What is MSTR Premium? MicroStrategy's Bitcoin Accumulative Coin Printing Mechanism

The emergence of MSTR premium

What is MSTR premium?

MSTR Premium (or MSTR NAV Premium) is an indicator that represents the difference between MicroStrategy's MSTR stock and its net asset value (NAV) (primarily Bitcoin), indicating how much the market values a company's stock higher or lower than the Bitcoin index the company holds.

MSTR is the NASDAQ stock exchange of MicroStrategy Incorporated, defined as a company operating in the field of mobile software, providing enterprise data solutions and cloud-based services.

Microstrategy is well known to the crypto community for its special interest CEO Saylorwith Bitcoin. MicroStrategy then had ambitions to become the first company to use BTC as a treasury reserve asset (Bitcoin Treasury Company).

This explains the fact that MicroStrategy has been continuously accumulating Bitcoin since September 2020. To accelerate the pace of Bitcoin accumulation, the company has used financial leverage to get more cash to buy BTC.

MicroStrategy has made several rounds of fundraising to continue buying more Bitcoin, most recently the issuance of $3 billion worth of bonds with a conversion rate of up to 55% of the market price.

These events, coupled with market optimism as BTC touched close to $100,000, caused the MSTR premium to increase. To understand why this indicator is important, let's learn about how to calculate it.

How to calculate the premium NAV value of MSTR

Some definitions and assumptions to simplify the calculation:

NAV (Net Asset Value) is the total value of assets minus the total liabilities of the company.

Assumption: MicroStrategy started as a software business valued at $0 and owned $0 in cash. The company borrowed $10 million, so now the company has $10 million in cash. The company then used that cash to buy $10 million in Bitcoin.

Thus: NAV = 10,000,000 USD BTC - 10,000,000 USD debt = 0 USD

After a year, the amount of BTC held has doubled in value and is worth $20 million. The debt is still only $10 million, then the formula for calculating NAV is:

NAV = 20,000,000 USDBTC - 10,000,000 USDDebt = 10,000,000 USD

Further, MSTR issued an additional $20 million in debt to obtain $20 million in cash, which was used to purchase an additional $20 million in Bitcoin.

NAV = 20,000,000 USDBTC (from earlier) +! 20,000,000 USDBTC (newly purchased) -! 10,000,000 USDold debts -! 20,000,000 USDnew debt =! 10,000,000 USD

After another year, that $40 million worth of Bitcoins doubled in value to $80 million in Bitcoin. The debt is still $30 million, the new NAV is:

NAV = 80,000,000 USD BTC - 30,000,000 USD Debt = 50,000,000 USD

As Bitcoin rises in price, companies using this method will be given an increase in asset value and can continue to use the loop, increasing the value of secured assets to continue borrowing cash, using face to face to continue buying Bitcoin.

At the same time, the value of the company's shares will also increase and the company can raise additional capital by selling shares.

This is a simple example to explain the leverage loop MicroStrategy has used to increase the value of Bitcoin-based assets. In fact, this company raises capital with many complex financial instruments such as bonds, convertible bonds, stocks...

Why is MSTR premium important?

The MSTR premium index is not just a mere financial indicator, but also reflects the market sentiment towards Bitcoin and MicroStrategy's investment strategy in the context of the volatility of the cryptocurrency market.

MSTR premium appears synonymous with MSTR capitalization value > BTC capitalization value that the company owns. This is because a large number of investors believe this loop strategy will work, or in other words, confidence in the sustainable growth of BTC, which creates great buying force with MSTR shares.

The premium MSTR also shows great investor confidence in Bitcoin's growth rather than a consideration of the company's core business. This strategy is working well in the context of a bullish market, in the context of BTC sideways or falling, MSTR premium can translate into MSTR discount.

Notably, MicroStrategy's method of soliciting capital for BTC investments shows the community's confidence in BTC. The debt instrument that MicroStrategy uses is convertible bonds with interest rate 0%and matures in 2029.

Some figures that are worth noting at the time when the company issues debt:

• MSTR Price: USD 495
• A 55% premium conversion rate, plus a price of $495, can calculate a conversion rate of495 x 1.55 = 767 USD.
• This means, investors buying convertible bonds are only profitable if the share price MSTR higher than 767 USDat the end of the year 2029. Otherwise it would be a loan. no interest durante 5 anos.
• BTC value per share (BTC per Share): 139.6 USD.
• BTC Price $94,800.
• The amount of BTC per convertible bond is: 139.6/94,800 = 0.0014706 BTC.
• The actual price per BTC at the $767 price of the bond: $767/0.0014706 BTC = $520,234 USD/BTC.

As such, investors for MicroStrategy bear a higher risk of both lending at a 0% interest rate if the MSTR price does not reach $767, and the cost per BTC is higher than buying directly off the market.

How will the stakeholders then benefit?

• MicroStrategy benefits from cheap capital raising, which in turn can buy more BTC, increasing its assets. This means that MicroStrategy borrows USD to buy BTC, betting on the devaluation of the local currency USD and increasing the price of BTC assets.
• Available investors will get additional BTC per share in addition to the available MSTR position without having to do anything. This mechanism is similar to paying the return to the stock investor in the form of BTC, which is expressed as BTC yield in MicroStrategy's financial statements.
• New investors are the ones who put their faith that MicroStrategy will become a treasury for Bitcoin and that the company will own more and more BTC (growth rate is currently 140% per year), and BTC will rise in price over time. Buying conversion bonds allows them to own tickets early in this game.

In the opposite case, BTC falls or goes sideways for about 3-4 years, the debt from the convertible bond can cause the MSTR premium to disappear and become a discount MSTR.

This would be a relatively negative sign for the market.

The wave of big companies that own Bitcoin

Seeing the enormous benefits of accumulating Bitcoin as a reserve asset, other large companies have begun to implement similar plans with MicroStrategy. A few prominent names include:

Metaplanet, the company using the strategy most closely resembling MicroStrategy holding 748.5 BTC ($45.7 million) recently went on to purchase an additional 109 BTC ($6.6 million).

Jiva Technologies, a Canadian healthcare company, has poured $1 million into Bitcoin as part of a long-term asset reserve strategy.

Blocks, another Nasdaq-listed company is buying about $2.2 million worth of Bitcoin each month.

The Rumble, an online video platform recently revealed plans to buy about $20 million worth of BTC, the stock's value also immediately rose 4% on the day.

The success of MicroStrategy's current BTC accumulation strategy has gradually created a wave of BTC approvals at the enterprise level.