Why Buy MSTR Instead of Directly Investing in Bitcoin ETFs?

Author: ++Murphy++

On October 15, MSCI officially approved new rules to exclude non-operating companies that do not meet standards from global investable market indices. In previous simulations, MSTR was listed among those proposed for removal. The final results will be announced on November 11 and will take effect after the market closes on November 30.

After the news was released, MSTR plummeted. Some people asked: how should one choose between BTC and MSTR?

To answer this question, we first need to clarify the underlying logic.

First, let's look at the theoretical selling pressure: it is currently estimated that funds tracking MSCI-related indices hold about 13 million shares of MSTR, valued at nearly $1.8 billion based on the closing price on October 16, which is equivalent to 60% of the average daily trading volume over the previous 30 days.

This potential sell-off is indeed significant, but it is not of a scale that the market cannot absorb.

If MSTR is indeed removed from the index, it will lose some "passive demand," but what we should pay more attention to is whether there will be enough "active demand" in the future?

This leads to another question:

In today's market, where Bitcoin spot ETFs are quite mature, if a company simply holds BTC long-term, why would investors not directly buy the ETF and instead bear additional management fees, financing costs, and risks of share dilution?

Thus, Strategy must prove: it can not only benefit from the rise of BTC but also ensure that the net BTC equity per share owned by common shareholders continues to grow through capital operations.

Is this possible? Of course!

For example:

Assume MSTR holds 100 BTC and has issued 100 shares, then each share corresponds to 1 BTC. If the market is willing to give a 1.5 times net asset valuation (i.e., mNAV=1.5), the company can issue 20 additional shares to raise funds equivalent to 30 BTC.

With this money, it continues to buy BTC, increasing its holdings to 130 BTC, and the total number of shares becomes 120. At this point, each share corresponds to 1.083 BTC, an increase of 8.33%. Even if the price of BTC does not change, the "BTC equity per share" of existing shareholders also increases.

This is the core of MSTR's financing flywheel: using stock premium financing to ensure that the growth of BTC reserves outpaces the growth of equity. If this growth can be sustained, it will naturally attract more active funds, thereby supporting valuation premiums and forming a positive cycle.

However, it is important to note that there are two prerequisites:

1. The market must be willing to provide sufficient premium (mNAV).

2. An increase in net BTC equity per share does not mean that MSTR's stock price will necessarily outperform BTC.

Because stock prices depend not only on BTC prices and net equity per share but also on how much valuation premium the market is willing to give. If mNAV shrinks significantly, it may offset the gains brought by the first two factors.

For this reason, what Saylor most wants to convey to the market now is that "we can create returns that surpass direct BTC holdings through capital management."

But this cannot be achieved by mere words; it must be proven by facts. The capital market is sensitive; as long as there are indeed "profits to be made," active demand will continue to flow in.

🚩 In other words, MSTR's investment returns will depend on three variables:

BTC price, net BTC equity per share (the amount of BTC per share after deducting claims such as debt and preferred shares), mNAV (the premium the market is willing to pay for MSTR's net BTC asset value per share).

From this, we can deduce three possible paths for MSTR in the future:**

Path 1: BTC Rises, mNAV Expands Simultaneously

BTC enters a strong bull market, and the market regains confidence in MSTR's financing ability, continuously increasing net BTC equity per share. In this case, MSTR not only benefits from the rise of BTC but also gains from the expansion of valuation premiums, with a chance to significantly outperform BTC.

Path 2: BTC Continues to Rise, but mNAV Remains Low

BTC prices rise, but more and more investment demand is absorbed by spot ETFs, making it difficult for MSTR to achieve a higher valuation. In this case, even if mNAV remains around 1, MSTR may still outperform BTC due to the amplification effect of its capital structure and the growth of net BTC equity per share. However, its excess returns come more from asset appreciation.

Path 3: BTC Rises, but mNAV Continues to Compress

Even if BTC rises, MSTR may still be affected by financing costs, share dilution, and changes in market preferences, leading to a continuous decline in valuation. In this case, if the growth of net BTC equity per share is insufficient to offset the compression of mNAV, MSTR may underperform BTC.

Finally, let's look at the current valuation.

On July 23 this year, Strategy modified the mNAV calculation criteria. According to the new data: it dropped to 1.01 times on August 21, reached about 1.20 times in early October, and closed at 1.08 times on October 16.

Objectively speaking, according to the new criteria, 1.08 times means that MSTR's current valuation premium is relatively limited. Of course, a low premium does not necessarily mean it is undervalued.

In the future, if Strategy can restore strong financing capabilities and continuously increase net BTC equity per share, the market may still reassign a higher valuation. Conversely, if the flywheel fails, mNAV may not return to historical highs even with the rise of BTC.

Therefore, when choosing between BTC and MSTR, the key lies in which path you believe in more.

If you are optimistic about Path 1 or Path 2, MSTR will be relatively more attractive (for Path 2, you need to assess how much MSTR's net equity per share can grow); if it is Path 3, then directly holding BTC or a spot ETF would be a better choice.

Ultimately, buying BTC is betting on the long-term value of BTC itself; buying MSTR, in addition to being optimistic about BTC, also adds a layer of bet on Saylor's capital management capabilities.

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