A 20% plunge in two days! The leveraged risks behind "Bitcoin shadow stock" MicroStrategy are starting to emerge
MicroStrategy's stock price plummeted by 20% amid the violent fluctuations in Bitcoin, revealing the hidden leverage risks behind it. As the largest corporate holder of Bitcoin, the company's investors purchased its stock to increase exposure to Bitcoin. However, the sharp fluctuations in Bitcoin prices led to a significant drop in MicroStrategy's stock price. The company's decline over the past two days reached 20%, marking the largest two-day decline since 2022. Despite holding around $14 billion worth of Bitcoin, MicroStrategy's stock price carries a premium of over 90% relative to the value of its Bitcoin assets. Investors now face the question of whether they should buy MicroStrategy's stock on dips
According to the Zhitong Finance and Economics APP, investors in MicroStrategy (MSTR.US) have been buying shares of this largest holder of Bitcoin enterprises to increase their exposure to this digital asset. However, with the drastic fluctuations in Bitcoin, they have also felt the pain of doing so.
This week clearly demonstrates how the leverage deployed by the company to purchase Bitcoin has caused explosive volatility. MicroStrategy plummeted nearly 16% on Monday, more than 10 times the drop in Bitcoin. On Tuesday, as the digital token continued to fall from its historical highs, the stock plunged another 5.7%. This resulted in a 20% decline in the stock price this week, the largest two-day drop since 2022. After doubling in price just last month, the stock's trend suddenly reversed.
Since 2020, this business software company has been increasing its holdings of Bitcoin, making its stock an alternative choice for investors who want to bet on the largest cryptocurrency without directly purchasing it. After selling convertible bonds twice this month to raise additional funds to buy more Bitcoin, the company now holds Bitcoin worth about $14 billion, accounting for over 1% of the total Bitcoin to be issued.
Based on calculations, given MicroStrategy's market value of about $24 billion, its debt, and the value of the core business that many on Wall Street attribute to the company at around $1.5 billion, its stock price has a premium of over 90% relative to the value of Bitcoin on its balance sheet.
Benchmark analyst Mark Palmer said, "It has created a very unique financial alchemy in the market."
For investors, the question now is whether this is a buying opportunity for MicroStrategy. This is a bet on Bitcoin's recovery, and it has certain advantages compared to buying Bitcoin ETFs. Since January this year, Bitcoin ETFs have become another new option for investors.
Lance Vitanza, Managing Director of Stock Research at TD Cowen, said, "We believe that MicroStrategy is an attractive investment tool for investors looking to invest in Bitcoin. This is the only reason to buy MicroStrategy stock, because you want to own Bitcoin."
Considering that the company can sell bonds to fund Bitcoin purchases, another benefit, besides the attractiveness of the stock, is that as a stock, it does not charge management fees like ETFs. According to Vitanza, especially for investors who hold Bitcoin long-term and expect it to rebound, the premium on the stock makes sense due to these advantages over ETFs in relation to BitcoinHe set a target price of $1560 for the stock, which is about 10% higher than the current level.
He said, "If you consider this impact over 20 years or longer, and assume that the potential value of Bitcoin will appreciate rapidly, it greatly proves that the premium we have recently seen in the market is reasonable."