MicroStrategy (NASDAQ:MSTR) has become one of the most valuable stocks on the market Nasdaq by following a simple strategy: buy Bitcoin (CRYPTO: BTC).
Stocks have soared alongside Bitcoin’s gains this year, which have been driven by the broader bull market, the launch of Bitcoin exchange-traded funds (ETFs) and optimism that a new Trump administration will adopt crypto-friendly policies. As you can see in the chart below, both MicroStrategy and the cryptocurrency have soared this year.
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MicroStrategy is unique in the stock market because it essentially acts as a leveraged Bitcoin ETF. Chief Executive Officer Michael Saylor, one of the biggest evangelists for the digital currency, started buying it for his company in 2020 and had 252,220 bitcoins in his possession at the end of the third quarter.
However, a well-known short seller is now saying that MicroStrategy is overvalued and its model is unsustainable. Citron Research’s Andrew Left posted his thesis on
Citron said MicroStrategy’s value is completely separate from the crypto’s performance. Citron noted that it was still bullish on Bitcoin, but hedged that bet with a short position in MicroStrategy.
The company’s shares fell 16% last Thursday when Citron released its short report.
The left is right that MicroStrategy’s fundamentals have become disconnected from Bitcoin’s value. It does have a small software business, but that is basically negligible in terms of its valuation: its market capitalization was $94.8 billion as of November 22. It now identifies itself as a Bitcoin Treasury company.
But its Bitcoin holdings don’t justify that valuation either, because based on its market cap and those holdings, the company is valued at $375,864 per token, which is almost four times the price of the cryptocurrency – $98,807 – at that time. of writing. Bitcoin’s balance sheet value now stands at $22.4 billion.
Currently, MicroStrategy is making a profit of $49,441 per Bitcoin, with an average purchase price of $39,266. In total, it has made $12.5 billion from its Bitcoin purchases.
The company also has $4.2 billion in long-term debt as it continues to borrow money and sell shares to buy the crypto.
Image source: Getty Images.
MicroStrategy trades like a leveraged Bitcoin ETF, as the company continually increases exposure to the crypto, essentially making it an outsized bet on Bitcoin’s rise. If you hold Bitcoin directly or through an ETF, you can’t do that because the exposure is stable.
The valuation of the bitcoins MicroStrategy holds can be seen as a price target for the digital currency, as it would have to reach that level for the company’s share price to make sense.
And Saylor borrows money and dilutes the stock to buy Bitcoin, which comes with risk. If Bitcoin’s price collapses, MicroStrategy could become insolvent, although that would require the crypto to fall sharply from its current price.
If Bitcoin crashes, investors could also lose confidence in MicroStrategy and abandon the stock.
Left makes a good point about MicroStrategy, but that alone won’t bring the stock down. In order for Bitcoin to fall significantly, it will also have to fall, and predicting the cryptocurrency’s movements is essentially impossible.
Bitcoin has been on the rise lately thanks to the Trump administration’s plans to embrace it, but it’s also possible that the election and subsequent inauguration will be a buy-on-the-rumor/sell-on-the-news moment could be, which would lead to a drop in the price. digital token.
Bitcoin is a high-risk asset that is traded mainly on vibrations and has no fundamentals. In many ways, this makes the cryptocurrency the ideal asset to create a bubble as it can theoretically be inflated forever. There is no real basis for claiming it is overvalued or undervalued.
Whether selling MicroStrategy stock is the right decision will depend on what happens with Bitcoin. If you are bullish on Bitcoin, it would be wise to use a MicroStrategy as it will likely outperform Bitcoin if the price of the cryptocurrency continues to rise.
However, if Bitcoin starts heading south, MicroStrategy investors should be prepared for the stock to crash.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Bitcoin and Coinbase Global. The Motley Fool has a disclosure policy.
Short-seller Andrew Left criticizes MicroStrategy. Are Michael Saylor’s Bitcoin Stocks in Trouble? was originally published by The Motley Fool
