Microstrategy (NASDAQ:MSTR) continues its incredible run as the company sells more debt and stock to buy more Bitcoin (CRYPTO: BTC). Shares rose as much as 16% in trading on Wednesday and are up 12.5% by the close of trading on Wall Street.
On Monday, the company announced that it had acquired 51,780 Bitcoins for approximately $4.6 billion at an average price of $88,627.
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On Wednesday, the company announced the pricing of $2.6 billion of 0% convertible senior notes due 2029. The notes could be converted into cash or stock at a conversion price of $672.40, subject to “the occurrence of certain events.” “
Microstrategy uses its high stock price to sell shares and acquire Bitcoin at what the company considers a discount. As Microstrategy becomes a pure Bitcoin play, if the company’s enterprise value exceeds the value of Bitcoin on its balance sheet, it will issue shares to buy Bitcoin. That’s the stage they’re in now, and it’s a feedback loop, creating demand for Bitcoin, which increases the value of the balance sheet.
This is an arbitrage strategy that will work until it doesn’t. Microstrategy has shown that there is a buying price for Bitcoin, but watch for a selling price if the enterprise value falls below the Bitcoin value on the balance sheet.
While the current strategy is working, it is not guaranteed to work forever. Bitcoin is extremely volatile and it is possible that the price will drop quickly if Microstrategy shares fall. That could create a situation where the stocks are underwater due to the value of Bitcoin they hold, and the largest buyer of Bitcoin (Microstrategy) will stop buying.
And with leverage being used in large numbers, the downside risk is as great as the long-term upside potential for Microstrategy.
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