MicroStrategy's Shares Surged Over 2,800% in the Last Five Years Following a Single Key Choice. Now, This Less-Known Tech Firm Has Also Implemented the Same Strategy.
Aug. 11, 2020, marked a significant shift in the cryptocurrency market, with both positive and negative consequences. For tech firm MicroStrategy (MSTR, 13.22%) and its shareholders, this transformation appeared to be beneficial.
On this day, MicroStrategy made its first Bitcoin (BTC, -0.22%) purchase. In the weeks leading up to this, then-CEO Michael Saylor revealed that the company was exploring Bitcoin as a means to combat inflation. As the following chart illustrates, Bitcoin has served as far more than an inflation hedge.
Currently, MicroStrategy's market value surpasses $100 billion, placing it among the world's most valuable companies. This substantial growth is particularly noteworthy considering the company's value was under $1 billion only five years ago. Despite a decrease in revenue during this period, all of MicroStrategy's stock market gains are attributable to its Bitcoin investment strategy.
MicroStrategy's Bitcoin initiative has yielded positive results, which may explain why Marathon Digital (MARA, 14.12%) is now emulating this approach.
Understanding MicroStrategy's Bitcoin strategy
In a 2021 interview with the Family Office Association, Saylor explained his perspective:
The sole purpose of time is to figure out how to buy more Bitcoin. Use all your money to buy Bitcoin, borrow money to buy more Bitcoin, sell assets to buy Bitcoin.
Initially, Saylor's comments seemed slightly humorous when he recommended using all available cash and accruing debt to purchase Bitcoin. However, MicroStrategy implemented this strategy, as discussed below.
At the end of 2019, MicroStrategy had approximately $566 million in cash, cash equivalents, and short-term investments. The company was also debt-free. By Dec. 8, MicroStrategy had acquired nearly 424,000 Bitcoins for a total of $25.6 billion. One may wonder, where did the company obtain such an enormous sum?
MicroStrategy utilized its existing cash reserves, additionally relying on positive operating cash flow. However, the company's main sources of funds were selling shares and assuming debt.
These actions often lead to a decline in shareholder value. Yet, MicroStrategy's financing methods have not been as detrimental as anticipated, for the following reason:
MicroStrategy terms this "Bitcoin yield." Essentially, if the company's stock value rises faster than Bitcoin, management views this as an opportunity. This is how management understands its potential to increase its Bitcoin holdings by 20% by diluting shareholders by 10% to secure the necessary funds.
Marathon Digital's approach
Marathon Digital is a Bitcoin mining company, allowing it to acquire Bitcoins through its regular operations. By the end of the third quarter of 2024, Marathon had amassed over 20,000 Bitcoins it had mined and held.
Marathon Digital has also started to acquire Bitcoins beyond its mining operations, following MicroStrategy's lead and adhering to Saylor's advice.
In Q2, Marathon updated its Bitcoin approach. Management stated in its Q3 letter to shareholders:
Our strategy is to strike a balance between mining Bitcoin and purchasing Bitcoin, considering market conditions.
Interestingly, as a Bitcoin miner, Marathon's revenue is directly derived from Bitcoin. The company adheres to a policy of retaining all the Bitcoins it mines. However, it still has expenses in USD, necessitating the sale of stock and the assumption of debt.
Marathon's recent strategy shift is based on the rationale of acquiring Bitcoin in the most cost-effective manner. Given the expense of mining Bitcoin, if it becomes less expensive to buy Bitcoin instead, Marathon will opt for this alternative.
This is a strategic move on Marathon's part with far-reaching implications for Bitcoin. For the sake of this discussion, if Marathon's goal is to accumulate more Bitcoin, then it should aim to do so at the lowest possible cost. According to its stated objectives, Marathon's management is making the right decision.
Investment considerations
Investors should recognize that any strategy dependent on leverage is inherently risky, and cryptocurrency is typically more volatile than other assets. Nevertheless, the MicroStrategy and Marathon strategies could prove successful if the price of Bitcoin remains stable and continues to rise.
Personally, I am optimistic about Bitcoin's future with good reason, making a strong case for its continued growth in 2025.
While buying Bitcoin alone is a viable solution, an investor may consider Marathon stock as an alternative to MicroStrategy stock due to several factors: Recently, MicroStrategy stock has outperformed Bitcoin by a substantial margin, whereas Marathon stock has underperformed.
The disparity in valuation with regards to Bitcoin is improving for Marathon, whereas it is becoming increasingly expensive for MicroStrategy. In this case, all things considered, Marathon stock may be a suitable choice for investors familiar with the company's objectives and comfortable with the inherent risks of this strategy.
Following MicroStrategy's lead, Marathon Digital has also started investing in Bitcoin, purchasing additional Bitcoins beyond its mining operations. This strategic move by Marathon could potentially lower the cost of acquiring Bitcoin, given the high expense of mining it.
As a result of MicroStrategy's Bitcoin investment strategy, the company's market value has increased significantly, surpassing $100 billion, despite a decrease in revenue during this period. This substantial growth has been solely attributed to MicroStrategy's Bitcoin investments, highlighting the potential financial benefits of investing in Bitcoin.