In 2023, investors experienced a 300% gain from MicroStrategy's bitcoin investment.

• In 2023, MicroStrategy's stock experienced a 337% increase, surpassing almost all U.S. companies valued at $5 billion or more.
• The company's bitcoin holdings, which were started in 2020, have driven the growth.
• Bitcoin accounts for the majority of MicroStrategy's worth, but it also maintains a software business.

Almost 35 years ago, a software company was established and, for the majority of its existence, it was a small business intelligence firm.

In 2023, the stock experienced a 337% increase, making it one of the largest gainers in the U.S. among companies valued at $5 billion or more, surpassing the 234% and 194% rallies.

Unlike its tech peers, which primarily drive their stock prices through revenue growth and market share gains, the appeal of this company is almost entirely based on its Bitcoin holdings. Since mid-2020, the company has acquired approximately 174,530 bitcoins, valued at around $7.65 billion as of late Friday.

Bitcoin's gain this year has been doubled by Wall Street's fascination with its story.

Joseph Vafi, an analyst at Canaccord Genuity, stated that "It's really Bitcoin" and has a buy recommendation on the stock. He emphasized that the other aspects of the company are healthy and performing well, but Bitcoin is the main focus.

MicroStrategy's market cap is $8.5 billion, with 90% of its value tied directly to its bitcoin holdings. The company's performance mirrors that of bitcoin, with a 74% drop in 2022 and shares still below their 2021 high despite a huge pop this year.

Since July 2020, MicroStrategy has been implementing a bitcoin strategy, with the company announcing it would allocate some of its cash towards alternative assets, including digital currencies. At the time, MicroStrategy had a market cap of approximately $1.1 billion, with a software business that had been declining since 2015. The company's annual revenue was just under $500 million, with minimal profit.

In the middle of 2020, MicroStrategy had approximately $530 million in cash and short-term investments on its balance sheet. Michael Saylor, the co-founder and CEO at the time, recognized that the money was not generating any returns due to low interest rates and decided to invest it.

He had to decide whether to invest in equities, precious metals, or bitcoin.

"We purchased bitcoin because it serves as a digital form of gold, as it is more difficult, intelligent, powerful, and quick than gold," Saylor stated during the company's first earnings call following the announcement of its strategy.

Saylor's decision allowed investors to invest in bitcoin through regular stock purchases, rather than buying coins directly. Saylor, who stepped down as CEO and became executive chairman, predicted that the bitcoin bull market would continue next year. He stated that 99.9% of global capital is invested in real estate, stocks, bonds, and commodities, with only 0.1% allocated to bitcoin.

As people become more educated about digital assets, they are recognizing the need to allocate more of their capital to this area, resulting in a shift from .1% to .2%, according to Saylor, who co-authored a book about bitcoin titled "What is Money?"

Novel use of cash

MicroStrategy is not the first company to invest its cash reserves in alternative investments, and it will not be the last to seek ways to generate significant returns on that money. Recently, GameStop granted CEO Ryan Cohen permission to use company funds to purchase stocks.

MicroStrategy is viewed almost exclusively as a bitcoin holding company.

Vafi stated that Michael Saylor is a visionary who saw an opportunity to utilize the company's cash and clean balance sheet to experiment with bitcoin as a treasury. The experiment has been successful, and the company is continuing down this path.

Vafi explained that MicroStrategy's stock has outperformed bitcoin this year due to a "scarcity premium," as there are limited investment opportunities in the equity market.

As the new year approaches, investors are preparing for an increase in bitcoin exchange-traded funds (ETFs). Currently, there are futures ETFs that involve contracts to buy and sell bitcoin but not the cryptocurrency itself. Additionally, there is the Bitcoin Investment Trust (BIT), a fund that owns bitcoin and trades over the counter rather than on a major exchange.

Grayscale sued the SEC last year after the regulator denied its application to create a spot bitcoin ETF, citing concerns about investor protections. In August of this year, an appeals court ruled in favor of Grayscale, a decision that many in the industry viewed as paving the way for a new crop of ETFs. Asset managers, including BlackRock, Fidelity, and Invesco, have filed with the SEC for their own products.

Vafi said the prospect of competition poses little threat to MicroStrategy.

If a bitcoin ETF is approved, the price of bitcoin is likely to increase significantly.

MicroStrategy's bet on bitcoin extends beyond passive management of ETFs, as it can actively utilize its holdings to generate more business opportunities.

Shirish Jajodia, vice president of treasury and investor relations at MicroStrategy, stated in an email to CNBC that the company is optimistic about the future of bitcoin due to the maturity of the regulatory environment and the growing institutional demand. He believes that this will lead to increased adoption of bitcoin by mainstream investors and corporations.

Saylor stated on MicroStrategy's recent earnings call that the company's software business is a significant advantage. He emphasized that it is a reliable source of revenue, allowing the company to purchase more bitcoin.

It has been challenging for the numerous investors who are opposing MicroStrategy.

By the end of early December, crypto stock short sellers had lost $6.1 billion for the year, with the rally in Bitcoin causing the most damage, according to S3 Partners. In the first three quarters of the year, short sellers spent $2.19 billion covering their positions, with the majority of the buying taking place on Coinbase and MicroStrategy.

This year, short sellers have lost a combined total of $5.4 billion on Coinbase and MicroStrategy, according to S3's data from last week. Out of MicroStrategy's publicly available shares, 23% are shorted, making it the second highest among crypto companies, surpassed only by bitcoin miners. The average for U.S. stocks is 5%.

MicroStrategy has continued to aggressively purchase bitcoin, with its latest purchase of 16,130 bitcoins in November for $593 million. This represents the largest amount of bitcoin the company has bought in any full quarter since the first three months of 2021.

— CNBC’s Kate Dore contributed to this report

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