The Strategy mode is gaining popularity. Can the coin price support the stock price?

Author: Saurabh Deshpande

Compiled by: Shenchao TechFlow

Hello!

Newton is famous for discovering gravity, but in his time, he was more interested in another field: the alchemy of finance, or the pursuit of turning lead into gold. This pursuit even led him to delve into theological studies. Modern finance seems to resonate with his interests—through financial engineering, we are in an era of "turning lead into gold," requiring only the right combination of elements.

In today's article, Saurabh provides a detailed analysis of how companies can achieve a premium on their actual value by adding cryptocurrencies to their balance sheets. Taking MicroStrategy as an example, this company has quarterly revenue just over $100 million, yet holds nearly $10.9 billion worth of Bitcoin. Around 80 companies worldwide are exploring how to incorporate cryptocurrencies into their balance sheets. Traditional financial institutions have shown great interest in this, paying a premium for the volatility and potential returns of such stocks.

Saurabh also analyzed the rise of convertible bonds, a financial instrument that has helped create this prosperous ecosystem, while exploring the risks involved and those companies attempting to incorporate other cryptocurrencies into their balance sheets.

Let's get to the point!

A software/business intelligence company with a quarterly revenue of only 111 million dollars has a market capitalization of 109 billion dollars. How is this possible? The answer is: it used other people's money to buy Bitcoin. And the market is now valuing its held Bitcoin at a premium of up to 73%. What kind of "alchemy" is behind this?

MicroStrategy (now known as Strategy) has created a financial mechanism that allows it to borrow nearly at zero cost to purchase Bitcoin. Taking its $3 billion convertible bonds issued in November 2024 as an example, here’s how it works:

The company issued a convertible bond with a coupon rate of 0%, which means that bondholders will not receive periodic interest payments. Instead, each $1,000 bond can be converted into 1.4872 shares of Strategy's stock, provided that its stock price rises to $672.40 or higher before maturity.

At the time of the issuance of these bonds, Strategy's share price was $433.80, so the share price would need to rise by 55% to be profitable. If the share price never reaches this level, the bondholder will get back $1,000 after five years. But if Strategy's share price spikes (which usually happens when the price of Bitcoin rises), bondholders can convert to shares and reap the full upside gains.

The cleverness of this mechanism lies in the fact that bondholders are essentially betting on the performance of Bitcoin, while enjoying downside protection that direct Bitcoin holders do not have. If Bitcoin crashes, they can still get their principal back, as bonds take precedence over stocks in bankruptcy liquidation. Meanwhile, the Strategy can borrow $3 billion at zero cost and immediately use that capital to purchase more Bitcoin.

However, the key trigger point of this mechanism is that starting from December 2026 (only two years after issuance), if the stock price of Strategy exceeds $874.12 (130% of the conversion price) for a certain period, the company can force the early redemption of these bonds. This "redemption clause" means that if Bitcoin drives the stock price high enough, Strategy can compel bondholders to convert to shares or redeem funds early, thereby refinancing under better conditions.

This strategy has been effective because Bitcoin has achieved an average annual growth rate of about 85% over the past 13 years, and the average annual growth rate over the past 5 years has also reached 58%. The company bets that the growth rate of Bitcoin will far exceed the 55% increase in stock price required to trigger the bond conversion. They have proven the success of this strategy by successfully redeeming early-issued bonds ahead of schedule, saving millions of dollars in interest expenses.

At the core of this structure are three different series of perpetual preferred shares: STRF, STRK, and STRD, each tailored for different types of investors.

STRF: Permanent preferred stock that provides a 10% cumulative dividend and has the highest priority. If the Strategy fails to pay dividends, the company must pay all unpaid STRF dividends before paying other shareholders. Additionally, as a penalty, the dividend rate will increase.

STRK: perpetual preferred stock that provides an 8% cumulative dividend with a medium priority. Unpaid dividends will accumulate and must be paid in full before any earnings are distributed to common stock shareholders. Additionally, STRK includes the right to convert into common stock.

STRD: Permanent preferred stock that offers a 10% non-cumulative dividend, with the lowest priority. The higher dividend rate is compensation for the higher risk—if Strategy skips a payment, those dividends will be lost forever and do not need to be compensated.

Perpetual preferred shares enable Strategy to raise capital similar to equity while paying perpetual dividends akin to bonds. Each series is custom-designed based on investors' risk preferences. The cumulative dividend feature protects holders of STRF and STRK, ensuring they ultimately receive all unpaid dividends, while STRD offers higher current yields but lacks a protection mechanism for unpaid dividends.

Transcript of Strategy

MicroStrategy began raising funds to purchase Bitcoin in August 2020. Since then, the price of Bitcoin has surged from $11,500 to $108,000, an increase of approximately 9 times. At the same time, MicroStrategy's stock price has risen from $13 to $370, almost a 30-fold increase.

