Transcription
Lots of attention is being paid to MicroStrategy these days. I've even had a few comments asking if I could comment on what's going on because they are issuing convertible debt to buy Bitcoin, and the price of the stock is going up, thereby putting the convertible bonds into a conversion position and diluting the current shareholders. I made the argument that there is no leverage here; there is no leverage. But this is a slide from MicroStrategy's last quarterly earnings showing the impact of intelligent leverage. Can't argue with this slide, and I'm going to show you on the next screen how this is done.
Look at this: total Bitcoin is going from December 31st—this is just year-to-date for the first three quarters—a 33% increase in the total Bitcoin, right? But if we look at their share count, to their benefit, they're using an assumed diluted share count. The difference between assumed diluted and fully diluted is that fully diluted will use the treasury method; anything that can be converted should be converted. For the assumed diluted share count, they're just saying convert everything. Just ignore everything; just assume that everything that could be converted is converted. Just convert everything.
Now, it is a little bit questionable because every year they have a huge amount of stock-based compensation, so this is not forecasting out a couple of years of dilution for free, right? Then, because they have share-based compensation. But still, let's see what they got here: a 133% increase, but a 33% increase in the Bitcoin count. So you would say Bitcoin per share has increased. If I buy a share—if I bought a share nine months ago and I buy a share today—never mind what I paid; let's just look at the asset value that I get because the asset count is climbing faster than the share count. The asset value per share is increasing. Isn't that leverage? Isn't that it right there? Let me show you how you get that. You'll be amazed at this.
Okay, I'm going to give you just a really simple example, but the logic would be the same no matter what numbers you created. You can prove it for yourself by just creating scenarios on your own, and you'll see that the math always works out. Let's start with a simple example here. Let's say we have a company that has 10 units of something valued at a dollar. These 10 units—so under assets we have 10, and we're really only concerned with that. We'll call it some kind of cryptocurrency, let's say, but that's all we're concerned about. And let's say that we have 1,000 shares that are valued at 50 cents a share. There's our initial condition.
What we'd like to do is increase our asset count. Let's buy 10 more of these; they're trading at a dollar a piece, so we'll have $20 in assets. We've got to buy 10 more, but the business that we run doesn't make any money. Let's say that we have a software business, and the software business loses money each year, so we can't really use cash flow from operations to do it. So what we'll do is we'll raise $10 in convertible debt. That's nice and simple. Since each share is 50 cents, we're raising 10 bucks; it'll convert to 20 shares. We raised $10 in convertible debt, and we can buy 10 more of these for a buck. Our asset value goes to 20. Our asset count went from 10 to 20 because we bought 10 more. We had a 100% increase in our asset count.
Let us just fully dilute everything. Let's say, okay, well, it's convertible debt, but it converts to 20 shares. Let's just say on an assumed converted basis you got 1,020 shares. That is a 2% increase in your share count, right? A 100% increase in your asset count. The magic does not stop there. Here we had 10 units of something for 1,000 shares, so each share represented a 1% ownership of one unit. If you had a share, you had a 1% ownership of one unit—that's 10 units divided by 1,000 shares. Now you have a 1.9% interest in one unit because we have a count of 20 but only 1,020 shares. So you had a 90% improvement in asset value per share through the use of this convertible debt: a 100% increase in your asset count, a 90% improvement in your asset value per share, and a 2% increase in your share count. There is your intelligent leverage. You should keep doing that.
Can anybody see where the problem is? What variable are we missing? How is this possible? How can we simply just create value? Where did this happen that we created this much value: a 100% increase in assets, a 90% improvement in asset value per share, but only a 2% increase in share count? Wouldn't everybody be doing this if this was possible? Now, the math on the screen is absolutely correct. The slide I showed you from MicroStrategy, with their Bitcoin count increasing 33% and their fully diluted—not even fully diluted—let's tip our hats to MicroStrategy here. They're saying even if it can't be converted today because it isn't advantageous, let's just convert it anyway. The assumed diluted shares only increased 133%, so the asset value per share has increased.
Look what I've done: a 90% improvement, a 100% increase, only a 2%. Where is the mathematical problem? Everything has to balance. You can't just create stuff out of nothing. Where's the problem? This is what I'm betting. If I have this, this is what I'm betting you can't figure out. Now, this on its own would be called illegal. In my interpretation of it, if I was just doing this, it's illegal. But if I wrap it up inside a corporation and I give you shares and I give you debt, I give you publicly traded assets such that you can always sell your share to someone else, it does not require new money coming in to pay out old money. That would be a Ponzi scheme; that would be illegal. So where is the problem?
Let me show you where it is. It's right here. This $10 coming in represents 20 shares. Let's just deal with the 20 shares. Of these 20 shares, it bought 10 units, so each share has a 50% interest in each unit. But once it gets added to the pool, it now drops to 1.9%. These guys suffer very greatly, but they help out the people who were in there first. So you have the original shareholders who got a 90% increase in the asset value per share, and you have the money coming in that didn't do very well. But all you have to do is just raise more money, and that will help these out. But they won't do very well. Well, you can just raise more money, and that will help them out, but they won't do very well. Well, you just raise more money, and that'll help them out, but they won't do very well. As long as you keep raising money, you can keep improving the asset value per share. But who is financing the improvement in asset value per share? It's always the last person in that is doing that.
