On Monday, MicroStrategy (MSTR) will be included in the Nasdaq 100 stock market index.
It’s a stunning achievement for the now infamous Bitcoin treasury company, which faced an “existential risk” of death four years ago, and whose initial bitcoin purchase was made “out of desperation” in 2020, said its chairman and co-founder Michael Saylor last month.
It also has massive implications for not only the company’s future performance, but the very nature of the stock market.
Within the Nasdaq 100, MicroStrategy sticks out like a sore thumb from its peers. After all, the index is reserved for the top “non-financial” companies on the stock exchange, yet MicroStrategy – while still technically a business intelligence software company– achieved its greatness through pure financial engineering.
“MicroStrategy is a bitcoin securities company,” explained Saylor in an October interview. “If I want high vol, high-performance bitcoin equity, you have to have a company that’s 150% bitcoin.”
MicroStrategy’s balance sheet is almost solely bitcoin. Its legacy software business also converts earnings into bitcoin, though this is a trivial source of MicroStrategy’s current revenues. Today, the company primarily earns by issuing long-dated convertible bonds to raise funds, which are immediately used to buy BTC upon each raise.
These bonds face price volatility reflecting that of the MSTR shares they can convert into, and those shares reflect the volatility of the company’s underlying BTC. This volatility is highly desirable to the convertible bond market, and as such, MicroStrategy has been able to raise many billions of dollars by selling its bonds.
The company also performs standard at-the-market equity issuance when its stock trades at a significant premium to its BTC holdings. Between equity offerings and convertible debt, Saylor’s execution has proven massively accretive to shareholders on a BTC-per-share basis, producing what he calls a “72.4% BTC yield” year to date.
Yet this is only the beginning. MicroStrategy’s inclusion in the Nasdaq 100 will make its bitcoin returns all the more mind-bending.
Popular ETFs tracking the index, including the Invesco QQQ Trust Series ETF with $300 billion in assets under management, will need to balance their holdings to include a weighted MSTR allocation. That’s at least $2.1 billion immediately flowing into MSTR stock prior to the launch.
More importantly, MicroStrategy will now enjoy consistent flows from investors across the country who passively invest in index funds tracking the Nasdaq 100. Knowing Saylor, we know what he’ll do with the additional money: buy more bitcoin. “All of you own Bitcoin now, whether you know it or not, planned to or not, like it or not,” tweeted Jeff Park, Head of Alpha Strategies at Bitwise Invest with regards to MicroStrategy last week.There are even greater implications when considering how much of the QQQ’s flows MicroStrategy will be entitled to.
Such flows are typically weighted based on the size of the companies included in the index. Since MicroStrategy is willing to relentlessly grow its absolute size by issuing stock and buying BTC, it will be entitled to a greater share of index flows in the long run.
In a sense, MicroStrategy is vampire attacking the stock market. Between equity issuance, convertible bond offerings, and passive stock market flows, MicroStrategy is draining both the bond market and index investors of their capital, growing its balance sheet, rewarding shareholders, and taking more bitcoin off the market.
This is a brilliant, profitable, and unique strategy only possible with a scarce and volatile asset like bitcoin at the center. Depending on how this plays out, companies may soon realize that the only way to beat MicroStrategy is to copy it, in which case bitcoin will become one of the most desirable assets in the world.
