Strategy, The Smarter Web Company & Coinsilium

Here's how it works

Good Morning Team.

I spend a decent amount of my time consulting for some of the larger crypto exchanges - and one of the most common questions I get asked is about how Strategy (formerly MicroStrategy) has any real value.

For context, right now, Strategy sports a market capitalisation of $109 billion, given or take a few hundred million.

It owns 568,840 bitcoins as of 12 May, with an average purchase price of $69,287 - at a a total cost of $39.4 billion.

So Charles - how can a company whose only real asset is worth maybe $60 billion at the current $104,000 BTC price command a market cap of $109 billion?

It’s simple.

Bitcoin Treasury stocks can rise to way, way above their fundamentals.

Because if the entire market’s a meme stock...

Strategy’s Strategy

Here’s what Michael Saylor has told you this year:

• Buying BTC now is like buying Manhattan 300 years ago.

• Every day is a good day to buy Bitcoin.

• The US government should sell all of its gold and buy Bitcoin.

• And a direct quote: ‘Soon every billionaire will buy a billion dollars of Bitcoin and the supply shock will be so great that we will stop measuring BTC in terms of fiat.’

And last week?

After telling us to sell a kidney for BTC a few months ago:

Bitcoin currently has a circulating supply of about 19.79 million coins (source: CoinMarketCap).

Roughly 2.5% of that supply was traded in the last 24 hours - a relatively slow day by Bitcoin standards.

Extrapolated, this implies that every six weeks, 100% of Bitcoin in existence changes hands - this includes active trading only and excludes vast amounts of Bitcoin locked in inactive or lost wallets.

Yes, much of this will be the same coins traded back and forwards, but this is not a market driven purely by long-term holders.

It’s largely dominated by speculative, high-turnover meme trading.

Bitcoin’s volatility is infamous: in 2022, it fell by about 70%.

Another crash of that magnitude is completely possible over the coming years - even most BTC maxis will concede this point - though it’s hard to know when in the cycle the drop will happen.

This context matters when considering MicroStrategy’s current valuation and strategy.

So why does Strategy trade at such a large premium relative to the value of its Bitcoin holdings?

The answer lies in the interplay between the company’s stock issuance and its Bitcoin purchases; a reflexive, self-reinforcing feedback loop largely orchestrated by Saylor’s aggressive buying strategy:

The Strategy Reflexive Feedback Loop

1. Strategy issues new stock or convertible debt to raise capital.

2. The company uses the raised funds to buy more Bitcoin on the open market.

3. This large-scale Bitcoin purchasing pushes up the price of BTC, given its limited free float and market liquidity.

4. As Bitcoin’s price rises, so does the paper value of Strategy’s Bitcoin holdings, boosting its net asset value (NAV).

5. The stock price rises as investors bid up Strategy shares based on increased NAV and the promise of more Bitcoin accumulation.

6. Buoyed by this premium valuation, Strategy can issue more shares or debt at favourable prices, fuelling further Bitcoin purchases.

7. The cycle repeats, driving both Bitcoin and Strategy stock higher — at least for as long as the market’s bullish on Bitcoin.

At face value, this seems like a genius plan.

Investors gain synthetic exposure to Bitcoin, Strategy grows its Bitcoin holdings per share, and the premium valuation is justified by ongoing capital raises and price appreciation.

The Danger: The Feedback Loop in Reverse

However, reflexivity is a double-edged sword, and this model carries enormous risk if the market turns bearish. Consider:

1. A significant drop in Bitcoin’s price reduces the value of Strategy’s Bitcoin holdings and its NAV.

2. Strategy’s stock price falls, losing its premium valuation and market confidence.

3. A lower share price and deteriorating fundamentals hamper Strategy’s ability to raise capital through equity or debt issuance.

4. If the company has outstanding convertible debt or loan notes with obligations, it may be forced to sell Bitcoin to meet those liabilities.

5. Forced sales create downward pressure on Bitcoin’s price, accelerating the decline.

6. The cycle feeds on itself, causing further stock price and Bitcoin price declines, creating a death spiral.

This dynamic makes MicroStrategy’s valuation highly sensitive to Bitcoin price swings - and importantly, much more than simply investing in Bitcoin.

What the Premium Really Means

The premium at which Strategy trades relative to the Bitcoin it holds is largely a reflection of this ongoing capital raise-and-buy cycle. But this premium is a paper valuation dependent entirely on continued price appreciation and access to capital markets.

It’s important to understand that Strategy cannot simply sell its Bitcoin holdings without tanking their price.

The company is effectively locked into a strategy of buy and hold, funded by new equity issuance. This means investors in Strategy shares are betting not just on Bitcoin’s value rising independently, but on the continuation of this aggressive capital-raising, Bitcoin-buying feedback loop.

