Two weeks ago, I posted on the topic Microstrategy Decouples from Bitcoin, but for How Long? I noted that while the share price of MSTR—Microstrategy Inc. was closely correlated to the price of Bitcoin earlier in the year, a de-coupling occurred in late September, and since then MSTR has gained a lot more than Bitcoin.
Since September 6, Microstrategy has increased 106%, while Bitcoin has increased a much more modest 25%.
Here’s the updated chart:
So what’s going on?
The obvious answer is leverage.
According to mstr-tracker.com, each Microstrategy share holds 0.001245 Bitcoin, so a share should be worth approximately 0.001245 x the closing price of Bitcoin on Friday of $66,700 = $83. But, the closing price on Friday of MSTR was $234.34, for a Net Asset Value (NAV) premium of over 2.8X. That’s the highest NAV premium in almost two years:
Source: mstr-tracker.com
According to the AI I consulted:
MicroStrategy has utilized financial leverage to acquire Bitcoin. Using debt instruments like at-the-market equity offerings (ATM) and convertible senior notes, MicroStrategy has amplified its Bitcoin holdings beyond what its equity alone would allow. This leverage means that for every dollar of equity, MicroStrategy controls more than a dollar in assets, primarily Bitcoin, leading to potentially higher returns if Bitcoin’s price rises.
For example, on September 18, 2024, Microstrategy announced the sale of around a billion dollars of convertible notes, maturing in 2028. The bondholder gets an interest rate of 0.625% on these notes.
That’s less than 1%.
Why would anyone invest in something paying less than the rate of inflation?
Because the interest rate is irrelevant. You are getting notes that are convertible to Microstrategy stock at 40% higher than the stock price when the notes were issued. You can read all of the details here, but in simple terms, the stock was trading at $130.85 when the notes were issued, so the conversion price will be around $183. That was in September. Today, MSTR is at $234.
The debt holders already have a potential profit of 28%, which is not bad for six weeks’ work.
If you run a pension fund, university endowment, or a fund that can only invest in debt but wants exposure to Bitcoin, you have only one option: Microstrategy convertible debt.
So Microstrategy takes the money from the bondholders, and buys Bitcoin. In August 2020 Microstrategy had no Bitcoin. But as they borrow to buy, the number of shares outstanding remains relatively constant (until the debt is converted), so the number of Bitcoin per share increases.
Source: mstr-tracker.com
That’s leverage. So if you think Bitcoin will increase in value, you can buy and hold Bitcoin yourself, or buy MSTR and let them do the work, and you get the leverage.
Of course, leverage is a two-way street. When Bitcoin drops, you lose more than the value of the drop.
But it’s no secret that Microstrategy plans to continue issuing debt and using the proceeds to buy more Bitcoin. Let’s do some “back of the envelope” math.
Currently each share of MSTR is backed by 0.001245 Bitcoin. What happens when that number gets to 0.0015?
If Bitcoin stays at the same price, and if the NAV stays the same, each share of Microstrategy is worth
0.0015 x $66,700 x 2.8 = $280
But if Microstrategy continues to buy Bitcoin, won’t the price of Bitcoin increase? Here’s the math at $100,000 Bitcoin:
0.0015 x $100,000 x 2.8 = $420 per share
That’s leverage, and that’s why investors are buying MSTR.
Now, of course, there are some flaws with this analysis.
First, the price of Bitcoin could drop. If Bitcoin drops to $50,000 (and it was there, briefly, in August), and there are no new purchases of Bitcoin, the math looks like this:
0.001245 x $50,000 x 2.8 = $174
Perhaps this spooks investors, and the NAV drops to 1.5, where it was in May of this year:
0.001245 x $50,000 x 1.5 = $93 per share
This could happen. MSTR briefly traded close to $100 per share in August and could return to that level again.
So here’s my point: Microstrategy is a leveraged play on Bitcoin. If you think Bitcoin will go up in the future, Microstrategy is a great way to play it. You can hold it in any investment account, so you have no worries about self-custody. There is also the added “kicker”: index inclusion.
Will Microstrategy get added to the S&P 500 Index?
Maybe. Probably. Someday. But it may not be imminent.
Microstrategy has the market capitalization to be included, but the index prefers profitable companies. Microstrategy isn’t. Their software business kicks off some cash, but it’s very small. It’s great that their Bitcoin holdings are increasing in value, but that’s not reflected on their income statement, so it’s not likely that index inclusion will happen soon.
So how do you play it?
One option is to “play the channel.” When MSTR is near the top of the range, you sell covered calls to capture the premium. When it’s in the bottom half of the range, you buy more shares, or buy calls. Microstrategy is currently in the top quarter of the monthly channel, so it’s not a strong buy, but not a sell either.