It is worth noting that MicroStrategy's regular business has not experienced any growth. Their quarterly revenue remains between $100 million and $135 million, consistent with the past. The only change is that they have borrowed money to purchase Bitcoin. Currently, they hold 582,000 Bitcoins, worth approximately $63 billion. Their stock market value is about $109 billion, which is 73% higher than the actual value of their Bitcoin. Investors are willing to pay an additional premium just to indirectly hold Bitcoin through MicroStrategy's stock.

Source: bitcointreasuries.net

As mentioned earlier, MicroStrategy has funded its Bitcoin purchases by issuing new shares. Since they began buying Bitcoin, the number of company shares has nearly tripled, increasing from 95.8 million shares to 279.5 million shares, a growth of 191%.

Source: MicroStrategy Document

In general, issuing such a large number of new shares can harm existing shareholders, as everyone's stake in the company gets diluted. However, despite the number of shares increasing by 191%, the stock price soared by 2,900%. This means that although the proportion of the company that shareholders own has decreased, the value per share has significantly increased, and overall they are still making a profit.

MicroStrategy's successful model has gained popularity.

Many companies have started to emulate MicroStrategy's successful model by holding Bitcoin as company assets. One recent case is Twenty One (XXI). This is a special purpose acquisition company (SPAC) led by Jack Mallers, backed by Brandon Lutnick (son of the U.S. Secretary of Commerce) with support from Cantor Fitzgerald, Tether, and SoftBank. Unlike MicroStrategy, Twenty One is not publicly listed. The only way to participate through the public market is via Cantor Equity Partners (CEP), which exchanged $100 million for a 2.7% stake in XXI.

Twenty One holds 37,230 bitcoins. Since CEP owns 2.7% of Twenty One, this effectively means that CEP controls approximately 1,005 bitcoins (valued at about $108,000 per bitcoin, worth around $108.5 million).

However, the market capitalization of CEP's stock reached 486 million USD, which is 4.8 times its actual value in Bitcoin! After the announcement of its Bitcoin correlation, CEP's stock price soared from 10 USD to around 60 USD.

This huge premium means that investors paid $433 million for a $92 million exposure to Bitcoin. As more similar companies emerge and increase their Bitcoin holdings, market forces will eventually bring these premiums back to a more reasonable level, although no one currently knows when this will happen or what the "reasonable level" actually is.

An obvious question is: why do these companies have a premium? Why are investors willing to pay a premium to purchase stocks of these companies instead of directly buying Bitcoin from the market to gain exposure? The answer may lie in "optionality." Who is funding MicroStrategy's Bitcoin purchases? Mainly those hedge funds seeking "risk-free arbitrage" (delta-neutral strategies) through trading bonds.

If you think about it carefully, this type of transaction is very similar to Grayscale's Bitcoin Trust (GBTC). In the past, Grayscale's Bitcoin Trust also traded at a premium to Bitcoin because it is closed-end (investors cannot withdraw Bitcoin until it is converted to an ETF).

Therefore, investors will deposit Bitcoin into Grayscale and sell their publicly traded GBTC shares. As mentioned earlier, MicroStrategy's bondholders can enjoy an average annual compound growth rate (CAGR) of over 9%.

But how significant is this risk? MicroStrategy's annual interest burden totals $34 million, while the gross profit for the fiscal year 2024 is $334 million, which is sufficient to repay the debt. MicroStrategy issued convertible bonds related to the four-year cycle of Bitcoin, with a maturity long enough to mitigate the risk of price declines. Therefore, as long as Bitcoin rises more than 30% within four years, the new stock issuance can easily cover the redemption costs.

When redeeming these convertible bonds, MicroStrategy can simply issue new shares to the bondholders. The bondholders will be paid based on the reference stock price at the time of issuance, which is approximately 30-50% higher than the stock price at the time of bond issuance. This only becomes a problem if the stock price is below the conversion price. In this case, MicroStrategy must return cash, which can be repaid by raising a new round of debt on more favorable terms to pay off the earlier debt, or by selling Bitcoin to raise cash.

Value Chain

This process clearly began with the company's attempt to acquire Bitcoin, but ultimately they used exchanges and custodial services. For example, MicroStrategy is a client of Coinbase Prime, which purchases Bitcoin through Coinbase and stores it in Coinbase Custody, Fidelity, and its own multi-signature wallet. While it's difficult to accurately estimate how much Coinbase has earned from MicroStrategy's Bitcoin execution and storage, we can make some guesses.

Assuming an exchange like Coinbase charges a fee of 5 basis points for executing an OTC trade representing MicroStrategy's purchase of Bitcoin, buying 500,000 Bitcoins at an average execution price of $70,000, they earn $17.5 million from the execution. Bitcoin custodians charge an annual fee ranging from 0.2% to 1%. Assuming the lower end of the range, storing 100,000 Bitcoins at a price of $108,000, the custodian earns $21.6 million annually by storing Bitcoin for MicroStrategy.

