MicroStrategy, once a discreet player in the software sector, is now in the global financial spotlight. Its bold strategy of betting on bitcoin has taken it to new heights, but the colossal risks involved beg the question: how long will this gamble hold up? We talk about it in Cryptic Analysis, after this week's essential news.
Block 1: Essential news
Trump Media X Bakkt?
Trump Media and Technology Group, majority-owned by President-elect Donald Trump, is in advanced talks to acquire cryptocurrency exchange Bakkt, even though in the first 9 months of 2024, the company recorded just 2.6 million in sales, posting a loss of $363 million. More broadly, the move signals Trump Media's deeper foray into the crypto sphere, building on its partnership with World Liberty Financial, where Trump and his family are set to receive 75% of token revenues.
Options and the bitcoin record
Options linked to BlackRock's Bitcoin IBIT ETF generated almost $2 billion in notional exposure on their first day of trading, a figure described as exceptional. With a call/put ratio of 4.4:1, they contributed to BTC 's record rise to over $94,000.
These SEC-approved options should, on paper, attract more institutional investors by offering new opportunities for hedging, speculation and passive income strategies.
Goldman Sachs: More and more BTC?
Goldman Sachs now holds at least $718 million in Bitcoin ETFs (BTC), according to an SEC filing, marking a significant increase since the $420 million reported in August. These investments are spread across several issuers, including BlackRock ($461 million), Fidelity ($95.5 million), and Invesco ($59.7 million). With a 45% rise in the BTC price since September 30, the current value of these holdings could exceed $1 billion, subject to stability in their positions.
FTX and Sam Bankman-Fried, the film
Apple will produce a film about Sam Bankman-Fried and the FTX affair, adapted from the book Going Infinite by Michael Lewis. Written by Lena Dunham, the feature will explore the rise of the FTX platform, its spectacular fall, and the aftermath that followed, including lawsuits and controversy over political donations. Bankman-Fried and Caroline Ellison, central figure and director of Alameda Research, will be at the heart of the plot. While Sam Bankman-Fried serves his sentence and demands a new trial, FTX's aggrieved users are still waiting for their money back.
Block 2: Cryptic Analysis of the week
The profile of MicroStrategy, whose career began in 1989 in Delaware, has changed considerably in recent years. Once a discreet software company, MicroStrategy is now at the heart of the world's financial attention. It has entered the top 100 companies listed on the US stock exchange, climbing to 97th place thanks to a spectacular rise in its share price. MicroStrategy can even boast of doing better than the stock market's rising star: Nvidia.
Between November 2023 and November 2024, Nvidia's share price rose by almost 200%, while MicroStrategy's rose by almost 750%.
On a longer time scale? Over the last five years, the two companies are neck and neck, recording a barely believable soaring of +2700%.
MicroStrategy VS Nvidia - 5 years
MarketScreener
How can a company with a third-quarter net loss of $340.17 million and declining sales post such a performance?
The company's progress is largely due to a single factor: its role as the largest holder of bitcoins among listed companies. Under the impetus of Michael Saylor, the company's Executive Chairman, MicroStrategy has adopted a strategy, which has so far paid off, of accumulating bitcoins via massive borrowings and making this digital asset the central pillar of its business model. But while this strategy has enabled the company to capitalize on bitcoin's historic rise, it also exposes it to major risks.
The company currently holds 331,200 bitcoins, acquired at an average price of $29,668. With one bitcoin currently trading at over $94,000, this reserve has a value of over $30 billion, a considerable amount that far exceeds the value of its traditional operating activities.
Yet MicroStrategy's market capitalization is close to $100 billion, well above the value of its bitcoins. This discrepancy can be explained by the leverage applied to its acquisitions and by investors' optimism that bitcoin will continue to appreciate in the future. In fact, MicroStrategy used significant leverage to finance its bitcoin purchases, notably via convertible bond issues. This effect amplifies the company's ability to acquire bitcoins far beyond its available liquidity, which has a direct impact on the market's perception of its value.
YBTCfinance
Since 2020, MicroStrategy has issued several zero-interest convertible bonds, maturing between 2027 and 2032. These financial instruments enable the company to raise significant funds without immediately diluting shareholders, while deferring repayment maturities. In 2024, the company raised $2.6 billion via a new convertible bond, bringing its total debt to around $6 billion. These funds are almost entirely reinvested in the purchase of bitcoins. Thanks to this leverage, MicroStrategy was able to accumulate 331,200 bitcoins, well beyond what it could have financed with operating revenues alone.
However, this strategy entails colossal risks. The most obvious is BTC's volatility. If the crypto-currency were to suffer a sharp fall, as has regularly been the case, MicroStrategy would see the value of its assets melt away rapidly, directly affecting its solvency. Such a situation could force the company to sell its bitcoins to repay its creditors, exacerbating the bearish pressure on the market. Furthermore, the massive use of debt exposes MicroStrategy to considerable financial obligations. Although convertible bonds are issued at 0% interest, they still represent a burden for the company. In the event of a market downturn, the pressure on its cash position could become unsustainable.
The company's valuation also raises questions. With a market capitalization well in excess of the value of its bitcoins, MicroStrategy relies on massive speculation on the part of investors, who anticipate a continued rise in bitcoin. Should this expectation fail to materialize, the stock could suffer a potentially fatal correction.
Finally, the leverage adopted by the company amplifies both gains and losses. One of the dynamics fuelling MicroStrategy's (MSTR) spectacular rise is the introduction and growing popularity of leveraged ETFs based on its stock. These financial products enable investors to amplify their gains or losses by betting on the performance of MicroStrategy's stock, which is itself closely linked to the evolution of bitcoin. These ETFs add a new dimension to MSTR's role as a bitcoin proxy, while increasing the share's volatility.
Among the main products marketed based on MSTR are :
- MSTX (Defiance ETFs): Offers 2x long exposure to the MicroStrategy share, meaning investors realize gains (or losses) equivalent to twice the daily variation in the share price.
- MSTU (T-Rex): Offers even more aggressive exposure with 4x long MSTR leverage, which multiplies potential returns but also increases risk.
- SMST (Defiance ETFs): Allows you to bet on a decline (short) in the MicroStrategy share with 2x leverage.
Assets under management (AUM) of these funds have exploded in recent weeks:
- MSTX (2x long): Nearly $600 million in AUM at the time of writing.
- MSTU (4x long): $1 billion, with 225% growth in just six weeks.
- SMST (2x short): Although less popular, this ETF manages around $5 million.
As you can imagine, these products are not without risk.
Since MSTR is perceived as a bitcoin proxy, the rise in BTC fuels demand for these ETFs, which indirectly pushes the stock even higher. ETFs such as MSTX and MSTU naturally attract speculative investors looking for quick gains, thus further increasing pressure on the market.
Leveraged ETFs, by their very nature, amplify movements. Strong downward pressure on MSTR, combined with forced selling, could result in a vicious circle, where falling share prices lead to further selling by ETFs, reinforcing the downward momentum. And unlike other listed companies, MicroStrategy cannot compensate for a fall in its share price via other solid business segments, as it is perceived almost exclusively as a Bitcoin proxy. In the scenario of a sharp and prolonged fall in bitcoin and therefore in MSTR, repayment of the bonds could be difficult and the company could be forced to sell its bitcoins at a loss, worsening the financial situation. For the time being, the company remains in the virtuous circle of bitcoin's rise, but for how long?
Block 3: Gainers & Losers
Cryptocurrency chart (Click to enlarge)
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