MicroStrategy outperformed Bitcoin four times in one year. Is leverage really risk-free?

Original author: Yue Xiaoyu (X: @yuexiaoyu111 )

MicroStrategy Incorporated ($MSTR) is a U.S.-listed company whose main business is enterprise analytical software. In recent years, it has begun to hold large amounts of Bitcoin (BTC), which has attracted market attention.

MSTR uses issuing debt to purchase Bitcoin as its primary investment strategy, which has a financial leverage effect: because the cost of debt is fixed, while the value growth of assets (Bitcoin) is higher, net profit growth directly increases stock value.

This is why MSTR’s share price has risen more than Bitcoin itself during this period, and MSTR is known as a “leveraged Bitcoin ETF.”

Judging from historical data, there is an obvious synchronous fluctuation relationship between MSTRs stock price and Bitcoin price.

2020-2021 Bitcoin Bull Run: MSTR stock price rose from a low of around $100 to a high of over $1,000, significantly influenced by the surge in Bitcoin prices.

Bitcoin Bear Market 2022-2023: MSTR’s stock price also fell sharply from its highs, reaching as low as $139.

At present, the average purchase cost of Bitcoin held by MSTR is relatively low, at around $40,000, while the price of Bitcoin is basically stable above $60,000. With the arrival of the main upward trend of the crypto bull market, MSTRs earnings will still have a lot of room for growth.

But is the MSTR strategy of borrowing money to buy Bitcoin really that good?

When the stock price rises, there are all praises, but we can rationally analyze the following issues in depth.

1. MSTRs strategy of investing in Bitcoin seems to be very effective, and the stock price has been rising again and again. So what are the disadvantages of MSTR ?

Any decision cannot have only good sides, there must be bad sides.

There are three main points:

(1) Over-dependence on Bitcoin: MSTR’s stock performance is closely tied to the price of Bitcoin, which makes its stock price extremely volatile.

(2) Business unity: Despite its software business, most of the company’s attention and market value growth has come from Bitcoin investment, and the development of its core software business has been neglected.

(3) Incurred a net loss: According to recent financial report data, MSTR showed a net loss and high operating expenses.

Second, MSTR’s strategy is very simple, which is to invest in Bitcoin regularly. So why does MSTR have a net loss and high operating expenses?

There are two main reasons:

(1) Bitcoin price fluctuations: Bitcoin prices are highly volatile. Even though MSTR’s strategy is to hold and purchase Bitcoin, its book value will decrease as the price of Bitcoin falls, resulting in a net loss in the accounting statements.

(2) Financial strategy and debt: MicroStrategy purchased Bitcoin by issuing debt, which increased the companys interest expenses. High interest-bearing debt means that even if the price of Bitcoin remains unchanged or rises slightly, the increase in interest expenses can lead to a net loss.

3. If other companies also follow MSTR’s strategy to invest in Bitcoin, what advantages does MSTR have?

MSTRs strategy has no threshold, but it cannot be denied that MSTRs unique advantage lies in its first-mover advantage and operational experience in the market. New entrants need to consider their own business attributes, risk management capabilities, regulatory environment and shareholder expectations.

MSTR’s moat:

(1) First-mover advantage: MSTR was one of the earliest public companies to adopt Bitcoin as a major financial strategy. This brought them early attention and lower average holding costs.

(2) Brand recognition: Due to MSTR’s active promotion, Bitcoin investment has become part of its brand. When people mention MSTR, they will associate it with Bitcoin.

(3) Experience and Strategy: MSTR’s leadership, especially Michael Saylor, has in-depth research and understanding of Bitcoin. They have established processes and strategies for managing large-scale Bitcoin investments.

(4) Financial structure: MSTR has optimized its capital structure to support investment in this highly volatile asset, including financing the purchase of Bitcoin through the issuance of bonds, which requires certain financial engineering capabilities.

(5) Market Positioning: MSTR has become a proxy investment target for Bitcoin in the minds of investors. For those investors who want to invest indirectly in Bitcoin, MSTR is a ready-made option.

4. Bitcoin spot ETFs have been listed, and investors can already hold Bitcoin directly and legally. Will the attractiveness of MSTR decline?

