$MSTR might not be a ponzi in the strict sense of the word, but it does contain ponzi-like traits, and it is ill-advised to purchase $MSTR…
Just a short blog post saying “I told you so”, and it’s also interesting game theory.
What is a ponzi?
The common definition of a ponzi scheme is a form of fraud, where initial investors are paid returns from the contributions of later investors. That is there is no product and relies solely on there being additional new investors.
Some common terms
$MSTR - Microstrategy
mNAV - Market Net Asset Value; the multiple of a company’s market capitalization to the underlying assets that it holds.
Is $MSTR a ponzi?
Based on the strict definition, no $MSTR is not a ponzi. Microstategy does not pay out returns to old investors from the investments of new investors.
Not a ponzi, but ponzi-like?
The premise of $MSTR is to provide BTC accumulation - that is, you purchase $MSTR shares at a premium to the underlying mNAV (BTC), and in return, over time the amount of BTC that each share represents increases.
Where does this “BTC yield” come from?
Basically financial engineering.
Common ATM
The most common - the $MSTR common shares ATM. Shares will be issued and sold - as long as mNAV > 1, selling common shares of $MSTR to buy $BTC will increase the amount of BTC / share.
Example: imagine there are 100 shares of MSTR at $150 each ($15000 market cap); however MSTR only holds $10000 worth of BTC (0.1 BTC at $100,000 / BTC) - that is, 1 share of MSTR is backed by $100 of BTC and mNAV is 1.5 ($15000 / $10000), and BTC per share of 0.0001. Now, imagine that 100 new shares of MSTR were issued and sold on average for $140 each (some market impact); this $14000 was then used to buy $14000 worth of BTC. So you now have 200 shares at $140 each, backed by $24000 worth of BTC ($10000 + $14000). Assuming the price of BTC has remained constant at $100,000 despite your buys, you now have 0.24 BTC outstanding, $24,000 worth of BTC and a market capitalisation of $28,000 with 200 shares outstanding; giving you ~0.0012 BTC/share (or 20% yield) at the detriment of mNAV which is now 1.16x.
Summary: mNAV down (sell pressure on MSTR, buy pressure on BTC), BTC/share increases.
Convertible bond offerings
This is a financial derivative - as BTC is quite volatile, option premiums are high and market-makers are quite happy to get a free perpetual call option. You can issue a bond with below market interest rates and option market-makers are more than willing to buy it, as long as they believe they can make more money from being long gamma than the opportunity cost of buying the bonds. This is quite complicated for a retail investor but you can basically think of it as high volatility = ability to raise money at low rates.
Summary: Cash raise to buy BTC; this needs to be repaid later, but if MSTR rises enough, the bond can be repaid in newly issued MSTR shares instead. mNAV increases if MSTR increases in price enough - liability if you do not meet conversion price.
Junk bonds
Fancy bonds that promise 8-12% annualized coupons when the risk-free rate is ~4%. There’s quite a few different ones: STRC, STRF, STRD, STRC. These pay coupons but there are a few catches - these dividends can be stopped, and the embedded call options of these junk bonds rely on MSTR to appreciate quite a bit, and these are all pretty much worthless if MSTR/BTC crashes completely or dividends are stopped. Coupons are paid from issuing and selling MSTR stock.
Summary: Sell pressure on MSTR / downwards pressure on mNAV. Initial cash raise is used to buy BTC and increase mNAV - but now there are interest payments to make and some drag on the common stock.
Where’s the ponzi?
The common ATM only works when people continue to buy MSTR at a premium. Once people stop, the mNAV narrows and/or MSTR can no longer be issued to buy BTC so buy pressure on BTC stops. The late investors do not get a return as the BTC accrual per share flywheel stops. As there becomes more and more MSTR shares available in circulation, it becomes harder to attract purchasing power to buy MSTR at a premium; however, the opposite is not true as people may panic to sell MSTR when it becomes clear that it is hard to convince additional people to buy MSTR at a premium to the underlying BTC. It isn’t guaranteed that mNAV will necessarily dip below 1, and trade at a discount, but likely given how Grayscale BTC traded at a steep discount in the past.
Convertible bond offerings only work while volatility is high and MSTR is increasing in price. Not inherently ponzi like. BTC is a maturing asset, and becoming less volatile as is MSTR - it is harder to issue low interest rate convertible bonds now and the fact that Michael Saylor hasn’t tried shows that demand for these is low.
Junk bonds; these are in general quite sketchy. I’m not sure it’s worth buying for just 4% above the risk free rate, considering that there is a possible death spiral and losing most of your principal if BTC crashes and/or the dividend gets cut. You’re almost certainly better off selling OTM put options for 8% annual yield than doing this. The yield on this also comes from selling MSTR; so it’s dilutive of the common stock - this only makes sense if you believe that the CAGR of Bitcoin is less than the coupons that are being paid from these bonds (8%), and also require you to believe that the BTC accrual flywheel will continue to work. If you don’t believe in the flywheel, it makes more sense to just get a margin loan instead and buy BTC instead of buying MSTR. If you have good credit and BTC holds a small percentage of your portfolio, you almost certainly can borrow at a cheaper rate (~7%) or so, and without having to worry about mNAV dilution.
The vocal fanbase
There is a very vocal group of supporters for $MSTR and chances are they made a lot of money from $MSTR. Whilst $MSTR isn’t strictly a ponzi by definition, similarly to a ponzi scheme, being an early $MSTR buyer helps. But as $MSTR market capitalization increases, there needs to be ever increasing capital to maintain mNAV premium; and there are only so many idiots you can persuade to pay $1.50 for $1 with the promise of the $1 being worth more in the future. If you believe in $MSTR, just leverage BTC instead - it’s also a stupid idea, but probably safer.
Summary
Really quickly and badly written article, but whilst $MSTR might not be a strict ponzi, it does contain ponzi like features. I’m not saying that $MSTR will collapse, as it is technically holding BTC - but it is almost certain that in the future $MSTR will trade below the underlying value of its BTC holdings.