The crypto world’s bullish obsession with MicroStrategy (MSTR) may be ending.
Speculators have long used MSTR as a proxy for owning bitcoin. After all, MSTR owns over 580,000 bitcoins. It is the largest corporate owner of the cryptocurrency. And, it’s in the habit of using the proceeds of stock and bond issuances to buy even more bitcoins.
As a result, MSTR shares tend to move in the same direction as the King of Crypto. When bitcoin is moving lower, MSTR tends to fall. When bitcoin is rallying, MSTR presses higher along with it.
That’s why last week’s action was curious…
Bitcoin rallied last week – trading as high as $112,000. But, MSTR shares declined.
MSTR started the week above $400 per share. It ended the week at $370. That’s a loss of nearly 8%. Meanwhile, bitcoin gained 5%.
That’s not supposed to happen. And, it’s likely a sign of changing sentiment towards MSTR.
At $110,000 per bitcoin, MSTR owns about $65 billion worth of the cryptocurrency. But, at $370 per share, the enterprise value of MSTR (which includes $8 billion of debt) is $112 billion.
In other words, MSTR trades at a 72% premium over the value of its bitcoin reserves. Folks who are buying MSTR shares as a proxy for bitcoin are paying $1.72 for one dollar’s worth of bitcoin.
That’s just foolish.
Of course, fans of MSTR – and of Michael Saylor, the company’s CEO – will argue the company’s use of leverage to buy bitcoin will increase the potential returns of the stock if bitcoin continues to rally.
I’ll argue the use of leverage is counter to the objectives of bitcoin’s true believers – which is to buy and hold on for dear life, no matter what happens to the price.
You see, by using leverage to buy bitcoin, MSTR is in a precarious position if bitcoin falls in value. During a sharp decline, MSTR may be forced to sell a good chunk of its bitcoin at depressed prices in order to satisfy lenders’ demands – thereby realizing losses and lessening the firm’s holdings of bitcoin.
In other words, MSTR may be forced to sell bitcoin at the worst possible time to be selling bitcoin. This possibility makes buying MSTR shares a poor alternative to buying bitcoin itself.
Perhaps last week’s action in MSTR stock is evidence that if you want to own bitcoin, then you should just buy bitcoin.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
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