MicroStrategy's Net Asset Value (NAV) Premium and BTC Yield
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MicroStrategy's Net Asset Value (NAV) Premium and BTC Yield
This article analyzes how MicroStrategy leverages its net asset value (NAV) premium to increase the number of bitcoins per share, thereby enhancing shareholder value.
Navigating Web3 tides with focused insightsAuthor: 0xEdwardyw
MicroStrategy's market capitalization is 2.7 times higher than the value of its Bitcoin holdings, a phenomenon known as NAV premium.
The company leverages this NAV premium to issue additional shares and uses the raised funds to purchase more Bitcoin. Although issuing new shares typically dilutes shareholder value, in this case, the per-share Bitcoin holdings actually increase.
MicroStrategy has introduced the concept of "BTC Yield" to measure the growth in Bitcoin holdings per share.
The company has achieved a year-to-date BTC yield of 17% this year and expects future BTC yields to remain between 4% and 8%, indicating a sustained upward trend in per-share Bitcoin holdings.
MicroStrategy and Michael Saylor
Founded by Michael J. Saylor in 1989, MicroStrategy was initially a company focused on business intelligence (BI) and analytics software. It specialized in providing enterprises with solutions that use advanced analytics, reporting, and decision-support tools to help organizations deeply analyze operational data for data-driven decision-making.
As a key figure in technology and business intelligence, Saylor led MicroStrategy through multiple waves of growth and innovation within the BI industry, maintaining its leadership position. However, the company’s historic turning point came in 2020 when it shifted strategic focus toward Bitcoin.
In August 2020, MicroStrategy announced its first strategic acquisition of 21,454 Bitcoins for $250 million. Saylor and management believed Bitcoin represented a superior store of value compared to cash, especially amid rising inflation and fiat currency depreciation risks. Since then, MicroStrategy transformed from a pure software company into a corporate leader using Bitcoin as a treasury asset. Its strategy of borrowing via various capital market instruments to invest in Bitcoin has made MicroStrategy one of the best-performing stocks in the market.
MicroStrategy’s Net Asset Value (NAV) Premium
As of October 2024, MicroStrategy holds approximately 244,800 Bitcoins at an average cost of about $38,585 per coin, representing a total investment of roughly $9.45 billion. The market value of these holdings exceeds $16 billion, meaning its Bitcoin investment has generated over 1.6x returns.
Although MicroStrategy’s balance sheet reflects more than $16 billion in Bitcoin assets, its stock market capitalization far exceeds this amount. As of October 2024, MicroStrategy’s market cap on U.S. exchanges surpassed $44 billion—approximately 2.75 times the value of its Bitcoin holdings.
Net Asset Value (NAV) Premium
MicroStrategy’s Net Asset Value (NAV) premium refers to the ratio between the company’s market capitalization and the value of its Bitcoin holdings. This reflects the premium investors are willing to pay for MicroStrategy stock relative to the intrinsic value of its Bitcoin assets.
By late October 2024, MicroStrategy’s NAV premium reached approximately 2.7 times the value of its Bitcoin holdings—the highest level since February 2021—indicating that investors are valuing the company significantly above the worth of its Bitcoin assets.
This premium may stem from two factors. First, while MicroStrategy’s primary focus has shifted to Bitcoin investment, its software business still generates positive cash flow—around $12 million in 2023. While modest relative to its massive Bitcoin investments, this provides some underlying business support. Second, investors hold optimistic expectations for Bitcoin price appreciation, possibly pricing in potential gains exceeding 100%, which could justify a 2.75x premium over the current Bitcoin asset value.
Bitcoin Securitization Strategy
Securitization is a financial engineering technique that involves transforming assets or portfolios into tradable securities to unlock value. In traditional finance, this often applies to mortgages or loans, where future cash flows are "securitized" into bonds, stocks, or other financial products sold to investors who receive returns based on the performance of the underlying assets.
In the context of Bitcoin, securitization means using Bitcoin holdings as underlying collateral. Companies can issue securities—such as bonds, stocks, or convertible debt—backed by their Bitcoin holdings, allowing investors indirect exposure to Bitcoin’s performance.
MicroStrategy holds billions of dollars’ worth of Bitcoin on its balance sheet, treating them as “permanent capital,” meaning the company has no intention of selling these assets.
MicroStrategy uses its Bitcoin holdings as collateral to issue convertible bonds to investors. Convertible bonds are debt instruments that can be converted into company shares under specific conditions. The proceeds from these bond issuances are used to buy more Bitcoin, further increasing its holdings.
