The roller-coaster trajectory of Bitcoin is not only unsettling investors within the cryptocurrency circle, but also those holding MicroStrategy in the stock market.
MicroStrategy, an enterprise software company, gained widespread recognition due to its involvement in cryptocurrency trading. Over time, its market value started to revolve entirely around the rise and fall of Bitcoin, eventually becoming the world's largest corporate purchaser of Bitcoin.
This year, the company has made multiple Bitcoin purchases, continually increasing its exposure to this digital asset.
According to MicroStrategy's latest filing to the U.S. SEC, the company purchased another 9,245 Bitcoins for $623 million between March 11 and March 18. This brings the company's total Bitcoin holdings to 214,246 coins, slightly over 1% of all Bitcoin mined so far.
A Sudden Reversal
MicroStrategy doubled its share price just last month, and this month it even hit a historic high of $1,815 per share. However, this good fortune did not last, with a sudden reversal occurring this week.
As Bitcoin plunged from its highs, MicroStrategy's U.S. stocks fell by 16% on Monday (18th March), more than ten times the day's decline in Bitcoin; on Tuesday, the company's share price fell again by 5.7%.
On the whole, MicroStrategy's shares fell by 20% in the first two days of this week, marking the stock's largest two-day drop since 2022.
Leverage Risk
The explosive volatility triggered by MicroStrategy's leveraged maneuver to buy Bitcoin can be seen in the stock price this week.
The company has been increasing its Bitcoin holdings since 2020, making its stock an attractive target for investors wanting to bet on Bitcoin without directly purchasing it. After selling convertible bonds twice this month to raise additional funds, the company now owns approximately $14 billion in Bitcoin, over 1% of the current total Bitcoin issuance.
In March, MicroStrategy raised $1.404 billion through two convertible bond issuances. According to the annual report last year, the company's total debt at the end of last year was $2.598 billion. These two debts alone have increased the company's debt by over 50%. Simplifying the estimate shows that the company's debt ratio has increased by 10 percentage points - in effect, the company has levered up to buy Bitcoin.
Mark Palmer, a Benchmark analyst, says, It creates financial alchemy that is really quite unique in the market.
Lance Vitanza, a Director of Equity Research at TD Cowen, says, We view MicroStrategy as an attractive vehicle for investors that are looking to create exposure to Bitcoin. That"s the only reason to buy MicroStrategy stock, because you want to own Bitcoin.
Another benefit to buying this company's stock is that, as a share, it does not charge a management fee like a crypto ETF does.
It's worth noting that based on MicroStrategy's current market valuation of around $24 billion, total indebtedness, and Wall Street's initial valuation of this firm's core business at about $1.5 billion, the company's market value is over 90% premium relative to the value of Bitcoin on its balance sheet.
In Vitanza's view, the stock's premium makes sense, especially for those who hold Bitcoin for long-term and anticipate Bitcoin to rebound. He even set a target price for the stock at $1560 per share, which is roughly 10% higher than the current level.
For investors, the question now is whether it's an opportunity to buy MicroStrategy at a dip, as this is essentially placing bets that Bitcoin will resume its climb.