Short-selling investment company Kerrisdale Capital released a report today saying that the company went long on Bitcoin but went short $MicroStrategy (MSTR.US)$, the latter is a proxy for Bitcoin. MicroStrategy once fell more than 5%, and as of press time, the stock was down nearly 3%.
Kerrisdale Capital claims that MicroStrategy's current transaction price has an unreasonable premium compared to Bitcoin, which is driving its value growth. Recently, as the price of Bitcoin has risen, MicroStrategy's stock price has also soared. But as is often the case in the cryptocurrency sector, things have gotten out of hand.
Currently, the implicit price of Bitcoin in MicroStrategy shares has exceeded $177,000, or 2.5 times the spot price of Bitcoin. Previously, MicroStrategy shares were a rare and unique way to earn bitcoins, but those days are gone. Bitcoin is now easy to obtain through brokerage firms, cryptocurrency exchanges, and recent low-fee ETPs and ETFs.
Of the commonly mentioned reasons why MicroStrategy is appealing, none of them prove it: paying much more than twice the price for the same currency is reasonable. MicroStrategy's trading history and basic common sense suggest that currently exaggerated premiums will shrink.
MicroStrategy touts itself as a Bitcoin development company. Its stable but sluggish software analysis business accounts for only 3% of the company's total enterprise value. MicroStrategy's value is driven by its Bitcoin holdings, which are mainly obtained through debt financing, equity-linked convertible notes, and ATM equity issuance. Bullish sources believe that MicroStrategy's management's “wise” use of leverage and increased Bitcoin purchases from stock sales are reasons why its share price should have a large premium.
But in fact, this logic is flawed. The use of leverage goes both ways. Although MicroStrategy has successfully increased Bitcoin holdings, the effects of large-scale dilution have also kept the amount of bitcoins represented by each share almost unchanged. Shareholder value creation is largely driven by simple Bitcoin price appreciation.
Other reasons cited for the large premium, such as the ability to reinvest the cash flow from the software business into Bitcoin, the lack of management fees, liquidity, and ease of transactions, are not very persuasive. For example, the liquidity and transaction convenience provided by IBIT, FBTC, and a range of other instruments will only continue to increase globally. While these developments bode well for Bitcoin, they are a long-term threat to MicroStrategy's value and bloated net worth.
Currently, MicroStrategy's stock premium is 2.6 times, which is very high. Since the beginning of 2021, 94% of trading day premiums have been 2.0 times or less, and the historical average is 1.3 times.
editor/tolk