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10/10/2024

MicroStrategy's Perpetual Motion Machine: Analyzing the Company's Surge Amid New All-Time Highs

Editor's note: The crypto market remains volatile, but MicroStrategy (MSTR), a company with heavy Bitcoin exposure, recently hit its all-time high stock price. On October 9, MSTR briefly touched $200, peaking at $198.35. Recently, overseas KOL Glenn Hodl published an analysis of MicroStrategy's strong performance. Glenn argues that even if Bitcoin's price doesn't rise, MicroStrategy can exploit the valuation gap between a commodity and a corporation to create a sustainable "perpetual motion machine" that continuously drives the company's market cap higher. He believes this could ultimately make MicroStrategy the largest company in the world by market capitalization.

MicroStrategy's Perpetual Motion Machine: Analyzing the Company's Surge Amid New All-Time Highs

Editor's note: The crypto market remains volatile, but MicroStrategy (MSTR), a company with heavy Bitcoin exposure, recently hit its all-time high stock price. On October 9, MSTR briefly touched $200, peaking at $198.35.

Recently, overseas KOL Glenn Hodl published an analysis of MicroStrategy's strong performance. Glenn argues that even if Bitcoin's price doesn't rise, MicroStrategy can exploit the valuation gap between a commodity and a corporation to create a sustainable "perpetual motion machine" that continuously drives the company's market cap higher. He believes this could ultimately make MicroStrategy the largest company in the world by market capitalization.

The following is Glenn's original post, compiled by Odaily Planet Daily:

MicroStrategy CEO Michael Saylor appears to have discovered an economic model that resembles a "perpetual motion machine."

I'm not sure whether this mechanism can be stopped, but if it keeps running, MicroStrategy could become the most valuable company in the world.

The reason lies in a fundamental difference between how a corporation is valued and how a commodity like Bitcoin is valued. This creates a valuation paradox for MicroStrategy (MSTR) in the market: commodities always trade at their current spot price, while companies trade at a discounted value of their future worth.

Therefore, if you believe Bitcoin will be worth more at some point in the future, the Bitcoin held by MicroStrategy will — and should — also be worth more.

This can create a "second-order effect," where MicroStrategy can continuously capture this price appreciation expectation. This reinforces their narrative and drives market cap higher.

Some readers may still be confused, so here is an extremely simplified static illustration.

Imagine a company that has issued 10 shares and holds 10 Bitcoin.

Suppose Bitcoin's current spot price is $2 and the market expects it to rise to at least $4. Under the corporate valuation model (traded at a discounted future value, assuming a 50% discount rate), the company's share price would be $3, representing a 50% premium to net asset value.

The company's owner spots an opportunity and issues 2 more shares at market price, using the $6 raised to buy 3 Bitcoin from the market.

The company has now issued 12 shares and holds 13 Bitcoin. The "Bitcoin held per share" ratio has changed from 1:1 to 1.08:1.

The key point is that the company's market cap is now $36, while the treasury value is $26, bringing the premium ratio down to 38% (or conversely, pushing the discount rate up to 62%). However, the market will still price the company at a 50% discount to future value, pushing the company's market cap up to $39, corresponding to a share price of $3.25.

After this premium re-rates, the company's owner can repeat the process — issuing another 2 shares at market price and using $6.50 to buy 3.25 Bitcoin from the market.

The number of shares outstanding now reaches 14, while Bitcoin holdings grow to 16.25, and the "Bitcoin held per share" ratio shifts from 1.08:1 to 1.16:1.

Then, as the market once again re-rates the premium based on the principle of "pricing the company at a 50% discount to future value," the company's market cap gets pushed up to $48.75, with the share price just under $3.50.

At this point, even though Bitcoin's price hasn't moved and the premium ratio has returned to 50%, the company's "Bitcoin held per share" ratio has increased by 16%, and the share price has also risen by roughly 16%.

A monster has begun to take shape. The company can continuously repeat this process, exploiting the valuation gap between a commodity and a corporation to create a perpetual motion machine — while the market will keep re-rating the company upward, partly driven by Bitcoin's future value and partly by the continued growth of the "Bitcoin held per share" ratio.

MicroStrategy is that monster, and it has the potential to become the largest company in the world by market capitalization.