As the largest corporate holder of Bitcoin, MicroStrategy has made headlines with its aggressive acquisition strategy, fueled by cheap financing. However, beneath the surface, a more nuanced story emerges. While the company’s "Bitcoin yield" narrative may have paid off spectacularly in 2020 and 2021, investors would do well to remember that such success stories rarely last forever.
The Virtuous Cycle: A House of Cards?
Since 2020, MicroStrategy has been minting an attractive "Bitcoin yield" for shareholders by issuing richly valued stock and borrowing for almost nothing. This virtuous cycle has sent MicroStrategy’s stock price ever higher, with MSTR gaining a staggering 2,500% since 2020. However, this success is largely due to the company’s ability to tap into cheap financing, which will eventually dry up.
Copycats Risk Similar Fates
As other companies follow in MicroStrategy’s footsteps, they risk facing similar fates. The "Bitcoin yield" narrative may have worked for MicroStrategy, but it’s not a sustainable model for all corporations. In fact, corporate treasuries are more accurately described as inflation hedges rather than justifying lofty stock premiums.
Saylor’s Vision: A High-Risk Strategy?
Founder Michael Saylor’s vision of using the company’s balance sheet to buy Bitcoin has paid off spectacularly. However, his bet on a $13 million price by 2045 and a "bear case" of $3 million may be overly optimistic. Moreover, MicroStrategy’s approach has had its detractors, with Benchmark analyst Mark Palmer pointing out that investors can simply buy spot BTC instead of buying MSTR shares.
MSTR Performance vs. Benchmarks
MicroStrategy’s performance is indeed impressive, but it’s essential to put this in context. As the data from MSTR Tracker shows, MicroStrategy’s Bitcoin treasury is worth over $40 billion, notching unrealized profits of about $16.5 billion – a more than 70% return on invested capital.
A Cash Crunch Is Inevitable
The terms of MicroStrategy’s recent convertible notes deal have sparked concerns that the company may face a cash crunch in the future. With at least $2 billion in debt featuring similar terms, investors can potentially demand repayment in cash if MSTR doesn’t hit the fixed price by June 1, 2028.
A Premium to Net Asset Value: A House of Cards?
MicroStrategy’s persistent premium to its net asset value is a house of cards waiting to be toppled. If noteholders seek redemptions or MSTR is forced to refinance on less favorable terms, the company’s "Bitcoin yield" narrative could evaporate overnight.
Why Most Investors Should Stay Away
For most investors, vanilla spot BTC exposure – including ETFs like BlackRock’s iShares Bitcoin Trust ETF – presents more than enough volatility. While Saylor’s triple-maxi Bitcoin bull strategy may be appealing to some, it’s essential to remember that a bet on MSTR is a high-risk proposition.
Conclusion
While MicroStrategy’s multibillion-dollar Bitcoin bet has paid off spectacularly in the short term, investors would do well to remember that such success stories rarely last forever. As cheap financing dries up and a cash crunch becomes inevitable, it’s essential for investors to be cautious and not get caught up in the hype surrounding MSTR’s "Bitcoin yield" narrative.
About the Author
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.