So if you can issue a lot of equity and a lot of debt, and you keep issuing it, you have to keep issuing it in bigger and bigger amounts. However, to keep pushing this up, you have to keep increasing in bigger and bigger amounts. I want you to keep that in mind. Let's revisit this chart again from MicroStrategy. Keep in mind what they're billing it as. They're suggesting that this is the impact of intelligent leverage, and I've just shown you on the previous screen it has nothing to do with intelligent leverage. It's just a flaw in the math that the people coming in last—those who are supplying the next round of financing—are losing significantly to help those out in front of them. They will increase the asset value per share for those people who are in before them, but they suffer for them to get an improvement in asset value per share. You got to bring in more money behind you.
Let's just see what's going on here. Let's go back to December 31st, 2023. There's your Bitcoin count: 18,950. I'm not questioning any of their numbers. I'm saying I'm going to give it to them; these numbers are right. And I'll even give it to them for using the assumed diluted shares—not just fully diluted, but convert everything just to show the worst-case scenario. Their numbers are right; you're not going to find a flaw here. 33%—18,950. Let's use their share count. The comma is in the wrong place; it's not the 20, it's 207,640. But I mean, I guess I could give it to them in the sense that, well, they did have a 10-for-one stock split, so you would move the comma over, right? You got to move it over.
That means each share has a 0.91% interest in a Bitcoin. Each share—if you have 189,000 Bitcoin and 207 million shares—each share has a 0.91%. That's a long way from 1%. That's not 1%; that's 0.91% of a Bitcoin per share. Well, you know how many shares of MicroStrategy you could buy instead of buying a Bitcoin? If you go back to December 31st, Bitcoin was $42,000; MicroStrategy was $631.9. Again, I'm adjusting for the split, right? It would have been $631, but I'm adjusting for the split. You could buy 668.86 shares. You could have bought a Bitcoin for $42,000, or you could have bought 668 shares of MicroStrategy. It's the same amount of money. If you bought $42,000 worth of Bitcoin, you own 100% of one Bitcoin. If you spent the same amount of money on MicroStrategy stock, you owned 61% of a Bitcoin, not 100%, but only 61% of a Bitcoin. But that's okay because apparently you have intelligent leverage.
Look, 33% and it only was 133%. If we take the $252,000 now and divide it by the new share count, each share is now 0.7% of a Bitcoin. Look at this: you went from 0.91% to 0.17%. You had a 17.76% increase in the Bitcoin per share. The asset value per share increased 17.76%. Bitcoin count increased 33%, and as long as this increase is less, you will get an increase in the Bitcoin per share. But at whose expense? Remember on the previous screen, it's the last money coming in that helps to pay for all the money in front of it.
Let's look at today. Bitcoin: $90,000. Last closing price: $90,000. MicroStrategy closed at $340. So you could buy one Bitcoin for $90,000, or you could buy $2,166.173 worth of MicroStrategy stock. You could have bought 100% of a Bitcoin, but instead you said, "No, I'm going to go for 29% of a Bitcoin," because of course I have intelligent leverage. That leverage only works if MicroStrategy plans to raise more money, and then for those people, that leverage only works if it plans to raise even more money.
Let's have a look at its share-raising or its fundraising strategy. So here it is: their capital raising target for 2025 to 2027. It says illustrative. Their plan is to raise $42 billion in capital over the next three years in equal amounts of debt and equity. I'm just going to move a few things around here so that we can see sort of what's going on just a little bit better. So let's just kind of move some things around here.
Remember what I said it relies on: you have to keep raising money, and you have to keep raising money in larger and larger increments to get this done. It's the only way to make this happen, right? Give me a second here; I just want to rearrange something. Let's just turn this over on its side like this. There is their fundraising strategy. If they do raise this amount of money, they can increase the number of Bitcoin per share that existing shareholders would have, at, of course, the cost of these shareholders. But they can make these shareholders okay by raising even more money to help everyone above them to raise the value of Bitcoin per share.
But keep in mind they're financing 100% of the increment but only getting a percentage of it. But that's okay; you can raise even more money the next year to help everybody else out in front. Of course, they would suffer quite a bit, but they would help everybody else out in front by raising the Bitcoin per share. And as long as you have a Bitcoin count that is that size and a share count that is that size, any increase in here would look like a large number compared to the increase in here. It would also make it look like you're increasing the asset value per share, but it relies on larger and larger and larger amounts of money coming in.
I don't know what I would call that shape. I'm not sure if there's a word for it. It doesn't seem like it mathematically makes sense because it does rely on an infinite regression into larger and larger amounts. There's a name for this; I don't know what it is. If anybody has an idea of what this is called, I think we've seen this before, but I'm not really sure what it's called. If you are inside an organization that has shares and shareholders are freely trading the shares, and shareholders are freely buying the equity and freely buying the bonds, and they can trade the equity and the bonds in the market, well, that's not a Ponzi scheme because you can trade; you don't have to rely on new money coming in to get your money out. But if you're looking at the asset value per share, that can only increase if you have new money coming in and bigger and bigger and bigger amounts of money coming in.
I don't know; do you guys have a name for this thing?