MicroStrategy’s aggressive Bitcoin (BTC)-buying strategy, paired with the finance industry’s outdated yet fading skepticism toward cryptocurrencies, has led some critics to allege that the company operates like a Ponzi scheme.
A Ponzi scheme is a deceptive investment operation that pays returns to earlier investors primarily using the capital from new investors rather than through legitimate business activities or profits. These schemes depend on a continual influx of new participants to maintain payouts, rendering them fundamentally unsustainable.
The term “Ponzi scheme” is named after Charles Ponzi , who, in the early 20th century, defrauded investors by promising high returns from international reply coupons and using new investors’ money to pay earlier investors.
A recent example of a classic Ponzi scheme is Bernie Madoff’s fraudulent operation , which collapsed in 2008, costing investors around $65 billion. Madoff promised steady, high returns through his firm but secretly paid earlier investors with money from newer ones, maintaining the illusion of profitability until the scheme fell apart.
Another well-known case is BitConnect, a cryptocurrency platform that lured investors with promises of massive returns through its supposed trading algorithm. Like Madoff’s scheme, BitConnect also relied on new investor funds to pay earlier participants. It ultimately collapsed in early 2018 and erased billions in investor wealth.
Comparing MicroStrategy to a Ponzi scheme arises from its recurring pattern: Raising capital by issuing shares and taking on debt, using the proceeds to purchase Bitcoin, and relying on the increase in Bitcoin’s price to boost its stock valuation.
A higher stock price allows the company to secure more capital, continuing the cycle. Each step feeds into the next, forming what critics describe as a system closely tied to Bitcoin’s continuous growth.
Skeptics argue that this approach rewards early investors at the expense of those who join later.
If Bitcoin’s price collapses, MicroStrategy may face pressure to sell its holdings, breaking the cycle. In such a scenario, the stock price could plummet, leaving recent investors with significant losses.
However, the skepticism is fundamentally misguided. Here’s why.
MicroStrategy, as a public company, adheres to strict financial reporting rules: It files quarterly and annual reports with the SEC detailing its Bitcoin holdings, debt and other key financial metrics. This full disclosure provides investors with an accurate view of the company’s financial health, in stark contrast to the secrecy typical of Ponzi schemes.
Strict regulatory oversight ensures that MicroStrategy follows securities laws designed to protect investors. This compliance mandates full disclosure, strict governance and adherence to rules to prevent insider manipulation. Fraudulent setups often avoid legal frameworks, allowing operators to conceal critical financial details.
Additionally, independent auditors conduct regular reviews of financial records to ensure accuracy, confirming that asset reports reflect real holdings. Ponzi schemes, on the other hand, do not undergo audits. Instead, operators falsify information and manipulate participants by presenting misleading financial statements.
Furthermore, the capital raised by MicroStrategy is used to expand its Bitcoin holdings. Financial filings clearly outline this strategy and indicate where the funds are directed.
MicroStrategy highlights risks associated with its business model in its filings and focuses on long-term goals without making any guarantees. On the contrary, Ponzi operators promise unrealistic returns without revealing the true nature of their activities.
Lastly, the Ponzi schemes typically end with either continuing the fraud or absconding with the funds. MicroStrategy’s approach, however, is fundamentally different.
Even if MicroStrategy decided to sell its entire Bitcoin reserve, the proceeds would still belong to the company. The funds would remain on the company’s balance sheet and be available for strategic use.
Selling such a substantial amount of Bitcoin would involve multiple stages of approval. Management teams would first assess the plan before presenting it to the executive committee. Subsequently, the board would evaluate the move and provide the final authorization.
The board ensures that actions taken serve long-term corporate goals rather than personal interests. With a layered process like this, the possibility of impulsive decisions by a small group of executives is completely eliminated.
Executives at MicroStrategy have a fiduciary duty to act in the best interests of shareholders. Any breach of that duty could result in legal consequences, including lawsuits and criminal charges.