To conclude, MSTR is the best-performing stock this year. It makes sense to have the best-performing stock in your portfolio, but of course, past performance does not guarantee future results. Position size is key. Don’t bet the farm on it.
Good luck. See you next week.
MicroStrategy’s Stock Soars: Outpacing Bitcoin’s Gains by a Wide Margin
by JDH on October 26, 2024
Two weeks ago, I posted on the topic Microstrategy Decouples from Bitcoin, but for How Long? I noted that while the share price of MSTR—Microstrategy Inc. was closely correlated to the price of Bitcoin earlier in the year, a de-coupling occurred in late September, and since then MSTR has gained a lot more than Bitcoin.
Since September 6, Microstrategy has increased 106%, while Bitcoin has increased a much more modest 25%.
Here’s the updated chart:
So what’s going on?
The obvious answer is leverage.
According to mstr-tracker.com, each Microstrategy share holds 0.001245 Bitcoin, so a share should be worth approximately 0.001245 x the closing price of Bitcoin on Friday of $66,700 = $83. But, the closing price on Friday of MSTR was $234.34, for a Net Asset Value (NAV) premium of over 2.8X. That’s the highest NAV premium in almost two years:
Source: mstr-tracker.com
According to the AI I consulted:
For example, on September 18, 2024, Microstrategy announced the sale of around a billion dollars of convertible notes, maturing in 2028. The bondholder gets an interest rate of 0.625% on these notes.
That’s less than 1%.
Why would anyone invest in something paying less than the rate of inflation?
Because the interest rate is irrelevant. You are getting notes that are convertible to Microstrategy stock at 40% higher than the stock price when the notes were issued. You can read all of the details here, but in simple terms, the stock was trading at $130.85 when the notes were issued, so the conversion price will be around $183. That was in September. Today, MSTR is at $234.
The debt holders already have a potential profit of 28%, which is not bad for six weeks’ work.
If you run a pension fund, university endowment, or a fund that can only invest in debt but wants exposure to Bitcoin, you have only one option: Microstrategy convertible debt.
So Microstrategy takes the money from the bondholders, and buys Bitcoin. In August 2020 Microstrategy had no Bitcoin. But as they borrow to buy, the number of shares outstanding remains relatively constant (until the debt is converted), so the number of Bitcoin per share increases.
Source: mstr-tracker.com
That’s leverage. So if you think Bitcoin will increase in value, you can buy and hold Bitcoin yourself, or buy MSTR and let them do the work, and you get the leverage.
Of course, leverage is a two-way street. When Bitcoin drops, you lose more than the value of the drop.
But it’s no secret that Microstrategy plans to continue issuing debt and using the proceeds to buy more Bitcoin. Let’s do some “back of the envelope” math.
Currently each share of MSTR is backed by 0.001245 Bitcoin. What happens when that number gets to 0.0015?
If Bitcoin stays at the same price, and if the NAV stays the same, each share of Microstrategy is worth
But if Microstrategy continues to buy Bitcoin, won’t the price of Bitcoin increase? Here’s the math at $100,000 Bitcoin:
That’s leverage, and that’s why investors are buying MSTR.
Now, of course, there are some flaws with this analysis.
First, the price of Bitcoin could drop. If Bitcoin drops to $50,000 (and it was there, briefly, in August), and there are no new purchases of Bitcoin, the math looks like this:
Perhaps this spooks investors, and the NAV drops to 1.5, where it was in May of this year:
This could happen. MSTR briefly traded close to $100 per share in August and could return to that level again.
So here’s my point: Microstrategy is a leveraged play on Bitcoin. If you think Bitcoin will go up in the future, Microstrategy is a great way to play it. You can hold it in any investment account, so you have no worries about self-custody. There is also the added “kicker”: index inclusion.
Will Microstrategy get added to the S&P 500 Index?
Maybe. Probably. Someday. But it may not be imminent.
Microstrategy has the market capitalization to be included, but the index prefers profitable companies. Microstrategy isn’t. Their software business kicks off some cash, but it’s very small. It’s great that their Bitcoin holdings are increasing in value, but that’s not reflected on their income statement, so it’s not likely that index inclusion will happen soon.
So how do you play it?
One option is to “play the channel.” When MSTR is near the top of the range, you sell covered calls to capture the premium. When it’s in the bottom half of the range, you buy more shares, or buy calls. Microstrategy is currently in the top quarter of the monthly channel, so it’s not a strong buy, but not a sell either.
To conclude, MSTR is the best-performing stock this year. It makes sense to have the best-performing stock in your portfolio, but of course, past performance does not guarantee future results. Position size is key. Don’t bet the farm on it.
Good luck. See you next week.