In addition to debt instruments, MicroStrategy also raises capital by issuing equity, leveraging its market NAV premium—the difference between its stock market valuation and the actual value of its Bitcoin holdings.
The “Money Printer” Strategy Using NAV Premium
MicroStrategy’s stock trades at a 2.7x premium over the value of its Bitcoin holdings, meaning when the company issues new shares, investors are willing to pay 2.7 times more than the actual Bitcoin-backed value. For example, if one share represents 1 Bitcoin, the market prices it as equivalent to 2.7 Bitcoins. When the company issues one new share, it raises enough cash to buy 2.7 Bitcoins. After reinvesting, the total of 2 shares will now be backed by 3.7 Bitcoins, increasing per-share Bitcoin holdings from 1 to 1.85.
Here’s how it works step-by-step:
1. Current State:
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Shares: 1 outstanding share
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Bitcoin Holdings: 1 Bitcoin
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Market Valuation: Due to the premium, the market values the share at 2.7 Bitcoins
2. Issuing New Shares:
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New Share Issuance: MicroStrategy issues 1 new share
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Funds Raised: The company raises cash equivalent to 2.7 Bitcoins from the new share issuance
3. Purchasing More Bitcoin:
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Use of Proceeds: The company uses the 2.7-Bitcoin-equivalent cash to purchase an additional 2.7 Bitcoins
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New Bitcoin Holdings: 1 + 2.7 = 3.7 Bitcoins
4. Total Shares After Issuance:
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Total Shares: 2 outstanding shares (1 original + 1 newly issued)
5. Bitcoin Per Share:
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Bitcoin per Share: Total Bitcoin holdings of 3.7 ÷ 2 shares = 1.85 Bitcoins per share
By issuing new shares at a price 2.7 times higher than the actual Bitcoin value per share, MicroStrategy effectively increases its per-share Bitcoin holdings. This strategy capitalizes on investor optimism and premium valuation, not only enhancing the Bitcoin backing per share but also increasing the Bitcoin asset value for existing shareholders.
Remarkably, although issuing new shares usually dilutes shareholder equity, due to the premium pricing, MicroStrategy achieves a net increase in per-share Bitcoin holdings. The key lies in selling new shares above their net asset value (NAV), enabling the company to acquire more Bitcoin with the proceeds than the dilution effect, thereby strengthening the Bitcoin backing per share.
Maximizing Bitcoin Per Share and "BTC Yield"
MicroStrategy aims to maximize Bitcoin holdings per share by raising additional capital against its Bitcoin holdings and reinvesting the proceeds into more Bitcoin. The company introduced the concept of “BTC Yield” to measure the return delivered to shareholders through its Bitcoin strategy. While called “BTC Yield,” this is not a traditional yield such as interest or dividends. Instead, it refers to the company’s ability to generate financial returns by raising capital and increasing Bitcoin holdings, thus enhancing the relative value of its stock against its Bitcoin reserves over time.
BTC Yield reflects the growth in MicroStrategy’s Bitcoin holdings. When the company issues equity or debt under favorable terms and uses the capital to buy Bitcoin, the per-share Bitcoin holding increases, leading to greater shareholder value.
BTC Yield measures the percentage change in the ratio of the company’s total Bitcoin holdings to its diluted share count, visually illustrating how the number of Bitcoins per share evolves over time.
According to the latest reports, MicroStrategy achieved a 12% BTC Yield in 2024 (Michael Saylor recently stated the year-to-date BTC Yield reached 17%). This indicates the company has successfully increased its per-share Bitcoin holdings, thereby boosting shareholder value. The company projects BTC Yield to remain between 4% and 8% over the next three years, suggesting shareholders' effective Bitcoin ownership may continue to grow.
Summary
MicroStrategy employs financial engineering to maximize Bitcoin holdings per share. By leveraging its Bitcoin holdings as collateral, the company raises capital through bond and stock issuances at a premium and continuously reinvests the proceeds into more Bitcoin.
The success of this strategy depends on Bitcoin’s long-term price appreciation. If Bitcoin’s price continues to rise, MicroStrategy can keep issuing capital at a premium and reinvest in Bitcoin, further increasing its per-share Bitcoin holdings.
However, if Bitcoin’s price stagnates or drops sharply, the value of the company’s holdings would suffer, and the market might lose confidence in its ability to generate returns through Bitcoin investments. This could lead to a decline in stock price, reduce the equity premium, and make it difficult for the company to raise new capital under favorable conditions.
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