And Now We Wait

by JDH on April 6, 2024

As I write this at 7:00 a.m. on Saturday, Bitcoin is exactly flat. It is hanging around some key technical levels. It’s not breaking down, not breaking out, just hanging around.

The uptrend line that started in February was violated this week, but Bitcoin is working to reclaim it.  It’s also bouncing between the key support levels of $62,223 and the previous all-time high of just under $69,000.

Bitcoin closed on March 31 above all of the support levels, which was important because it was a weekly, monthly and quarterly close.  Since then, it’s down.

So what does all of this mean?

In the long term, nothing.  These are all just lines on a chart.  Technical analysis is “astrology for men.”  By the end of the year I expect Bitcoin to be well over $100,000 USD, probably considerably higher.  In the short term, who knows?  The halving is projected to happen on April 20, so between now and then Bitcoin may bounce around.  It may go down.  After the halving, it’s likely it will go up.

So, I’m not trying to time anything.  I have my MSTR – Microstrategy Inc. position.  I’ll hold it, and sit back and watch.

Enjoy the eclipse.  See you next week.

Microstrategy: Are the shorts winning?

by JDH on March 30, 2024

This week, yes, the shorts one.

On Thursday, Kerrisdale Capital Management issued a report recommending a short sale of Microstrategy.  Their thesis is simple: as of March 18, 2024 Microstrategy owns 214,246.  At a Bitcoin price of $70,000 USD, that’s a Bitcoin value of just under $15 Billion.

However, MSTR – Microstrategy Inc. has an implied shares outstanding of just under 17 million (15 million shares outstanding plus another 2 million if all convertible debt converted), so at its closing price on Friday of $1,704 per share, that’s a market capitalization of just under $29 million.

Microstrategy does have a non-Bitcoin business that generates cash flow and debt, but ignoring those factors, which are not huge, MSTR is trading approximately two times its underlying Bitcoin asset value.

So, the short sellers say to short Microstrategy and buy Bitcoin, and capture the premium.

It makes sense.  If you can buy Bitcoin for $1, why would you buy MSTR for $2?  You can get twice as much Bitcoin by buying it directly.

That’s true, but there are valid reasons why Microstrategy trades at a premium to it’s Bitcoin holdings.

First, many investors cannot hold Bitcoin directly.  If you are a university endowment or a pension fund you may be prohibited from investing in anything other than stocks or bonds.

Fine, but can’t they just buy the Bitcoin ETF?  Not necessarily.  Clients of Vanguard cannot purchase Bitcoin ETFs, because Vanguard believes their clients are idiots who can’t think for themselves.  They will let their clients buy double leveraged stock ETFs where the time premium is guaranteed to erode their wealth, but Bitcoin is apparently too risky.  However, MSTR is a stock, so Vanguard has no problem with their clients buying it.

Third, Bitcoin EFTs have a management fee; Microstrategy doesn’t.

But there is a fourth and most important reason why MSTR trades at a premium: Michael Saylor is a master at capital allocation.  When the stock is trading at a premium to Net Asset Value, they issue shares and buy Bitcoin.  Bitcoin goes up, and the shares are worth more, so over the medium term, it is not dilutive.  But that’s not the best part.

The best part is convertible debtOn March 8, 2024 Microstrategy completed a private offering, to institutional investors, of convertible debt.  The debt matures in 2030, and pays an interest rate of 0.625%, payable semi-annually.  So they are borrowing virtually for free.  On $800 million, the interest cost is $5 million a year.  Their net profit is around $70 million per year, so they can easily pay $5 million in interest.  The notes have complicated conversion terms, but the most likely scenario is:

The conversion rate for the notes is initially 0.6677 shares of MicroStrategy’s class A common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $1,497.68 per share.

So this is a great deal for the purchasers of the convertible bonds.  They are buying a long-dated call option that allows them to buy MSTR for $1,500.

Let’s assume that between now and the conversion date in 2023 the price of Bitcoin doubles (it ‘s up 60% in the last three months, so doubling in five years is not a stretch), and let’s also assume that MSTR doubles and is trading at $3,000 per share.  The bond holders double their money, which is pretty good for a five or six year investment.  If Bitcoin doesn’t double, they get their money back.

For existing shareholders of MSTR this is also a great deal, because they are getting access to free money to buy Bitcoin.  If Bitcoin goes up, so does MSTR, and the existing shareholders win.

Why would an investor buy convertible notes instead of Bitcoin directly?  Because, again, many investors can only invest in specific securities, like bonds.  These notes are a perfect way to get exposure to Bitcoin while adhering to the investment rules of their fund.

So here’s my point: yes, MSTR is trading at a significant premium to NAV, and it therefore may pull back.  But, they have the advantage of leverage, and the price of Bitcoin will likely continue to increase, so shorting MSTR seems very risky to me.  Let’s see what happens when markets open on Monday.

Happy Easter.

Have we learned anything yet?

March 23, 2024

No.  I haven’t learned anything yet. During the rocket ride up for MSTR – Microstrategy Inc.  I sold covered calls, significantly reducing my potential profits. Then, from March 15 to March 19 MSTR crashed 32%, but assuming the rocket ride up would continue, I was not covered, so I suffered the downside and lost the […]

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Microstrategy – The MSTR Story Continues

March 16, 2024

Let me bring you up to speed: I wanted a leveraged, highly risky way to play the Bitcoin pump, so I bought MSTR – Microstrategy Inc.  I’m not completely crazy, so I decided to mitigate the risk by writing covered calls against my position.  I give up some of the upside, but I get some […]

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Bitcoin and Microstrategy: My Unbounded Idiocy

March 9, 2024

The saga continues.  As I reported last week in How NOT to do covered writes on MSTR – MicroStrategy, I own MicroStrategy, and to “juice” my returns I’ve done covered writes (selling out of the money call options on my MSTR shares). The strategy has been a dismal failure. The theory is simple enough.  The […]

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How NOT to do covered writes on MSTR – MicroStrategy

March 2, 2024

I have no idea what will happen, but here’s how I’m playing it: As I noted last week in my post two weeks ago, Not Even Close: Thoughts on Bitcoin and Microstrategy, I own a small MSTR – Microstrategy Inc. position, and to “juice the returns,” I’m doing covered writes against it. The theory is simple.  […]

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Bitcoin: Sideways, Then Up or Down

February 24, 2024

Here’s the current Bitcoin chart, with the uptrend channel starting in mid-October: As I write this at 7:00 am on Saturday, Bitcoin is just over USD 51,000, exactly where it traded on Wednesday.  The $49,000 level is of interest, which represents either significant support or resistance, depending on which side of the line we are […]

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Not Even Close: Thoughts on Bitcoin and Microstrategy

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 […]

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Bitcoin: The (Temporary) Top is In

February 10, 2024

Today, a deeper dive into Bitcoin.  Let’s start with the five-year chart: I’ve drawn the long-term trend line, starting with the peak in 2019, and then pivot points in 2021, 2022, and 2024.  I’ve also drawn in a shorter-term trend line starting at the October 2022 peak.  I’ve circled the pivot points: Keep the big […]

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Here’s the Thing

February 3, 2024

The market sure looks over-extended: The S&P 500 Index is up 126% from the pandemic lows.  It’s up 42% since the lows of October 2022.  The economy doesn’t look great.  Unemployment is increasing, inflation remains problematic, wars are ongoing, immigration is a massive problem in North America, and we are in an uncertain election cycle.  […]

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