First, let’s talk about the most direct impact of Bitcoin ETF on MSTR:

(1) Increased competition: Bitcoin ETFs provide an alternative to investing directly in Bitcoin, which may cause some investors who originally invested in Bitcoin indirectly through MSTR to turn to ETFs because ETFs are a more direct investment tool with lower management fees. This may reduce investors demand for MSTR shares, thereby exerting downward pressure on its share price.

(2) Changes in market positioning: MSTR was previously viewed by many investors as a proxy investment tool for Bitcoin due to its large holdings of Bitcoin. With the launch of the Bitcoin ETF, MSTR’s unique market positioning may be weakened because investors now have a more direct way to invest in Bitcoin.

(3) Liquidity and convenience: ETFs are generally highly liquid and can be traded at any time during trading days, while holding MSTR shares requires considering the impact of the companys other businesses and the liquidity of the stock market. Better convenience and liquidity may attract some investors to switch from MSTR to Bitcoin ETFs.

(4) Risk diversification: Although MSTR holds a large amount of Bitcoin, it is still a business operating company. Its stock price is not only affected by the price of Bitcoin, but also by its software business, management decisions, etc. ETFs can be regarded as a purer Bitcoin price tracking tool.

MSTRs attractiveness will decline, but not by much, because of the following advantages and differentiations:

(1) First-mover advantage and brand recognition: Despite the launch of the Bitcoin ETF, MSTR’s first-mover advantage and Michael Saylor’s popularity in the Bitcoin community may still maintain its appeal, especially for investors who are optimistic about MSTR’s long-term strategy.

(2) Leverage effect: MSTR actually provides investors with a leveraged Bitcoin investment by borrowing money to buy Bitcoin. If the price of Bitcoin rises, this leverage effect can amplify the gains of MSTR stock, which ETFs may not be able to provide directly.

(3) Taxes and Management Fees: For some investors, holding Bitcoin directly or through an ETF may involve different tax considerations and management fees, and MSTR offers a different financial structure that may still be attractive to some specific investors.

Overall, the launch of a Bitcoin ETF may indeed have some impact on the attractiveness of MSTR as investors have more options.

But MSTR’s unique positioning, its deep integration into Bitcoin, and the company’s own business strategy may continue to attract another segment of investors, especially those who value its strategy and Bitcoin as a long-term holder.

Therefore, despite increased competition, MSTR’s attractiveness will not necessarily decline across the board, and it will maintain its value among specific investor groups.

5. If MSTR starts selling coins one day, will it further depress the price of Bitcoin, leading to a downward spiral?

MSTRs strategy of borrowing money to buy coins will bring significant stock price increases in a bull market, but it will also face considerable risks in a bear market.

Because MSTR purchases Bitcoin through debt financing, it increases financial leverage, which may lead to financial pressure when the price of Bitcoin falls, resulting in having to sell coins to repay debts.

However, MSTR’s massive holdings and support from its CEO Michael Saylor have been seen as a shot in the arm for the Bitcoin market.

If MSTR starts selling, it may be interpreted by the market as a loss of confidence in the future value of Bitcoin, causing other investors to start selling as well, forming negative market sentiment.

This negative market sentiment could trigger other holders to sell at stop losses or force loans collateralized by Bitcoin to enter a margin call status, further increasing selling pressure, forming a downward spiral, and even ultimately leading to a systemic stampede and collapse.

Of course, whether it will really lead to a downward spiral depends on several other factors. For example, as the Bitcoin market gradually matures and more institutions participate, the markets absorption capacity will increase, and Bitcoins price sensitivity to single events may decrease.

Furthermore, if MSTR sells, it may adopt a strategy (such as selling in batches or selling when there is sufficient buying in the market) to minimize the impact on the market.

Todays Bitcoin market is much more mature and diverse than the previous bull market, so there is no need to worry too much.

However, everyone needs to realize that there is such a risk. You must know that MSTR is one of the top five holders of Bitcoin. Once it sells the coins, it will mark the beginning of a bear market or an accelerator of a bear market decline.

Next, let’s welcome the arrival of the main uptrend of the bull market first, enjoy the carnival of the bull market, and then worry about the bear market problems.

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