Analysis of Bitcoin Arbitrage Model for Strategy

In the past five years, a certain company has invested 40.8 billion USD to acquire over 580,000 Bitcoins, accounting for approximately 2.9% of the Bitcoin supply or nearly 10% of active Bitcoins. The company's stock has increased by 1600% over the past three years, far exceeding the Bitcoin increase of about 420% during the same period. The company's valuation has surpassed 100 billion USD and has successfully entered the NASDAQ-100 index.

This astonishing growth has sparked controversy. Some predict that the company will become a trillion-dollar giant, while others express concern about the potential forced sale of Bitcoin leading to market panic. This article will delve into the company's operating model and analyze whether it poses a significant risk to the Bitcoin market.

Source of Funds Analysis

The company mainly raises funds to purchase Bitcoin through three channels: operating income, stock issuance, and debt financing. Among these, stock issuance is the primary source of funding, rather than the debt financing that is generally of more interest to outsiders.

This model seems counterintuitive: why do investors choose to buy company stocks instead of directly buying Bitcoin? The answer lies in the existence of arbitrage opportunities.

Investment Restrictions for Institutional Investors

Many institutional investors, funds, and regulated entities are bound by "investment mandates" that restrict them to specific types of assets. For example, equity funds can only purchase stocks, and credit funds can only invest in credit instruments. These restrictions prevent a significant amount of capital from directly entering emerging markets, including the cryptocurrency sector.

The company's founder insightfully recognized the contradiction that institutional investors wanted exposure to Bitcoin but were limited by investment mandates, cleverly capitalizing on this. Before the emergence of Bitcoin ETFs, the company’s stock became one of the few reliable avenues for these institutions to gain exposure to Bitcoin.

Authorized Arbitrage

Due to the demand for the company's stock exceeding supply, the stock price often trades at a premium. The company continuously uses this premium to purchase more Bitcoin, while increasing the amount of Bitcoin contained in each share. Over the past two years, investors holding the company's stock have achieved a 134% return in Bitcoin terms, making it the highest return in large-scale Bitcoin investments in the market.

Even after the launch of the Bitcoin ETF, this strategy remains effective. Because many funds, including most mutual funds managing $25 trillion in assets, are still prohibited from investing in ETFs.

Debt Advantage

The company's debt structure also has unique advantages. Its debt is similar to a corporate mortgage, requiring only interest payments within a specified period, while the principal is repaid at the end of the term. As long as the interest is paid on time, creditors have no right to sell the company's assets. This flexibility allows the company to better cope with market fluctuations.

Conclusion

The company's core business model is arbitrage, rather than purely leveraging operations. Although it currently does hold some debt, the Bitcoin price would need to drop to around $15,000 within five years to pose a serious risk to the company.

As more companies adopt similar Bitcoin accumulation strategies, the market landscape may change. If these companies stop charging premiums in order to compete with each other and begin to incur excessive debt, it could have serious consequences. Investors should closely monitor developments in this area.