Beyond BTC

So far, financial instruments designed to provide exposure to Bitcoin (BTC) in the capital markets have performed well. In May 2025, SharpLink raised $425 million through a private investment in public equity (PIPE) financing led by ConsenSys founder Joe Lubin, who also became the company's executive chairman. This financing issued approximately 69 million new shares at a price of $6.15 per share, with the funds to be used to purchase about 120,000 Ethereum (ETH), and may subsequently participate in staking. Currently, staking is not allowed for Ethereum exchange-traded funds (ETFs).

This financial instrument offering a 3%-5% return is more attractive than ETFs. Before the announcement, SharpLink's stock price was $3.99, with a total market capitalization of about $2.8 million and only 699,000 shares outstanding. The issuance price of this financing was at a 54% premium to the market price. Following the announcement, its stock price soared to $124.

It is worth noting that the newly issued 69 million shares are equivalent to about 100 times the current number of circulating shares.

Another company, Upexi, plans to acquire over 1 million Solana (SOL) before the fourth quarter of 2025 while maintaining cash flow neutrality. This plan began with a round of private financing led by GSR, where Upexi raised $100 million by selling 43.8 million shares. Upexi expects to pay preferred stock dividends through 6%-8% staking yields and maximally extractable value (MEV) returns, providing self-funding for future SOL purchases. On the day the news was released, its stock price soared from $2.28 to $22, before closing at around $10.

Before financing, Upexi had 37.2 million circulating shares, so the newly issued stocks caused about 54% dilution for existing shareholders, but the stock price soared nearly 400%, which was enough to offset the losses from dilution.

Sol Strategies is another company that finances the purchase of SOL through the capital markets. The company operates Solana validation nodes, with over 90% of its income coming from staking rewards. Currently, the company has staked 390,000 SOL, with approximately 3.16 million SOL entrusted to its nodes by third parties. In April 2025, Sol Strategies reached a convertible bond agreement with ATW Partners, securing a financing limit of up to $500 million, of which the first $20 million has been used to purchase 122,524 SOL.

Recently, Sol Strategies submitted a shelf registration statement, planning to raise $1 billion through common stock (including "at-the-market offerings"), warrants, subscription receipts, units, debt securities, or any combination thereof. This provides the company with diversified financing flexibility.

Unlike MicroStrategy's convertible bond model, SharpLink and Upexi raise funds by directly issuing new shares. I believe MicroStrategy's model is more suitable for investors with different targets. Compared to directly purchasing ETH or SOL, investors who gain exposure through buying stocks take on additional risks, such as intermediaries potentially leveraging beyond the investors' risk tolerance. Therefore, unless there is additional service added value, a model that uses convertible bonds with sufficient operating profit buffers to pay interest is more reasonable.

When the music stops

These convertible bonds are primarily aimed at hedge funds and institutional bond traders seeking asymmetric risk-return opportunities, rather than retail investors or traditional equity funds.

From their perspective, these financial instruments offer the option of "huge profits if they win, limited losses if they lose," which aligns very well with their risk management framework. If Bitcoin achieves the expected increase of 30%-50% within two to three years, they can choose to convert the bonds; if the market performs poorly, they can still recover 100% of the principal, although they may lose some value due to inflation.

The advantage of this structure is that it addresses the practical issues faced by institutional investors. Many hedge funds and pension funds lack the infrastructure to hold cryptocurrencies directly, or are unable to directly purchase Bitcoin due to investment restrictions. These convertible bonds provide them with a compliant "backdoor" into the crypto market while maintaining the downside protection required for fixed-income assets.

However, this advantage is destined to be temporary. As regulations become clearer and more direct cryptocurrency investment tools (such as custody solutions, regulated exchanges, and clearer accounting standards) emerge, the demand for these complex workarounds will gradually decrease. The 73% premium that investors currently pay to gain Bitcoin exposure through MicroStrategy may shrink with the emergence of more direct alternatives.

We have seen similar situations before. In the past, opportunistic managers leveraged the premium of the Grayscale Bitcoin Trust (GBTC)—buying Bitcoin and depositing it into Grayscale's trust, then selling GBTC shares on the secondary market at a premium of 20%-50% above net asset value (NAV). However, as more and more people started to follow suit, by the end of 2022, the premium of GBTC turned into a record discount of 50% from its peak. This cycle indicates that without sustainable income support, repeated financing backed by cryptocurrencies will ultimately be arbitraged away by the market.

The key question is, how long can this situation last, and who will be able to stand firm when the premium collapses? Companies with strong business fundamentals and conservative leverage may withstand this transition, while those lacking durable revenue sources or competitive moats, and merely chasing cryptocurrency assets, may face sell-offs due to dilution after the speculative frenzy subsides.

Currently, the music is still playing, and everyone is dancing. Institutional capital is pouring in, premiums are expanding, and more and more companies are announcing Bitcoin and cryptocurrency asset strategies every week. However, savvy investors know this is a trade, not a long-term investment logic. The companies that will survive are those that leverage this window to create lasting value that goes beyond their cryptocurrency holdings.

The transformation of corporate financial management may be permanent, but the extraordinary premiums we see today are not. The question is, are you ready to profit from this trend, or are you just another player hoping to find a seat when the music stops?