On August 11, 2020, MicroStrategy began buying Bitcoin with the cash reserves on their balance sheet. Once all their cash was invested in Bitcoin, they began using debt and equity issuances to buy up more to the tune of billions of dollars.
So far this bet has paid off. MicroStrategy's market cap is 7x higher than it was last year, their Bitcoin holdings are valued at more than 2x their purchase price, and their core software business has even started to grow again, thanks in part to the awareness generated by their Bitcoin bet.
This level of success hasn't gone unnoticed, and other public companies have since followed MicroStrategy's playbook to accumulate more Bitcoin using debt and equity issuances themselves.
The playbook was first replicated by North America's top public Bitcoin mining companies, who began holding all of the Bitcoin they mined while funding their costs using fiat debt in early 2021.
Following in their footsteps, a public Lightning Network company called LQwD became the latest to issue securities to accumulate additional Bitcoin last week.
It is no longer fair to characterize MicroStrategy's debt and equity issuances as a unique and unaccompanied strategy. Other public companies are clearly following in their footsteps and are quietly accumulating Bitcoin despite the lack of public market attention they are receiving.
Until this year, most public Bitcoin mining companies didn't hold a significant portion of the Bitcoin they mined. They primarily focused on operating profitable mining machines and using their revenues to cover operational costs.
However, that changed in 2021.
At almost the exact same time, the largest public miners launched what they call a 'HODL strategy', whereby they hold on to all their mined Bitcoin and fund their operations and expansion plans with debt. To see the early effects on their balance sheets, take a look at the changing BTC balances of mining companies since 2021 began.
December 2020 Bitcoin Holdings (4,809 BTC)
September 2021 Bitcoin Holdings (20,707 BTC)
Bitcoin mining is a highly competitive market with incredibly low barriers to entry, so profit margins on mined coins will trend towards zero over time.
However, this assumes miners must immediately sell their earned Bitcoin to cover operating expenses. Under this assumption, miners are not gaining from holding Bitcoin, the best performing asset of the last decade.
What if miners could apply Gresham's Law to their business and hold on to their sound money (Bitcoin) while spending their debased money (fiat)? By taking on fiat-denominated debt, miners are now funding their near-term obligations using dollars while building a strong balance sheet of Bitcoin to hold in their treasury for decades.
If Bitcoin is worth 10x or 100x more by the time their long-term debt obligations come due, they can choose to either re-pay their debt using a small fraction of their Bitcoin holdings or get a subsequent loan to continue benefitting from Bitcoin's price appreciation against dollars.
With easy access to cheap debt, public miners now have a second arbitrage opportunity they can add to their business, one that is not limited by the hyper-competitive nature of Bitcoin mining.
All the major public Bitcoin miners have already earned money from their new HODL strategies, as Bitcoin prices have risen over the last month. Now this strategy is starting to catch on outside the Bitcoin mining world too.
LQwD, a $30 million public Lightning Network company in Canada, quietly announced a $50 million shelf offering this summer. This gave them the right to sell up to $50 million of securities (debt, equity, warrants, etc...) without going through the regulatory approval process each time.
Last week, LQwD announced they are using that shelf offering for a $6 million equity raise, which was quickly upsized to $7 million. Those funds earmarked for buying Bitcoin and for general corporate purposes and are expected to close tomorrow.
The scale of LQwD's offering is much smaller than that of MicroStrategy, but for a company with a market cap of only $30 million, the potential impact of a $7 million Bitcoin purchase could be significant. Furthermore, if LQwD chooses to use the remaining $43 million of their shelf offering to buy Bitcoin there could be some significant upside assuming equity dilution is kept in check.
For Bitcoin holders, LQwD and the major public Bitcoin miners are showing that MicroStrategy's playbook is in fact being replicated by public companies looking to make use of low interest rates to protect themselves against inflation.
As fiat money is being debased at a record pace in all major economies, I suspect we will see many more public companies recognize that the cheap debt being subsidized by central bank purchases offers Bitcoin holders a compelling arbitrage opportunity.
For companies with access to long-term bonds, paying 1-2% per year to buy Bitcoin could be a great way to get asymmetric upside. If Bitcoin goes up, the gains pay off the debt. If Bitcoin goes down, which hasn't happened over a 4+ year period in Bitcoin's history, high inflation will still make the value of the loan easier to pay off.