Not Even Close: Thoughts on Bitcoin and Microstrategy

by JDH on February 17, 2024

Last week, I said: Bitcoin: The (Temporary) Top is In.  When I wrote that, Bitcoin was trading at around $47,000 USD.  Bitcoin hit just under $52,900 USD on Thursday.

Apparently, the top was not in.  Here’s the five-year chart:

As I write this at 6:30 am Saturday morning, February 17, 2024, Bitcoin is trading at $51,273, which, as you can see, has closed above some major resistance levels.  in fact, there are only two major resistance levels remaining: $59,291 and the all-time high of around $69,908.  A shorter-term view is more instructive:

As you can see, there was a major convergence of technical indicators (all of the different coloured lines) around $48,000, so when that level was breached, it was clear sailing to $52,000.

But wait, it gets better:

As noted last week, I own a small MSTR – Microstrategy Inc. position.  In anticipation of the temporary Bitcoin top, I did a covered write to “lock in” my gains.

  • On February 8, I sold the February 9, 2024, $585 calls for $7.50.  MSTR went way up, and on February 9, I bought them back for $59.  Oops.  That’s a loss of $51.50.
  • On February 9, I sold the February 16, 2024, $615 calls for $45.  MSTR went way up, and on February 15, I bought them back for $94.  Oops. That’s a loss of $49.
  • Then on February 14, I sold the February 16, 2024, $770 calls for $40.  MicroStrategy pulled back, and on February 16, the options expired worthless for a profit of $40.

To review the math, that’s an overall loss on the options of $60.50.  In hindsight, I should have done nothing.  I got too cute.

The only good news in this sorry tale is that on February 8, when I did the first covered write, MicroStrategy was trading at $580 per share.  It closed on February 16 at $699.56 per share, so my profit per share is $120, which more than offsets my loss on the options of $60.50.

(Even worse, as is often the case, the stock closed at $699.56, which of course, is just below the “nice round number” of $700, so I’m sure many option holders got “reckt.”  I should have sold $700 calls and waited, and I would have done great.  Oh well, that’s life).

The big question, of course, is, do I do it again?

The answer, probably, is yes.

MicroStrategy is highly correlated to the price of Bitcoin, and Bitcoin has had a great run.  From January 23 to February 16, it was up 37%.  Bitcoin won’t continue to rise by 37% every 24 days.  A pullback is inevitable.  So, yes, I will likely do a covered write next week, but we shall see.

Returning to the above charts, Bitcoin appears to be at a major resistance level.  It’s near the top of the parallel up-channel and many resistance levels.  A pullback below $50,000, an even down to $44,000, would cause no long-term technical damage, so the safe bet is for Bitcoin to fall in the coming week.

But that’s what I said last week, and I was completely wrong, so who knows?  It’s obvious that there is significant demand from the new spot ETFs:

If Bitcoin hits a new high, this demand will increase, so in the medium to long term, I expect Bitcoin to increase.  My base case remains that Bitcoin will hit $100,000 by the end of the year.  It’s a solid investment for a portion of your portfolio but is highly volatile, so don’t bet the farm on it.

One final point on MSTR – Microstrategy Inc.: it’s a play on Bitcoin, but also a play on its possible future inclusion in the S&P 500 Index, which would create a new wave of institutional buying (because if you track the SPX, you would have to buy it).

According to the S&P Dow Jones Indices Methodology, page 7, to be included, a company requires a market capitalization of US $15.8 billion or more.  Today, MSTR has a market capitalization of just under $12 billion, so it’s not eligible yet.

MSTR owns 190,000 Bitcoin, currently worth $9.8 billion.  With a market capitalization of $11.87B, MSTR has a premium over Bitcoin value of around $2 billion.

If Bitcoin hits a new high of $70,000, MSTR’s Bitcoin stake would be worth $13.3 billion, and if you apply the same premium to net asset value of $2 billion, that would imply a market cap of $15.3 billion, which is very close to the level required for inclusion in the S&P 500.

Of course, my analysis is simplistic.  MSTR has debt on its balance sheet, so it’s not as simple as multiplying the Bitcoin value by its holdings to determine NAV.  But it is also true that MSTR will likely buy more Bitcoin so that the holdings will increase.  My point: in addition to their Bitcoin holdings, MSTR has other “tailwinds,” so it is a prudent, although very volatile, speculation.  Buy on the dips.

Those are my thoughts.  I was wrong last week.  Let’s see how it goes this week.  See you next week.