Unlike spot ETFs which trade at or near NAV, Strategy trades at a 50%+ premium to the value of its BTC because of the belief that it makes the BTC go up.

Legally, MicroStrategy’s approach is fully compliant — it’s simply a sophisticated financial strategy. Economically, however, it shares characteristics with momentum-driven, self-referential schemes:

• The company relies on issuing equity or debt to fund asset purchases.

• Rising asset prices attract more investors and capital.

• The value proposition is dependent on new inflows rather than fundamentals, like earnings or cash flow.

If Bitcoin endures another major bear market — the kind that saw a 70% drop in 2022 — MicroStrategy’s stock could fall far more dramatically.

In this sense, MicroStrategy is not a traditional buy-and-hold asset but a leveraged Bitcoin momentum trade with embedded financial risks. Investors should be aware that they are effectively betting on:

• Bitcoin continuing to appreciate over time

• Saylor’s ability to keep raising capital and buying Bitcoin

• No significant prolonged Bitcoin bear market that forces distressed selling

History suggests these kinds of reflexive feedback loops tend to unwind violently once the tide turns.

The Long-Term Value of Holding Bitcoin

That said, there is obviously potential long-term value underpinning Strategy’s massive Bitcoin accumulation that investors should consider.

If Bitcoin ultimately fulfills its promise as a:

• global digital store of value

• hedge against inflation and fiat currency debasement

• foundation for future decentralised financial systems

then holding tens of thousands of BTC could represent a transformative asset base.

The value locked in these holdings might far exceed the current market cap and current price levels — assuming Bitcoin’s network effects continue to expand and regulatory clarity improves.

In this scenario, Strategy’s Bitcoin cache could become a foundational treasury asset akin to gold reserves for a modern corporation, potentially delivering outsized returns over decades.

However, this long-term thesis depends heavily on Bitcoin’s continued adoption and resilience….

and I’m not sure ‘digital gold’ is a replacement for the real thing.

BUT

Many very intelligent people are.

Only time will tell.

Smarter Web & Coinsilium

The Smarter Web Company - and now Coinsilium - have adopted this idea.

Copy Strategy’s BTC Treasury, and enjoy similar rises.

It’s not a bad plan, for two reasons.

First, AIM is broken. If you try the traditional model of actually building a business, and raising new capital every so often to keep building, you will be wiped out by large discounts on the placings.

Second, there’s a reason why AIM is broken. The risk capital has gone to US tech stocks - and to crypto.

Anyone trading altcoins sees a 100% rise in a day as a bit boring. And many are trading on no fundamentals at all.

We live in a world where Fartcoin has a $1.3 billion market cap.

One where Trump Coin can in the space of 24 hours generate higher returns than the S&P 500 - in percentage terms - since its inception in 1957.

……………

So when The Smarter Web Company & Coinsilium start up their own BTC - or altcoin - treasuries, they are taking advantage of Strategy’s strategy (and also, offering the potential to get in on the ground floor of the next Strategy).

This creates a positive feedback loop as investors expect a similar trajectory - but the pair are also tapping into the hyped-up meme trading activity that means you can create a market cap well above the fundamentals.

We live in a world where most AIM shares sport market caps well below the fundamentals - with some holding more cash than their market cap - so it makes more sense than you might think.

The risks are higher in the small cap world though. There’s far less liquidity so it’s easier for it all to go wrong. And in a crypto bear market the juniors will last about five minutes before needing to liquidate.

But that swings both ways. Lower liquidity means sharper price jumps.

That’s how you IPO at £3.7 million and hit £50 million in a few weeks.

The potential volume and profit is beyond the mind of the small cap UK investor to comprehend. And these stocks allow investors to buy into a Bitcoin treasury within an ISA/SIPP - so keeping the tax advantages, without any forex costs. No stamp duty either.

You’ve also got to bear in mind that the FCA banned the sale of crypto derivatives, ETFs and ETNs to retail in early 2021, arguing that retail investors cannot reliably value these assets and are at high risk of loss (Policy Statement PS20/10).

And due to the EU/UK PRIIPs (Packaged Retail and Insurance-based Investment Products) regulations, US-domiciled ETFs also cannot be marketed to retail investors in the UK unless they publish a Key Information Document. Most US ETF providers (Vanguard, BlackRock, etc) do not publish KIDs for their US funds, meaning they can’t be sold to UK retail investors via regular broker platforms.

Which means that Smarter Web and Coinsilium are giving you access BTC in a way that is currently inaccessible elsewhere.

This could easily be attractive to institutions looking to cash in on the crypto craze by sidestepping current regulations.

Remember though.

Pigs get fat. Hogs get slaughtered.

But absolutely insane returns (with correspondingly high levels of risk) are very much on the table.