MicroStrategy will eventually unravel — Bitcoin bulls should look elsewhere

Opinion by: Alex O’Donnell, Former Senior Writer for CryptoMoon turned Full-time Bitcoin Maximalist.

Opinion by: Alex O’Donnell, Senior Writer for CryptoMoon.

MicroStrategy’s massive investment in Bitcoin has proven incredibly profitable. However, this prosperity may not be sustained permanently. As accessible financing decreases, the value of MicroStrategy’s stocks could significantly decline.

Copycats risk similar fates. Bitcoin (BTC) maxis should look elsewhere.

Starting from 2020, bullish investors have essentially been compensating MicroStrategy for buying Bitcoin. By issuing highly-valued stocks and borrowing at minimal costs, MicroStrategy has generated an appealing “Bitcoin income” for its shareholders. This action by MicroStrategy sparked a positive trend, causing the price of their stock (MSTR) to consistently increase. Following this lead, various companies such as pharmaceuticals and YouTube competitors have been promoting similar treasury strategies.

Corporate BTC treasuries are inflation hedges. They don’t justify lofty stock premiums. The cycle that sent MicroStrategy’s shares skyward will eventually reverse course. In 2025, investors should skip MSTR and opt for plain spot BTC exposure instead.

Saylor’s vision

Initially functioning as a software firm, MicroStrategy shifted its role to essentially serve as a Bitcoin investment vehicle in 2020. This transformation occurred under the leadership of founder Michael Saylor, who began using the company’s resources to purchase Bitcoin. Since then, MicroStrategy has invested a substantial sum of approximately $23.5 billion in Bitcoin. As a result, it currently holds over 400,000 Bitcoins, representing around 2% of the total Bitcoin supply, as per data from the MSTR tracker.

Saylor’s wager has proven successful. As we stand on December 7th, the data indicates that MicroStrategy’s Bitcoin reserves exceed $40 billion, yielding an estimated unrealized profit of around $16.5 billion. This equates to a more than 70% return on the initial investment capital.

MicroStrategy’s shares have continued to perform exceptionally well since 2020. In this timeframe, MicroStrategy (MSTR) has seen a staggering increase of approximately 2,500%, surpassing all but a few notable public companies such as Nvidia in terms of growth. The current year has proven particularly fruitful for MSTR. As of December 7th, the company’s stock price has risen by almost 600% compared to the beginning of the year, outperforming Bitcoin’s gains of 125%.

The stock for MSTR is worth approximately $400 per share, which gives it a market value over $90 billion. In other words, the price of each MSTR share is priced more than double its corresponding Bitcoin treasury value.

Instead of attributing MicroStrategy’s losses from its legacy software business in Q3 ($18.5 million), focus on the value generated for shareholders through MSTR’s treasury operations, such as consistently accessing capital markets to acquire Bitcoin and expand their holdings, as suggested by Mark Palmer in a November research note.

Doubling down

Investors have shown an insatiable appetite for it since August. In that timeframe, Exchange-Traded Funds (ETFs) focusing on boosted exposure to MSTR have amassed over $4.5 billion in management under their control (AUM). On November 29th, Solv, a protocol within the decentralized finance (DeFi) sector, revealed intentions to introduce a blockchain-based version of MicroStrategy, which we might refer to as “an onchain MicroStrategy”.

In the meantime, various other entities are taking a cue from MicroStrategy’s example. These entities encompass drug manufacturer Hoth Therapeutics, artificial intelligence innovator Genius Group, video-sharing platform Rumble, software titan Microsoft, and electric vehicle company Tesla (owned by Elon Musk), which holds approximately $1 billion in Bitcoin.

Approximately $52 billion worth of Bitcoin is being stored by corporate treasuries, as reported on bitcointreasuries.net as of December 7th.

In August, MicroStrategy made a bold move by focusing on an unconventional key performance indicator – Bitcoin yield. This measure calculates the number of Bitcoins held relative to the number of outstanding company shares. Essentially, they’re using Bitcoin per share as a guiding principle for their corporate success.

In October, MicroStrategy announced a strategy to gather $21 billion in equity and an additional $21 billion in debt over a three-year period, which they’ve called the “21/21 Plan.” This plan is focused on purchasing large amounts of Bitcoin. As explained by Palmer, the objective is to boost MicroStrategy’s annual Bitcoin return from 4% to 6% currently, up to a range of 6% to 10%, over the next three years.

Investing an astounding $42 billion in Bitcoin seems like common sense to Saylor, as he anticipates its value to reach an astronomical $13 million by 2045 – even a ‘bear case’ of $3 million doesn’t phase him. Yet, it’s worth noting that MicroStrategy’s investment strategy has garnered its fair share of skeptics, according to Palmer.

Palmer stated that “to those who’ve questioned why someone might choose to purchase its shares over just owning Bitcoin, management has defended their criticism by looking at the results – specifically, MicroStrategy’s exceptional performance since 2020,” he added, emphasizing the impressive track record of MSTR. It should be noted that scores can indeed fluctuate over time.

Brace for an unraveling

In November, MicroStrategy secured a $3 billion loan through convertible notes, which they will use to acquire more Bitcoin. This move marked the beginning of their 21/22 Plan and presented attractive terms. Since the Annual Percentage Rate (APR) was zero, MicroStrategy essentially borrowed money for free. However, investors have the option to exchange these notes for MSTR shares, but only at a fixed price of $672.40 per share, which is approximately 70% higher than MSTR’s stock price on December 7.

As a researcher, I’ve come across an important detail regarding MSTR. If the stock doesn’t reach a specific price by June 1, 2028, holders of these notes have the right to request repayment in cold, hard cash. Interestingly, similar conditions apply to other MicroStrategy notes, accumulating at least $2 billion in debt. This potentially sets the stage for a financial squeeze come that date.

If noteholders request repayments, MicroStrategy might choose to refinance at less advantageous conditions or sell their Bitcoin holdings. The latter action could create a significant stir in the cryptocurrency market as MicroStrategy is currently the largest corporate Bitcoin holder globally. In either scenario, MicroStrategy’s premium over its Bitcoin treasury could vanish instantly, potentially ending the notion that they generate a “Bitcoin yield.

Since the peak of approximately $543 per share on November 21st, MicroStrategy (MSTR) has seen a significant decrease of almost 25%. If the premium attached to MSTR were to fully disappear, it would fall below the $170 mark per share. This prediction assumes that the price of Bitcoin remains unchanged. Market fluctuations, particularly drawdowns, could potentially cause shares to sink even further.

As a researcher, I find that for many investors, the standard spot Bitcoin exposure, including ETFs such as BlackRock’s iShares Bitcoin Trust ETF, already offers an ample dose of volatility. If you’re among those who are extremely bullish on Bitcoin, like MicroStrategy’s CEO, then by all means, make significant investments in MSTR. However, more conservative investors might want to steer clear.

As a seasoned writer specializing in cryptocurrencies for CryptoMoon, I’ve had the privilege of walking the path less trodden. Prior to this, I was the founder of DeFi developer Umami Labs and spent seven years delving into the world of M&A and IPOs as a financial journalist at Reuters. Now, I am honored to serve as the crypto growth lead at Expert Dojo, a dynamic startup accelerator. In essence, my journey has been about harnessing the power of blockchain technology and sharing its potential with others.

This piece serves a broad informational function; it’s not meant to serve as legal or financial guidance. The perspectives, ideas, and viewpoints shared within this text are solely those of the writer and may not align with or be endorsed by CryptoMoon.

2024-12-10 17:16

Saylor’s vision

Doubling down

Brace for an unraveling

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