In the wake of the recent election, Bitcoin’s price soared to nearly $100,000, which in turn propelled MicroStrategy’s stock past the $500 mark. However, concerns about short selling have since led to a significant decline in MicroStrategy’s share price. This has prompted Glenn Rosenberg to explore potential investment opportunities linking MSTR and BTC.
Correlation Between MSTR and BTC
Many investors have witnessed Bitcoin’s remarkable ascent following the election, currently hovering around $98,000. This brings attention to how MicroStrategy, under the guidance of its unconventional co-founder Michael Saylor, responded to this surge.
As anticipated, MicroStrategy’s stock reached its post-election peak, elevating above $500. Yet, in a surprising twist, the stock took a significant dive of around 22% in the past week, triggered by worries over the company’s valuation outlined in a recent report. Intrigued by this situation, I set out to analyze whether there are market advantages, or at least evaluate the value of holding MSTR compared to BTC.
Investment Implications
To understand the situation, it’s crucial to closely examine the provided data. One element influencing MSTR’s greater price growth compared to Bitcoin is the company’s extensive leverage. MicroStrategy has amassed approximately 386,700 Bitcoin, costing around $22 billion, which accounts for nearly 99.5% of its balance sheet. To fund these acquisitions, MSTR has taken on $9 billion in debt, some of which carries no interest. If Bitcoin’s value were to plummet, repaying this debt could become challenging for the company. Additionally, MicroStrategy has raised $4.6 billion in equity to bolster its BTC purchases, with an average acquisition cost of about $56,500 per Bitcoin. This heavy reliance on appreciation to enhance its market capitalization reveals a precarious financial strategy.
When we delve into the relationship between MSTR and BTC, we discover a strong correlation. The Pearson and Spearman correlation coefficients estimate around 65%, with this analysis drawn from the daily closing prices over the last year. Considering the leverage aspect, the connection appears relatively straightforward: as Bitcoin’s price changes, so does MicroStrategy’s stock. However, it’s worth noting that while the correlation is significant, it isn’t absolute. MSTR also boasts a profitable business intelligence (BI) segment, generating about $500 million annually, making it one of the largest players in that space. This means MSTR’s stock price is not solely tied to Bitcoin, but the leverage still magnifies its volatility, creating a risk profile approximately 2.5 times greater than that of Bitcoin.
Future Considerations
For many, investing in MicroStrategy might not be the ideal way to gain exposure to Bitcoin, particularly for risk-averse individuals who prefer to steer clear of high leverage and price fluctuations. A more direct route could involve purchasing a Bitcoin ETF. Traders looking for a similar risk profile might consider leveraging perpetual Bitcoin contracts or ETFs. For those willing to take on more risk, allowing Michael Saylor to manage that risk while simply tracking Bitcoin price movements could be a sound strategy.
Given the strong correlation between MSTR’s stock price and Bitcoin’s value, trading opportunities could potentially arise. The sharp rally in MSTR’s stock leading up to its recent fall produced a z-score nearing four standard deviations (4σ). Historical analysis reveals a lack of mean-reverting opportunities in similar contexts, largely due to MSTR’s increased leverage, which has shifted the dynamics between the two assets compared to previous situations.
Additionally, MicroStrategy still has the option to issue around 13 million more shares of equity, which could further widen the valuation gap. This analysis indicates that MicroStrategy may currently be overvalued relative to Bitcoin, suggesting the likelihood of a more significant contraction in the price disparity between the two assets in the future.
Source: Coindesk
