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Market Analysis
Is MicroStrategy’s Bitcoin Strategy a Double-Edged Sword? This Hedge Fund Thinks So
A hedge fund claims MicroStrategy's premium cannot be sustained and that 'leverage cuts both ways.'
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Kerrisdale Capital has recommended a unique investment strategy involving Bitcoin and MicroStrategy (NASDAQ: MSTR) shares. The investment firm suggests going long on Bitcoin while shorting MicroStrategy shares, anticipating that the premium at which MicroStrategy often trades due to its Bitcoin holdings might contract, as it has in the past.
Hedge Fund Claims MicroStrategy’s Premium Cannot Be Sustained and ‘Leverage Cuts Both Ways’
MicroStrategy is often considered a proxy for Bitcoin due to its strategic decision to hold the cryptocurrency as a store of value and use debt to purchase more Bitcoin.
Kerrisdale argues that the premium at which MicroStrategy’s stock trades is excessively high, especially given the increasing accessibility of Bitcoin to investors through brokerages, exchanges, and new spot exchange-traded funds.
These developments have diminished MicroStrategy’s unique position as a way for investors to gain exposure to Bitcoin. While MicroStrategy’s stock has surged over 200% alongside Bitcoin’s record rally, Kerrisdale notes that the premium to Bitcoin can both benefit and harm shareholders.
The report also highlights the downside of MicroStrategy’s leverage strategy. Despite the company increasing its Bitcoin holdings, the massive dilution has kept the amount of Bitcoin per share virtually unchanged. Shareholder value has mainly been driven by Bitcoin’s price appreciation rather than any unique value added by MicroStrategy.
Betting against MicroStrategy has been unprofitable for short sellers, who have faced significant paper losses this year. However, Kerrisdale’s pair trade strategy suggests that there may be an opportunity to profit from the potential contraction of MicroStrategy’s premium while still benefiting from the appreciation of Bitcoin itself.
MicroStrategy’s Bitcoin Buys Summarized
MicroStrategy has amassed a significant portfolio of Bitcoin, totaling 214,245 Bitcoins at a current price of $71,413.03 per Bitcoin. The portfolio’s total value is an impressive $15.34 billion, representing an all-time profit of approximately $7.76 billion, or a 102.4% increase from the initial investment. The company’s average purchase price, or dollar-cost average, is $35,372.59 per Bitcoin.
MicroStrategy’s purchases have been made at various price points, ranging from as low as $10,419.15 to as high as $68,477.00 per Bitcoin, with a total reported cost of $7.578 billion.
The portfolio has experienced varying degrees of profit across different transactions, with percentages ranging from 20.4% to over 500% for specific buys.
MicroStrategy Stock Brief
MicroStrategy shares were trading at $1,889.00, down $30.16 (-1.57%), as of 10:40 AM EDT on Thursday. The company has a market capitalization of $32.053 billion.
The stock opened at $1,942.00 and has fluctuated between $1,822.23 and $1,989.00 throughout the day, compared to the previous close of $1,919.16. Over the past 52 weeks, the stock has traded between $266.00 and $1,999.99.
The trading volume for the day stood at 1,121,956 shares, lower than the average volume of 2,254,900 shares. The stock has a beta of 2.83 (5-year monthly) and a PE ratio (TTM) of 71.34, with earnings per share (TTM) of $26.48.
The company is expected to report its next earnings between April 29, 2024, and May 3, 2024. MicroStrategy does not currently offer a forward dividend. Analysts have set a one-year target estimate for the stock at $1,144.25.
Do you think MicroStrategy’s premium will make sense in the future as Bitcoin continues to gain mainstream adoption? Let us know in the comments below.
Disclaimer: The author does not hold or have a position in any securities discussed in the article.
Tim Fries
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.
