MicroStrategy will eventually unravel — Bitcoin bulls should look elsewhere

1 week ago 4

Opinion by: Alex O’Donnell, Senior Writer for Cointelegraph.

MicroStrategy’s multibillion-dollar Bitcoin bet has paid off spectacularly. Still, the good times won’t last. When cheap financing dries up, Microstategy’s stock price will wither.

Copycats risk similar fates. Bitcoin (BTC) maxis should look elsewhere.

Since 2020, bullish investors have effectively paid MicroStrategy to accumulate BTC. MicroStrategy has minted an attractive “Bitcoin yield” for shareholders by issuing richly valued stock and borrowing for almost nothing. MicroStrategy’s actions triggered a virtuous cycle, sending MicroStrategy’s stock, MSTR, ever higher. Copycats — from drugmakers to YouTube competitors — are touting similar treasury strategies.

Corporate BTC treasuries are inflation hedges. They don’t justify lofty stock premiums. The cycle that sent MicroStrategy’s shares skyward will eventually reverse course. In 2025, investors should skip MSTR and opt for plain spot BTC exposure instead.

Saylor’s vision

Originally a software company, MicroStrategy became a de facto Bitcoin hedge fund in 2020 when founder Michael Saylor started using the company’s balance sheet to buy BTC. Since then, MicroStrategy spent almost $23.5 billion buying Bitcoin. It now owns more than 400,000 BTC, or around 2% of Bitcoin’s total supply, according to data from the MSTR tracker.

Saylor’s bet paid off. As of Dec. 7, the data shows that MicroStrategy’s Bitcoin treasury is worth over $40 billion, notching unrealized profits of about $16.5 billion. That’s a more than 70% return on invested capital.

MicroStrategy’s stock has done better still. Since 2020, MSTR has gained about 2,500%, outperforming practically every sizeable public company except Nvidia. This year has been its strongest. As of Dec. 7, MSTR had gained nearly 600% year-to-date, outpacing BTC’s 125% gains.

MSTR trades at $400 per share, clocking a market capitalization exceeding $90 billion. That means MSTR trades at a more than 2x premium to the company’s BTC treasury.

Don’t credit MicroStrategy’s legacy software business, which lost $18.5 million in the third quarter. Instead, look to the “shareholder value that MSTR has been creating through its treasury operations, i.e., its repeated tapping of the capital markets to raise proceeds to fuel the addition of Bitcoin to its sizeable holdings,” Benchmark stock analyst Mark Palmer said in a November research note.

Doubling down

Investors can’t get enough. Since August, exchange-traded funds (ETFs) touting leveraged exposure to MSTR bootstrapped more than $4.5 billion in assets under management (AUM). On Nov. 29, Solv, a decentralized finance (DeFi) protocol, announced plans to launch an “onchain MicroStrategy”.

Meanwhile, other companies are following MicroStrategy’s lead. They include drugmaker Hoth Therapeutics, artificial intelligence developer Genius Group and YouTube alternative Rumble. Even software giant Microsoft is interested, and Elon Musk’s Tesla already owns nearly $1 billion worth of BTC.

Corporate treasuries hold more than $52 billion in BTC as of Dec. 7, according to bitcointreasuries.net.

MicroStrategy is doubling down. In August, MicroStrategy committed to a unique performance metric: Bitcoin yield, which measures the ratio of BTC holdings to outstanding shares. It sets BTC-per-share as a lodestar for corporate performance.

In October, MicroStrategy unveiled plans to raise $21 billion in equity and another $21 billion in debt to fund a three-year, multibillion-dollar BTC buying spree dubbed the “21/21 Plan.” The goal is simple. MicroStrategy aims to increase “MSTR’s BTC Yield for each of the next three years from 4%–6% to 6%–10%,” Palmer said.

Buying $42 billion worth of BTC is a no-brainer for Saylor. He thinks BTC will hit $13 million by 2045 and considers $3 million a “bear case.” However, MicroStrategy’s “approach has had plenty of detractors,” Palmer said.

To “those who have asked why anyone would buy its shares rather than simply buying Bitcoin, management has responded to criticism by pointing to the scoreboard,” Palmer said, referring to MSTR’s stellar performance since 2020. Scores can, however, change.

Brace for an unraveling

In November, MicroStrategy raised $3 billion from convertible notes to finance more BTC buying. It was the first big step toward the 21/21 Plan. The deal terms sparkled. At 0% APR, MicroStrategy effectively borrowed for free. Investors can potentially convert notes to MSTR stock — but only at a fixed price of $672.40 per share. That’s around 70% higher than MSTR’s Dec. 7 trading price.

There’s one catch. If MSTR doesn’t hit that price by June 1, 2028, noteholders can demand repayment in cash. Other MicroStrategy notes feature similar terms, constituting at least $2 billion in debt. A cash crunch is practically inevitable.

If noteholders seek redemptions, MicroStrategy can refinance (probably on less favorable terms) or sell Bitcoin. The latter would send shockwaves through cryptocurrency markets. MicroStrategy is the world’s largest corporate BTC holder. Either way, MSTR’s persistent premium to its BTC treasury could evaporate overnight. That would bury MicroStrategy’s “Bitcoin yield” narrative.

MSTR has dropped nearly 25% from Nov. 21 highs of roughly $543 per share. If MicroStrategy’s premium vanished completely, MSTR would sink below $170 per share. That’s assuming BTC’s price stays constant. Market drawdowns could send shares even lower.

For most investors, vanilla spot BTC exposure — including ETFs like BlackRock’s iShares Bitcoin Trust ETF— presents more than enough volatility. If you’re a “triple maxi” Bitcoin bull like Saylor, then by all means, bet big on MSTR. More cautious investors should stay away.

Alex O’Donnell is a senior writer for Cointelegraph. He previously founded DeFi developer Umami Labs and worked for seven years as a financial journalist at Reuters, where he covered M&A and IPOs. He is also the crypto growth lead at startup accelerator Expert Dojo.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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