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Market on edge: MicroStrategy - a speculative bet on bitcoin or strategic genius?
Koen Hoorelbeke
Investment and Options Strategist
Summary: MicroStrategy has transformed itself into a high-risk, high-reward Bitcoin proxy, leveraging billions in low-cost debt and equity to accumulate 331,200 BTC, now worth $31.2 billion. While its stock has massively outperformed Bitcoin in 2024, this aggressive strategy leaves the company highly exposed to severe market corrections and the fragility of its speculative feedback loop.
MicroStrategy: A speculative bet on bitcoin or strategic genius?
Bitcoin is back in the spotlight, trading at all-time highs and reigniting global interest in the cryptocurrency market. Whenever Bitcoin dominates headlines, one name consistently comes up: MicroStrategy (MSTR). Once a software company specializing in business intelligence, MicroStrategy has reinvented itself by becoming a proxy for Bitcoin investment, loading its balance sheet with the cryptocurrency. The company’s strategy has positioned it as a favored vehicle for Bitcoin exposure, with its stock often outperforming the cryptocurrency itself during bull runs.
In this article, we analyze MicroStrategy’s Bitcoin-centric model, explore the forces driving its remarkable stock performance, and examine the risks that come with tying its fortunes so tightly to the volatile cryptocurrency.
But as Bitcoin soars, questions arise about the sustainability of MicroStrategy’s approach. Is the company using a calculated financial strategy to capitalize on Bitcoin’s success, or is it a speculative bet that could unravel in the face of a sharp market correction?
The Bitcoin strategy
MicroStrategy began its Bitcoin journey in 2020, citing concerns over inflation and the long-term devaluation of fiat currencies. The company shifted its treasury strategy, using cash, debt, and equity to accumulate Bitcoin. By Q3 2024, the company had amassed 331,200 BTC at a cost basis of $16.5 billion, with a market value of $31.2 billion.
While Bitcoin now dominates MicroStrategy’s identity, its original software business still operates. In Q3 2024, the analytics segment generated $116.1 million in revenue, though this marked a year-over-year decline of 10.3%. The enterprise software business, while still functional, has taken a back seat to Bitcoin in the eyes of investors.
The company’s strategy now almost entirely revolves around the aggressive accumulation of Bitcoin. Looking forward, MicroStrategy plans to raise an additional $42 billion over the next three years, split equally between equity and debt, to fund further Bitcoin purchases.
Is MicroStrategy borrowing "free money"?
One of the most provocative claims about MicroStrategy is that it borrows "free money" to buy Bitcoin. While this claim has some basis, it is an oversimplification. Here’s why:
Low-cost debt:
MicroStrategy has raised billions through convertible notes with interest rates as low as 0%, which convert into MSTR stock under certain conditions. These rates are far below market averages, making the cost of borrowing negligible. Investors accept these terms because the notes offer upside potential through equity conversion.Equity issuance:
MicroStrategy also issues shares, particularly during periods of strong stock performance. While this capital is effectively "free" in terms of direct cost, it dilutes existing shareholders, transferring value to new investors.Bitcoin appreciation:
If Bitcoin appreciates faster than the interest cost of debt, the returns from Bitcoin can outweigh the financing costs, making the borrowing appear "free."
While these mechanisms provide cheap funding, they make the company extremely vulnerable to downturns in Bitcoin prices and its own stock price.
Why MSTR outperforms Bitcoin
MicroStrategy’s stock has outperformed Bitcoin significantly in 2024, rising 650% year-to-date, compared to Bitcoin’s 180% gain over the same period. This outsized performance can be attributed to two key factors:
Leveraged ETFs:
In August 2024, the first leveraged single-stock ETFs tied to MSTR began trading. These funds, offering 2x leveraged exposure to MicroStrategy’s stock, have attracted significant inflows, creating additional demand for MSTR shares. As of November 2024, these ETFs collectively represent nearly 9% of MicroStrategy’s market cap.What is a leveraged single-stock ETF?
A leveraged single-stock ETF is a financial product designed to provide amplified exposure to the performance of a single stock, like MicroStrategy (MSTR). For example, a 2x leveraged ETF aims to deliver twice the daily returns of the underlying stock, whether those returns are positive or negative. These products achieve this by using derivatives such as swaps or options to magnify exposure. While leveraged ETFs can enhance gains during an uptrend, they also amplify losses in a downtrend, making them highly speculative and risky investments.Feedback loop:
MicroStrategy’s strategy creates a circular dynamic:- The company issues equity or debt to buy Bitcoin.
