MicroStrategy’s meteoric stock rise, fueled by founder Michael Saylor’s Bitcoin strategy, seems like a corporate “infinite money glitch.” By tapping markets to buy Bitcoin, the company turned $4.3 billion in debt into a $24 billion crypto hoard. But with Bitcoin’s volatility and an eye-watering $42 billion borrowing plan, sustainability looms as a major risk. Will Saylor’s faith in Bitcoin sustain this high-stakes bet, or is a reckoning inevitable?
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By Lionel Laurent ___STEADY_PAYWALL___
“Overheated” is how short-sellers Citron Research described MicroStrategy Inc. on Thursday. That somehow understates the hype surrounding company founder Michael Saylor’s laser-eyed bet on Bitcoin using capital-market funding, which has fueled MicroStrategy’s stock-price rise of over 600% this year. It looks more like a corporate-finance version of an infinite money glitch in video-games — lucrative, addictive and likely unsustainable.
MicroStrategy’s core gameplay loop goes something like this: Tap debt and equity markets to raise cash, spend that cash on Bitcoin, watch its shares ride the Bitcoin price higher, go back to markets to raise more cash, rinse and repeat. This is the fun part of any glitch; the license to print huge sums of money that seem to have no bearing on reality. MicroStrategy’s average purchase price of Bitcoin is just under $40,000, according to Barclays estimates, and with Bitcoin trading at almost $100,000 its current hoard is worth approximately $24 billion. That is orders of magnitude higher than the $4.3 billion debt on the company’s balance sheet — debt being taken on with a 0% coupon via convertible bonds. The company is gearing up to borrow more.
What makes the glitch likely addictive for Saylor — aside from his unshakable faith in the “goddess of wisdom” and “fire of truth” that Bitcoin represents, of course — is the fact that it seems to be getting easier, not harder, as time goes on. MicroStrategy’s stock is valued at 2,000 times next year’s earnings and is attracting new buyers, including digital-asset ETFs, as Bitcoin’s price soars and analysts unanimously rate the shares a “Buy.” Remarkably, the company’s creditworthiness as rated by agency S&P has actually improved, rising to B- from CCC+. Considering this firm is plowing billions into illiquid assets with no cash flows, the CFA-holding TradFi world seems to have some laser eyes of its own.
Now, as MicroStrategy doubles down with a plan to raise $42 billion to buy more Bitcoin, the issue of sustainability is hovering into view.
One obvious risk is if the price of Bitcoin stops going to the moon and falls back to Earth; this is an asset that’s no stranger to 50%-plus drawdowns, even when new and dependable whale-sized buyers appear. A crypto crash could create a vicious cycle of write-downs and asset sales for MicroStrategy, even though its debt currently has low interest payments and no near-term maturities falling due. While a pro-crypto White House is certainly new territory, even that is unlikely to magic away price volatility.
Even without a crypto apocalypse, MicroStrategy’s model faces a reckoning. The stock is an increasingly expensive Bitcoin proxy in a crowded market of Bitcoin proxies — its market capitalization is almost four times the value of its Bitcoin stash — and might just be too frothy for its own good. (One toppish indicator: Living meme “Hawk Tuah Girl” this week took to social media to praise Saylor for his Bitcoin-buying advice.)
Hence why Citron is opting to bet on a fall in the price of MicroStrategy relative to Bitcoin, which is probably a wiser move than trying to gauge a shift in sentiment in the wider crypto world. Since Citron’s publication of its bet, MicroStrategy is down 16%; Bitcoin is up.
Saylor has raised a cult of his own on financial markets; the question now is how blind his followers are to the risks of what might happen next. With MicroStrategy tying itself to the mast of an eye-wateringly huge borrowing plan, and with so much that has to go right in crypto land, this infinite money glitch won’t last forever.
Read also:
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© 2024 Bloomberg L.P.
