Strategy (recently renamed from Microstrategy) is one of the top performing companies in the US stock market in recent years. The stock price of the highly controversial “Bitcoin holding company” is up 210% in the last year alone and up a staggering 3,300% in the last five years.
One reason why Strategy has done so well is because it is one of the best at raising cheap capital. How does this work?
Self-fulfilling cycle
Strategy’s Bitcoin playbook is pretty simple and yet quite ingenious. The “Bitcoin holding company” basically takes advantage of its stock price trading at a premium to book value by selling new shares for cash.
Imagine a company that has a book value of $1 million and has 1 million shares. Each share, hence, has a book value of $1. But let’s say that for some reason, someone is willing to buy the shares at $2 each. The company can take advantage of this and sell new shares to this buyer. Let’s say the company sells 1 million new shares for $2 million. After the share issuance, the company now has 2 million shares outstanding and $3 million in book value. The book value per share is also now magically $1.50. The process can become a self-fulfilling cycle where the company raising shares above book value actually leads to the book value per share increasing.
This is exactly what Strategy has done. Its book value per share has risen by using this simple financial engineering trick. But Strategy then also uses proceeds from its share issuance to buy Bitcoin. If Bitcoin’s price rises, Strategy’s book value per share will increase yet again.
In 2023, Strategy raised US$2.0 billion from issuing shares. In 2024, the company raised an even larger sum of US$16.3 billion from ordinary share sales. As of its last quarterly earnings update for the first quarter of 2025, it has raised another US$5.7 billion through sales of common shares and preferred shares.
But Strategy has gone yet one step further. The company has also raised capital through debt markets to buy more Bitcoin, in effect leveraging up its balance sheet and increasing its exposure to Bitcoin. Strategy’s total debt has increased from US$2.2 billion in 2023 to US$7.2 billion in 2024, and US$8.1 billion in the first quarter of 2025.
What the bulls believe
Investors who are bullish on Strategy believe that this virtuous cycle can continue forever. They believe that Strategy’s premium to book value will exist for many years as there are sufficient buyers of the stock who believe in this self-fulfilling cycle.
If true, Strategy will become a compounding machine simply by issuing new shares at a premium and juicing its book value per share. There’s also the Bitcoin purchases, which adds another growth-factor for Strategy’s book value per share.
But as I mentioned earlier, there’s also leverage at play with Microstrategy because the company has used debt to buy more Bitcoin that it can actually afford. Microstratregy’s book value will therefore swing more than Bitcoin’s price. If Bitcoin’s price rises, Microstrategy’s book value will go up faster.
When will the party end?
“I applaud Strategy’s playbook. But there are some risks that shareholders need to be wary of. The obvious one is if Bitcoin’s price falls. When this happens, Strategy’s book value per share will fall faster because of the leveraged nature of the company’s balance sheet. As of 31 March 2025, Strategy had US$43.5 billion worth of Bitcoin but only US$32.2 billion in equity. If Bitcoin’s price falls by 50%, Strategy’s book value would drop to US$10.5 billion, or roughly a 66% fall. For Strategy to enter negative book value territory, Bitcoin will need to fall by around 74% from the 31 March Bitcoin price.
The other major risk is if stock market participants decide that Strategy’s stock price simply does not deserve to trade at a premium to book value. In other words, buyers of the stock only want to pay book value to buy shares. This throws Strategy’s ability to raise capital cheaply out the window. But it also means that Strategy’ shareholders who first invested at a premium to book value could face a potential heavy loss.
As of Bitcoin’s price at the time of writing, Strategy’s book value is worth around US$38 billion. But based on the company’s current stock price, its market capitalisation is around US$108 billion, or a 180% premium to its book value. Even if Bitcoin’s price remains stable, but Strategy’s stock price reverts to no premium on book value, this could still lead to a painful 64% reduction in the stock price price.
For now, momentum and the current environment suggests that market participants are unlikely to bid down Strategy’s stock price so drastically so soon. But things can change during “risk-off” environments and when market participants become more cautious.
A double whammy for Strategy shareholders can happen if both Bitcoin’s price falls and Strategy’s premium to book value narrows.
The bottom line
Whatever you think about Michael Saylor and his Bitcoin views, he certainly has mastered the dark arts of financial manoeuvring. In most assets, fundamentals drive price. Saylor has managed to turn the script around, making price drive fundamentals.
But this comes with risks. If Strategy’s stock price collapses, the virtuous engine stops running. Saylor seems to be wary of these risks. While Strategy continues to issue shares to buy Bitcoin, Saylor is constantly selling his Strategy shares.
Despite the risks, market participants seem hungry for more of such companies. Besides Strategy, there are now a number of copy cats around the world, such as Metaplanet in Japan which has seen a meteoric rise in its share price this year. Its stock price is at an eye-popping 7 times book value.
For such companies, the party will end when there are no more greater fools to sell to (both for Bitcoin and for new shares of the company). Whether – or more likely, when – that happens is anybody’s guess. Just be careful not to be the last one holding the bag.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned. Holdings are subject to change at any time.