Doubts Cast on MicroStrategy’s Bitcoin Strategy

MicroStrategy’s strategy of purchasing bitcoin through debt financing is unsustainable in the long term, according to Bloomberg Opinion columnist Lionel Laurent.

Michael Saylor’s company has increased its market capitalization by approximately 50 times since August 2020, when it adopted the leading cryptocurrency as a reserve asset.

MicroStrategy primarily uses equity and debt capital to acquire digital gold. The expert simplified the firm’s actions: securing financing, purchasing cryptocurrency, seeing stock prices rise with bitcoin, and returning to the market to repeat the cycle. Investors view these investments as an indirect purchase of the digital asset.

Meanwhile, bitcoin has risen about 120% since the beginning of the year, while MicroStrategy’s stock has surged approximately 650%. The company is valued at 2000 times the size of its projected profit for the next year. Laurent compared the situation to a financial glitch in a video game: “profitable, exciting, and probably unsustainable.”

“That’s the fun part of any glitch — a license to print vast sums of money that seem to have no relation to reality,” he noted.

The expert acknowledged that MicroStrategy’s current bitcoin holdings, worth approximately $24 billion, far exceed the $4.3 billion debt on its balance sheet. However, plans to raise $42 billion over the next three years raise questions about the sustainability of the scheme given the risks.

One threat to MicroStrategy, according to Laurent, is the potential decline in cryptocurrency, which has historically experienced drops of 50% or more. Such a collapse would trigger a “vicious cycle of write-offs and asset sales by the company.”

“Even without a crypto apocalypse, MicroStrategy’s model will face bill payments. The stock is an increasingly expensive bitcoin proxy in a crowded market of similar products — the market capitalization is nearly four times the value of its BTC reserves,” the columnist emphasized.

In this context, he noted that Citron Research’s disclosed short position in MicroStrategy’s stock might be a wise move. Since its initiation, the firm’s stock has dropped by 16%, while the price of the leading cryptocurrency has risen.

“Saylor has created his own cult in financial markets. The question now is how blind his followers are to the risks expected ahead. For MicroStrategy, which has bet on an astonishingly large borrowing plan, […] this infinite money glitch won’t last forever,” Laurent concluded.

Earlier, BitMEX analysts deemed it “extremely unlikely” for MicroStrategy to liquidate its bitcoin reserves due to market conditions. According to their assessment, the asset would need to plummet to $15,000 for this to occur.