The corporate governance system ensures accountability and oversight, which prevents any executive from misusing company funds for personal gain.
The most important aspect is custody: MicroStrategy prioritizes the security of its assets by placing Bitcoin holdings under U.S.-regulated custodians.
Before selecting a custodian, the company conducts extensive evaluations over six to 18 months, reviewing licenses, financial records, and operational capabilities. The goal is to ensure that custodians can protect assets under all conditions.
For added security, MicroStrategy employs multi-signature cold storage. This setup requires multiple approvals from trusted parties before any Bitcoin can be transferred.
The structure prevents any single individual from gaining control over the entire reserve. Even if someone within the company intended to act against its interests, the system would block unauthorized access.
As previously mentioned, a Ponzi scheme is a fraudulent operation where returns to earlier investors depend on inflows from new participants. It requires a continuous stream of fresh capital to maintain payouts, and when that inflow ceases, the scheme inevitably collapses.
The fact that MSTR’s value proposition includes an asset—Bitcoin—that could appreciate independently of new share issuance contrasts with Ponzi schemes, which have no asset backing the returns.
Where are these supposed “inflows from new participants” in MicroStrategy’s case?
One might argue that buying MicroStrategy stock is similar to providing liquidity for early investors. However, buying MSTR stock is fundamentally no different from buying Nvidia or Apple shares.
Still, no one calls Nvidia or Apple Ponzi schemes. In fact, quite the contrary: They’re worshiped as staples in every investor’s portfolio unless one views the stock market as one big Ponzi playground.
The stock price reflects market expectations about a company’s future cash flows, growth potential and risk profile. Transactions in the secondary market, where most stock trading occurs, involve buyers and sellers exchanging ownership without affecting the company’s cash flow or operational funding, unless the company issues new shares, which we will explore further below.
In other words, the stock market facilitates ownership transfer, not direct investment into the company’s operations.
When more investors want to buy a stock than sell it, demand drives the price up, and vice versa. This is basic market equilibrium. The price adjusts to balance demand and supply. The increase in stock price influences a company’s market capitalization, which can improve its ability to secure financing or issue debt under better terms.
Additionally, companies with high stock valuations may raise significant capital by issuing new shares. Executive compensation tied to stock performance also creates an incentive for management to focus on shareholder value.
So, stock price changes impact shareholders, not the company’s direct financial position. Investors buy stocks based on their expectations of future performance, and when they sell at a higher price, their returns result from market-driven valuation changes rather than the company needing new buyers to sustain payouts.
For example, if MicroStrategy’s Bitcoin holdings total $50 billion while its market cap remains only $10 billion, retail investors, institutions and traders would likely identify a clear mispricing in the market.
Such a scenario signals a strong value play, encouraging investors to buy, thus driving stock prices up until the gap closes and equilibrium returns.
Today’s premium on MicroStrategy’s Bitcoin holdings reflects confidence in future growth based on two key factors: The anticipated rise in Bitcoin’s value and MicroStrategy’s clear strategy of continuous accumulation.
Yes, early investors often benefit more than latecomers, and someone buying a stock near its peak might serve as exit liquidity for earlier sellers. But this is common in speculative markets. It reflects typical risk-reward mechanisms rather than fraudulent intent.
Since adopting its Bitcoin strategy, MicroStrategy has increased the number of its outstanding shares from 96,861,770 to 245,459,000, a rise of 253.41%.
Similarly, diluted shares have expanded from 124,510,000 to 281,418,000, representing a 226.02% increase. Despite the rise in share count, Bitcoin per share has grown more than fourfold in both cases.
Initially, 2,532 outstanding shares or 3,255 diluted shares equaled 1 Bitcoin. As of the end of 2024, only 550 outstanding shares or 630 diluted shares represent 1 BTC. This reflects a rise in Bitcoin per share of 460.54% and 516.36%, respectively.
