Chris Curl,
Editor
Dec. 5, 2024
MicroStrategy's (NASDAQ: MSTR) insane run-up over the past year has every investor scratching their heads wondering what the heck is going on. In fact, it’s been arguably the best performing stock this year up over 518%.
With its convertible bond strategy, the company has not only achieved incredible returns but also introduced a unique mechanism that has been coined the "infinite money glitch."
The strategy involves the company using its Bitcoin holdings and leverage to create a premium on its stock, allowing them to sell shares and acquire even more Bitcoin. While this results in shareholders owning a smaller percentage of the company, their Bitcoin holdings per share increase.
This process temporarily decouples MicroStrategy from its Bitcoin premium until market forces bring it back in line. It creates a cycle where the company can repeat the process.
I am not naive enough to believe an “infinite money glitch” is truly possible. And while I appreciate Michael Saylor’s enthusiasm for Bitcoin, MSTR’s recent performance makes me a little leery of its long-term prospects. If MSTR implodes, it could be the black swan event that brings down crypto, akin to the FTX collapse.
Below I highlight many concerns regarding MSTR’s strategy:
Addressing the "What-ifs"
Let's address some common concerns regarding MicroStrategy's convertible bond strategy:
- What if MicroStrategy can't pay the annual interest on their bonds? MicroStrategy is not solely reliant on Bitcoin holdings. As a software company with legitimate offerings, it generates substantial revenue of around $400 million per year, more than covering its interest payments.
- What if the Federal Reserve hikes rates and interest payments increase? MicroStrategy has bought bonds at fixed interest rates. While the value of those bonds may lower if rates are hiked, the company will continue to honor its cheap and predictable interest payments.
- What if the custodian of MicroStrategy's Bitcoin goes bankrupt? MicroStrategy stores its coins with reputable custodians like Fidelity and Coinbase (NASDAQ: COIN). It is likely that the company has joint custody and holds the multisig keys, mitigating any concerns about loss of access to the Bitcoin.
- Won't the premiums erode when other companies adopt this strategy? The adoption of similar strategies by other companies would likely skyrocket Bitcoin's price, giving MicroStrategy a first-mover advantage that would be challenging to replicate. Additionally, Bitcoin's inelastic supply gives MicroStrategy a sort of digital monopoly.
- Won't the premium disappear or invert during a bear market? It is true that the company and its investors may need to weather the storm and wait for the next bull market. Investing in MSTR should be viewed as a long-term hold, taking into account the cyclical nature of the crypto market.
- Can MicroStrategy sustain its premium above its net tangible assets? Many mega-cap companies, like Microsoft, trade at significant premiums above their assets. MicroStrategy's premium is relatively low compared to other industry giants.
Key Risks Posed By MicroStrategy to Bitcoin
Here are the four major risks that the firm poses to Bitcoin:
- MSTR Valuation Premium: At one point, the MSTR stock was trading at more than 3.2x its net asset value of Bitcoins, leading to concerns about a potential valuation bubble. In a bear market, this premium could deflate, impacting the MSTR stock's performance.
- Debt Exposure: MicroStrategy has been financing its BTC purchases through debt issuance, resulting in over $7 billion in convertible notes. In the event of worsening market conditions, the need for repayment or conversion to equity could force MicroStrategy to sell BTC, affecting both Bitcoin's price and MicroStrategy's financial position.
- Market Volatility: The price of MSTR stock is highly sensitive to Bitcoin price swings, with current volatility at 4x that of BTC and 3x that of Ethereum. Historical episodes have seen MSTR volatility reach 200%, highlighting the potential for significant fluctuations in the company's stock price.
- Concentration Risks: Holding approximately 1.9% of BTC's total supply makes MicroStrategy vulnerable to market shocks. Any forced liquidation of their BTC holdings could have a substantial impact on both the price of Bitcoin and the value of MSTR stock.
MicroStrategy's Journey Ahead: Triumph or Reckoning?
MicroStrategy and Michael Saylor have gained an almost cult-like following. And he remains steadfast in his mission declaring that the company will never sell its Bitcoin. In fact, for Saylor, this is a bet on the future of money itself.
It’s a ballsy move, one that will end in triumph or disaster.
I, for one, hope that it succeeds and our future is one of decentralization and individual empowerment. But having so much resting on one man and one company is a very precarious situation indeed.
I go more in depth on MicroStrategy and the entire crypto space in my premium publication Crypto Cycle. You don’t want to miss out on what’s next in the crypto market as Bitcoin surges over $100,000.
Click here to check it out now.
Keep coming back,
Chris Curl
Editor, Daily Profit Cycle