Alice Morgan, Alice Morgan’s composite photo for Investopedia. Getty Images
What you need to know
- MicroStrategy shares have gained more than 400% since the start of the year thanks to investor optimism about the software company's strategy of buying bitcoin as the cryptocurrency repeatedly hits record highs.
- Stocks that are considered as a substitute for bitcoin have outperformed the digital currency in terms of gains. Like bitcoin, it's also extremely volatile.
- MicroStrategy leverages to purchase more Bitcoin. These purchases can be funded by issuing additional shares or borrowing.
- While analysts remain bullish on the stock as the outlook for bitcoin remains positive, some investors have expressed concern about whether the stock's blockbuster performance is sustainable.
MicroStrategy, a software company that was previously unknown, began making massive bets on bitcoin (BTCUSD) when it first started.
The shares of this company are up more than 400% from the beginning of 2024. Bitcoin has soared above $100,000 in record-breaking highs amid the optimism that digital currencies will be benefited by policies implemented by the new Trump Administration and the crypto-friendly Congress.
MicroStrategy – a company that was relatively unknown to many investors prior to this year’s rally – is now gaining more attention as it becomes part of the Nasdaq 100 Index. The index contains some of the biggest and most actively traded stocks in the world including Nvidia(NVDA), Apple(AAPL)and Tesla (TSLA). Exchange-traded fund that tracks the index such as Invesco’s QQQ trust (QQQ) will have to update their portfolios in order to include MicroStrategy.
Analysts are optimistic that MicroStrategy’s shares will continue to rise, given the favorable outlook for Bitcoin and the leveraged strategy the company uses to increase its bitcoin holdings. Some investors, however, have claimed that the stock’s explosive price increases aren’t sustainable due to the leverage.
MicroStrategy Stock Gains Far Outpace Bitcoin's
MicroStrategy shares have generally mirrored bitcoin's directional moves as the company has built its stake in the cryptocurrency. Leverage has led to stock prices that are far higher than bitcoin’s, which has risen about 125% in the past year.
The company, which hasn't turned a profit in any quarter this year, purchased its first batch of bitcoin in 2020, when it was trading close to $11,000. Michael Saylor’s then CEO had claimed that Bitcoin would become a mainstream currency in just seven short years. “days are numbered.”
Saylor, the company’s chairman and current CNBC host, described MicroStrategy as a Bitcoin treasury operation. The company has purchased the cryptocurrency 44 times since 2020 for a total of 439,000 BTC on its books. MicroStrategy is the second biggest corporate holder, behind BlackRock’s iShares Bitcoin Trust.
It measures the success of its Bitcoin investment using a metric known as bitcoin yield. In other words, it is based on how many bitcoins are owned per outstanding share.
MicroStrategy’s bitcoin holdings were 189.150 at the end last year. The assumed outstanding shares figure of MicroStrategy was 207.636, which makes the ratio 0.91. As of Dec. 15, with the company's bitcoin holdings soaring to 439,000 BTC and its outstanding shares at 279,510, the ratio was 1.57. The bitcoin yield is the difference in percentage between the ratios from one year to the next.
MicroStrategy said in a regulatory filing this month that the yield "can be used to supplement an investor’s understanding of the Company’s decision to fund the purchase of bitcoin by issuing additional shares of its common stock or instruments convertible to common stock."
A 'Leveraged Play on Bitcoin'
In order to purchase larger amounts of bitcoin, the company uses simple arbitrage. It issues either equity or debt with zero interest rates backed up by a portion of its bitcoin reserves. This company, which announced its plans in October to raise over $42 billion by using this method, is working hard towards their goal.
It has been increasingly relying upon issuing shares in order to purchase bitcoins, however, when the company opts to issue convertible debt, buyers of that debt will have an option to convert their debt into MicroStrategy stock at a specific price. This would be similar to a “call option”.
"When we do it with debt, we issue $3 billion of debt that's backed by $600 million of bitcoin, it comes due in five years, we pay 0% interest. We purchase $3 billion worth of bitcoin and capture $2.4 billion arbitrage profit upfront. But then over the course of the five years, we double or quadruple the investment, because we're buying an asset which is appreciating faster than the S&P," Saylor told CNBC.
Analysts at Bernstein have said that “MicroStrategy presents a leveraged play on Bitcoin.” Bernstein has recently increased its target price for the stock from $290 to $600. The current price of the stock is around $360.
The longer duration of the loan gives the firm some protection against the volatility or immediate repayment. Also, even if MicroStrategy has to issue shares to meet the convertible debt obligations, those will have a limited effect in diluting the company's equity, according to Benstein.
Some say Stocks headed for correction
Not everyone is convinced MicroStrategy's performance is sustainable.
Short seller Citron Research is bullish on Bitcoin but it opened a MicroStrategy short position as an insurance, essentially betting that the price of MicroStrategy will fall.
“Much respect to @saylor, but even he must know $MSTR is overheated,” Citron Research said in a November X-post that short sellers are claiming the trading volume of the company is inflated. “completely detached” From bitcoin basics.
Galaxy Digital’s CEO Mike Novogratz said to CNBC in a recent interview that due to leverage, he anticipates a greater correction for bitcoin-related companies such as MicroStrategy rather than the currency itself.
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