- MicroStrategy is now more of a position in bitcoin than a software company
- That bitcoin position is leveraged
- The fall in bitcoin is thus a disaster for Microstrategy
Microstrategy (NASDAQ: MSTR) is so fully committed to bitcoin that it really trades now as a bitcoin fund holding. Possibly worse than that, at a certain bitcoin price level, it's a leveraged holding in bitcoin and leveraged not in a good direction. This is why it appears that Microstrategy is valued at about half that of its bitcoin stash – with the software company coming for free.
Of course, as the bitcoin price was rising, this was a stance that did well for MSTR. Now that it's falling, substantially, that's not so good. MSTR peaked back in November, about when bitcoin did, and has lost 75% of its value over the past year. It dropped 25% just yesterday as concerns about that bitcoin price came to the fore.
The point here being that sure, Microstrategy has a nice little software and consulting business. They've been ploughing the profits from that into holdings in bitcoin. Well, that might be sensible, it might not be, that depends upon the bitcoin price, obviously. For they've amassed a holding of some 130,000 BTC. That means they've used borrowings to add to their pile – they issued some convertible bonds. Then they've gone one stage further and borrowed against the value of their bitcoin in order to buy more bitcoin.
That's a practise that if the market is going up, that juices profits. As and when markets turn that can lead to the immolation of the company itself – it depends upon how much leverage they've taken on.
The market as a whole is worried about the Microstrategy position. The current market cap is about $2.3 billion, which is less than the reported value of the bitcoin stash itself. The short interest is 35% or so – one thing that MSTR has been useful for is being a cheap way of shorting bitcoin. All of this is after the 25% fall of yesterday but before the further 6% fall premarket this morning.
As to what happens next at Microstrategy, that will depend near entirely on your view of bitcoin. If you think that it's going to revive and climb back up over $40k say, on it's way to those glory days of $50k plus again, then MSTR is a perfectly good place to ride that play. If you think that bitcoin is now over – except for dead cat bounces – then Microstrategy might well be heading for zero.
Yes, zero, for don't forget they haven't just invested their own cash or profits into BTC. They've borrowed money in two ways, bond issues and against their holdings. The exact price at which they might start getting margin calls is disputed but the CFO has said a BTC price of about $21,000 would do it. Which is, it's possible to note, the price we've already passed through this morning.
It's possible to worry over Tesla (NASDAQ: TSLA) and their holdings of bitcoin, sure. But it's near trivial item on their balance sheet. Here at Microstrategy, it's really that bitcoin is the balance sheet. So cuts in the BTC price are going to feed through full and hard to that MSTR price