- Bitcoin purchases push BTC prices higher, boosting MicroStrategy’s stock.
- Higher stock prices allow for further equity issuance, which funds more Bitcoin purchases.
This cycle has amplified MicroStrategy’s stock performance during Bitcoin bull runs but poses significant risks if Bitcoin’s price reverses.
Chart: MSTR vs. BTC—Who’s rising faster?
The following chart illustrates how MSTR’s stock has surged far more rapidly than Bitcoin over the last few months. While Bitcoin has posted substantial gains, MSTR’s rise is amplified by leveraged ETFs and speculative investor demand. This outsized growth highlights the risks of volatility should Bitcoin’s price falter.
What is BTC yield?
MicroStrategy has introduced a controversial performance metric called BTC yield, defined as the percentage change in Bitcoin per share. This measure attempts to reflect the additional Bitcoin holdings generated by issuing stock or raising capital. However, critics argue that BTC yield can be misleading since it ignores the potential impact of Bitcoin price volatility on shareholder value.
For instance, BTC yield could remain positive even during a Bitcoin price collapse, masking the underlying financial risks to investors. This metric’s fragility becomes particularly relevant when assessing MicroStrategy’s long-term sustainability.
What are convertible notes?
Convertible notes are a type of debt instrument that allows investors to loan money to a company with the option to convert the debt into equity (shares) at a later date, often at a pre-agreed price. These notes typically carry low or no interest rates, making them attractive to companies seeking inexpensive funding.
For investors, convertible notes offer the potential upside of equity ownership while providing downside protection as debt holders. In MicroStrategy’s case, these notes have played a crucial role in funding its aggressive Bitcoin purchases.
What happens in a 50% Bitcoin correction?
While a 20%-30% Bitcoin correction is relatively common, a 50% drop, though less frequent, is not unprecedented. Such a scenario would have severe implications for MicroStrategy:
Asset value decline:
A 50% Bitcoin correction would reduce the value of MicroStrategy’s holdings from $31.2 billion to $15.6 billion, wiping out $15.6 billion in value. This would trigger substantial impairment charges, eroding shareholder equity.Stock volatility:
Historically, MicroStrategy’s stock reacts more aggressively than Bitcoin to price movements due to its leveraged exposure. A 50% Bitcoin drop could result in a 60%-80% decline in MSTR stock price.Debt and dilution risks:
The company’s ability to refinance debt or issue equity would be significantly hampered during a downturn. Existing shareholders could face heavy dilution if MicroStrategy needs to issue stock at depressed prices.BTC yield fragility:
Even if Bitcoin per share remains stable, the real value of the holdings would decline significantly, exposing the limitations of BTC yield as a performance metric.
The bubble within a bubble?
Critics argue that MicroStrategy’s valuation reflects speculative excess. The company’s fully diluted market cap—its theoretical value if all convertible notes and stock options are converted into shares—is approximately $106 billion, far exceeding its Bitcoin holdings' market value of $31.2 billion. Adjusting for $4.2 billion in debt, this premium appears even more pronounced.
Moreover, the feedback loop driving MicroStrategy’s stock performance depends on continued Bitcoin appreciation and ETF inflows. If either of these factors reverses, MicroStrategy’s valuation could rapidly "revert to the mean."
Broader implications
MicroStrategy demonstrates how a corporate strategy centered on Bitcoin can influence the cryptocurrency’s price dynamics. However, the company’s approach is highly unique and not indicative of broader corporate adoption trends. For investors, MSTR offers a highly leveraged way to gain exposure to Bitcoin, amplifying both potential rewards and risks.
Conclusion
MicroStrategy’s aggressive Bitcoin strategy has delivered extraordinary returns during bullish periods, but it leaves the company heavily exposed to severe corrections. A 50% Bitcoin drop would erode billions in value, trigger impairment charges, and expose the fragility of its leveraged feedback loop.
For investors, MSTR represents not just a proxy for Bitcoin, but a magnified bet on the cryptocurrency’s long-term success—with all the associated risks. Whether MicroStrategy’s strategy proves to be visionary or reckless depends on Bitcoin’s trajectory, making it a speculative play that demands careful consideration.
| More from the author |
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| Koen Hoorelbeke's articles on Saxo |
| Previous "Market on edge" updates |
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