MicroStrategy, with nearly $37 billion worth of Bitcoin, has a stock market valuation of over $100 billion. Does this extremely high valuation give rise to a bubble? This article, written by Zack Guzman and compiled, translated, and edited by Blocklike, addresses this question.
Summary: Reflecting on missing out on the surge in MicroStrategy’s stock price
Background: MicroStrategy further invested $5.4 billion to purchase 55,000 BTC: Bitcoin is not expensive at $97,000!
MicroStrategy’s founder, Michael Saylor, has become one of the most outspoken supporters of Bitcoin, boldly claiming that there is “no second-best option.” Since 2020, Saylor has used his publicly traded company to accumulate over $30 billion worth of Bitcoin, resulting in a paper profit of over $14 billion and making MicroStrategy the company with the largest holdings of Bitcoin. This strategy has won the praise of Bitcoin extremists while also drawing skepticism from traditional investors.
However, as MicroStrategy continues to raise billions of dollars, planning to raise an additional $42 billion through financing over the next three years, concerns are growing. Will this give birth to another massive bubble? And if the price of Bitcoin falls, how will MicroStrategy’s bold actions fare?
1. Echoes of Ghost Trading
MicroStrategy’s Bitcoin strategy has similarities with one of the most notorious trades in the cryptocurrency field, the “GBTC premium trade.” During the peak of this arbitrage trade, investors acquired positions in Bitcoin through the Grayscale Bitcoin Trust (GBTC), as its trading price was higher than the value of the underlying Bitcoin holdings. They borrowed against their GBTC shares and earned a premium profit when the lock-up period ended.
This type of trade experienced a dramatic collapse in 2021 when the GBTC premium turned into a discount. Companies like Three Arrows Capital and BlockFi, which were highly leveraged or associated with leveraged clients, went bankrupt. A series of subsequent bankruptcies, including Genesis, highlighted the risks of financial strategies built on fragile market imbalances.
Critics now warn that MicroStrategy is walking on a similar tightrope. However, unlike utilizing the GBTC premium, MicroStrategy has opened up a new path by leveraging its own stock and bonds for Bitcoin trades, essentially transforming the company into a leveraged Bitcoin proxy.
2. The Magic of Convertible Bonds
MicroStrategy’s strategy revolves around raising funds through the issuance of convertible bonds and stocks, operating as follows:
MicroStrategy borrows at low-interest rates (0%) and offers bonds to bondholders at extremely low or even zero interest rates.
In return, bondholders are provided with the potential for stock appreciation and can convert their bonds into MicroStrategy’s stock when the stock price rises. This potential return has attracted numerous institutional investors, including Germany’s largest insurance company, Allianz.
The funds raised from purchasing more Bitcoin are then used to buy even more Bitcoin, further driving up the stock price.
This feedback loop has resulted in MicroStrategy’s stock performing astonishingly well, rising nearly 500% in just 2024. This strategy has been so successful that bond investors are willing to lend billions of dollars to the company at 0% interest, enticed by the potential appreciation of the stock.
This is an attractive proposition: why settle for low-interest returns on bonds when MicroStrategy offers the opportunity for investments to double or even quintuple? As Saylor stated in a recent investor conference call, bondholders are fleeing a world of “actual negative returns” in pursuit of the potential gains provided by Bitcoin.
Currently, MicroStrategy’s strategy is operating very well, with the rising price of Bitcoin creating a virtuous cycle. But what will happen if the Bitcoin trend reverses?
MicroStrategy holds nearly 387,000 BTC, valued at around $37 billion, while its stock market valuation has exceeded $100 billion. This high valuation largely depends on the assumption of a continuing rise in the price of Bitcoin. If Bitcoin were to fall, the company’s stock price, essentially a leveraged bet on Bitcoin, could see a significant decline.
It is also worth noting that leveraged ETFs like MSTU and MSTX, which focus on MicroStrategy, further amplify speculation in the market based on MicroStrategy’s Bitcoin bets.
All of these factors are driving enormous Bitcoin purchases. According to research by Fundstrat, MicroStrategy’s actual buying volume far exceeds the total inflow of all Bitcoin ETFs earlier this month. If the market begins to doubt MicroStrategy’s ability to achieve its $42 billion financing goal, the price of Bitcoin could fall, further endangering MicroStrategy’s financing capabilities.
Once this situation changes, the circumstances could deteriorate rapidly. Similar situations have occurred during financing attempts by FTX when it needed funds the most and during Terra’s $40 billion collapse.
Although Saylor has emphasized multiple times that the company will never sell its Bitcoin, maintaining this stance could become challenging if debt pressures increase and the price of Bitcoin falls.
3. Historical Lessons
The cautionary tale of the GBTC premium trade is still fresh in our memory. When market conditions change, such bubbles burst, exposing the vulnerability of leveraged strategies. While MicroStrategy’s approach avoids some of the pitfalls of GBTC trades, such as not relying on an inefficient fund structure, it still faces the core risk that leverage can magnify losses if the price of Bitcoin falls.
Saylor’s unwavering belief in Bitcoin may inspire confidence, but history shows that markets cannot rise indefinitely. Just as the overconfidence in a “self-sustaining system” led to a $40 billion loss during Terra’s collapse in 2023, MicroStrategy’s stock price may face a similar liquidation moment if the price of Bitcoin declines.
However, for Bitcoin supporters who believe that the US government will follow suit and include Bitcoin in its strategic reserves, MicroStrategy’s bet has the potential to become one of the greatest investments in history, either becoming renowned for its “genius move” or leaving a legacy of “disastrous failure.”