In a direct Bitcoin investment scenario, placing $200,000 when Bitcoin trades at $100,000 results in 2 BTC. If the price doubles to $200,000, the investor’s holdings become worth $400,000, though they still only own 2 BTC unless additional funds are deployed.
A somewhat similar scenario applies to MicroStrategy stock. As a Bitcoin proxy, the stock closely tracks Bitcoin’s price movements, with a Pearson Correlation Coefficient of 0.863, which indicates a strong relationship.
Essentially, when Bitcoin doubles, MicroStrategy’s stock delivers a comparable return. At times, the return may exceed Bitcoin’s due to the premium, though drawdowns can also be steeper.
However, MicroStrategy provides an additional benefit beyond price appreciation—growth in Bitcoin per share.
Consider an investor buying 550 shares when MicroStrategy holds 1 BTC per 550 outstanding shares. If each share costs $350, the investor spends $192,500 to gain exposure to 1 BTC: $100,000 for the Bitcoin value and $92,500 as a premium.
As the company continues accumulating Bitcoin, this premium diminishes over time. Hypothetically, if Bitcoin remains at $100,000 and MicroStrategy’s share price stays at $350, but Bitcoin per share increases to 1 BTC per 225 shares, those same 550 shares would now represent 2 BTC or $200,000, effectively eliminating the initial premium.
In simpler terms, the investor would have acquired 2 BTC at $192,500 rather than $200,000.
Moreover, any future premium above Net Asset Value (NAV) and a rising Bitcoin price offer additional upside. Investors benefit both from Bitcoin’s price appreciation and MicroStrategy’s ongoing accumulation, which enhances potential returns.
If Bitcoin’s price falls, MicroStrategy faces no risk of a margin call.
A margin call occurs when the value of an asset used as collateral for a loan drops below a certain percentage of the loan amount. The lender requires the borrower to provide additional collateral or repay part of the loan to maintain the agreed loan-to-value (LTV) ratio.
Michael Saylor has clarified that MSTR’s convertible debt does not include a traditional call option. He emphasized that even if Bitcoin’s price were to plummet dramatically, there’s no mechanism in the convertible debt agreements that would force MSTR to “call” or redeem the bonds due to a margin call.
Moreover, the company’s debt-to-assets ratio stands at $7.46 billion to $44.64 billion, or 0.1671. This represents a low level of leverage that shouldn’t raise concerns.
For MicroStrategy to face serious financial issues, Bitcoin would need to lose more than 80% of its value. Such a drop remains highly unlikely, given the Power Law model , one of the most accurate predictive frameworks for Bitcoin. According to this model, Bitcoin’s price cannot fall below $36,018 on Jan. 13, 2025.
At that price, MicroStrategy’s Bitcoin holdings would still be worth around $16 billion, well above its total debt.
Even in the unlikely event of Bitcoin falling below this threshold, MicroStrategy retains options. With no margin call mechanism in place, the company could issue additional shares to raise capital. These funds could then be used to either acquire more Bitcoin at lower prices or repay existing debt, ensuring continued financial stability.
MicroStrategy employs an extremely well-executed strategy that many still fail to fully grasp. It leverages the financial system in a way that redefines conventional corporate finance, transforming it into a mechanism for large-scale Bitcoin accumulation.
The strategy can best be described as “The MicroStrategy Ouroboros,” a self-perpetuating approach resembling the mythical serpent eating its own tail.
MicroStrategy consumes its own tail of shareholder equity to grow its body of Bitcoin. Each act of dilution (the bite) not only sustains but expands the cycle, as the dilution itself fuels further Bitcoin accumulation.
This creates a self-reinforcing system where dilution (the end) directly feeds into more Bitcoin acquisitions (the beginning), ultimately increasing shareholder value over time.
CCN Reports is a regular series that delves into the details to provide in-depth analysis of cryptocurrencies and the companies associated with them. We aim to engage a global audience interested in what’s what, who’s who and perhaps even why’s that.