The most expensive bitcoin fund might be MSTR, not GBTC

For years, the flagship Grayscale Bitcoin Trust (GBTC) has been the world’s largest publicly traded bitcoin fund. Grayscale charged shareholders 2% every year to manage up to $30 billion worth of bitcoin.

Now a spot bitcoin ETF that charges 1.5%, GBTC is widely considered to be the most expensive of its kind — competing against 10 others boasting expense ratios as low as 0.2%.

However, MSTR’s complicated mix of debt service, share dilution, stock-based derivatives compensation, and preferred voting rights may deem it to be far more expensive than any bitcoin ETF.

Chart via Yahoo Finance.

MicroStrategy is a de facto bitcoin holding company. At press time, it holds $7.69 billion in BTC, which makes up 98% of the firm’s $7.83 billion market cap.

Meanwhile, the actual enterprise software business of MicroStrategy earned a trivial $90 million in net income from continuing operations over the last year.

From a cursory glance, MSTR might seem to be the least expensive bitcoin fund. A buyer of MSTR seemingly might pay a one-time 2% fee (the non-bitcoin equity of MicroStrategy’s enterprise software business) then gain ostensibly “fee free” bitcoin exposure for endless years into the future.

Yet through MicroStrategy’s complicated mix of debt service, share dilution, stock-based derivatives compensation, and preferred voting rights, MSTR may be far more expensive than any bitcoin ETF.

67% voting control over MSTR bitcoin

Executive chairman and co-founder Michael Saylor owns 99% of MicroStrategy’s super-voting Class B shares (1,961,668 of 1,964,025 outstanding), which have 10 times the voting power of MSTR (Class A shares). As a result, Saylor personally controls approximately 67% voting power over MicroStrategy.

As MicroStrategy admits publicly, because of his absolute control, “Mr. Saylor could transfer control of MicroStrategy to a third party without the approval of our Board of Directors or our other stockholders, prevent a third party from acquiring us, or limit the ability of our other stockholders to influence corporate matters.”

In almost any corporate matter concerning MicroStrategy, Saylor may always cast his controlling, 67% vote.

Bitcoin trackers reveal Saylor and El Salvador both rekt

Just over a year ago, Saylor was down $1.7 billion on his bitcoin investments.

Read more: MicroStrategy and Silvergate are 2022’s most shorted crypto stocks

Stock-based compensation

Over time, long-term holders of MSTR are diluted by various forms of derivatives. For example, MicroStrategy has issued Restricted Stock Units (RSUs), options, and various convertibles that are not included in its 16.71 million outstanding share count.

All of these stock-based derivatives might dilute common shareholders over time:

• 2025 convertible notes
• 2027 convertible notes
• Restricted stock units
• Performance stock units
• Employee stock repurchases

In SEC disclosures, MicroStrategy admits that common shareholders will be steadily diluted: “We may issue and sell additional shares of Class A common stock, convertible notes, or other securities in subsequent offerings to raise capital or issue shares for other purposes.”

Ignoring fully diluted calculations

Most investors divide the value of MicroStrategy’s bitcoin into MSTR’s market capitalization. Only, Class B and other convertibles hold a claim to that same bitcoin.

The fully diluted calculation of MSTR’s bitcoin backing, which includes Class A, B, and convertibles, reveals that buying MSTR earns you not 98% value in bitcoin holdings but less than 85%.

While these names have corrected from their highs we feel downside remains. Specifically for MSTR, the stock continues to trade at a ~20% premium to its underlying BTC (using conservative assumptions). We do not see a rational reason for this premium to persist, and we have… https://t.co/p7Sd7DuYTN pic.twitter.com/0NNKnQDTA8

— Hal Press (@NorthRockLP) January 19, 2024

Read more: Barry Silbert deletes old tweets amid GBTC selloff

While certain Class B shares are convertible 1:1 into Class A shares, Saylor can exercise his right to convert. Presuming he won’t overestimates the value of bitcoin holdings per share of MSTR.

In the end, after considering MicroStrategy’s ongoing debt-servicing interest costs, Saylor’s controlling voting power, ongoing share dilution, and stock-based derivatives compensation, MSTR might be one of the most expensive bitcoin fund-like shares listed on US securities exchanges.

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