000 of its shares outstanding, using a share count that assumed all its convertible debt was turned into stock. That ratio was up 41.8% since Dec. 31, when it owned 0.91 bitcoin per 1,000 shares.
That 41.8% increase is what MicroStrategy called its year-to-date BTC yield. The same metric can be calculated quarter over quarter, year over year, or using any other starting and ending points for which data is available. Lately the BTC yield has been soaring. In the headline for a Nov. 11 press release, just a week earlier, MicroStrategy boasted of “BTC Yield of 26.4% YTD.” That was up from 17.8% as of Sept. 30.
When MicroStrategy first started touting this new metric as a key performance indicator, it said it was targeting a long-term annual BTC yield of 4% to 8% starting next year. So the company is already way ahead of pace in this regard, whatever the number’s informational value.
Judging by what the stock market says, a bitcoin owned by MicroStrategy is worth almost four times as much as a bitcoin owned by an ordinary mortal. MicroStrategy owned 331,200 bitcoins at last count, worth $31.2 billion, and had about $4.2 billion of net debt. (The software business isn’t worth much.) By comparison, its stock-market value is $106 billion using the company’s recently updated share count. It says it paid about $16.5 billion for the bitcoin it owns. That is a terrific gain, but nothing like the 650% increase in MicroStrategy’s share price this year.
And that is the phenomenon the rising BTC yield reflects—that MicroStrategy has succeeded wildly at selling stock for irrationally high prices and using the proceeds to buy more bitcoin, which also keeps soaring, but not by as much as MicroStrategy’s stock has. The company presumably will keep selling overpriced stock as long as investors are eager to buy it. Last month the company announced a goal of raising $42 billion of new capital over the next three years, half of it in equity and half in debt, to buy more bitcoin.
MicroStrategy says it uses BTC yield “to help assess the performance of our bitcoin acquisition strategy.” In that respect, as a rearview-mirror metric, it conveys useful information: The stock price went up even more than bitcoin did, so the strategy worked.
It doesn’t tell you how sustainable its strategy will be or what its holdings are worth. Consider a scenario in which the company kept its share count and bitcoin holdings unchanged and the price of bitcoin plunged. Its BTC yield would be zero because its bitcoin per share would stay the same. But the company’s stock price wouldn’t stay flat; it probably would plummet.
If you want to speculate that bitcoin is heading higher, buy some. Your guess about its future direction might be no better than anyone else’s, but at least you will be paying market price. To go long MicroStrategy’s stock is to wager that bizarrely inefficient markets will become even more so.
And forget about getting a yield—it doesn’t pay one.
Write to Jonathan Weil at [email protected]