MicroStrategy Incorporated ($MSTR) is a publicly traded company in the US, primarily engaged in enterprise analytics software. In recent years, it has started to hold BTC on a large scale, attracting market attention.
MSTR's main investment strategy is to purchase BTC by issuing debt, which has a financial leverage effect: the cost of debt is fixed, while the value of the asset (BTC) grows at a higher rate, directly increasing the net profit and stock value.
This is why MSTR's stock price has risen more than BTC itself during this period, and MSTR is referred to as a "leveraged BTC ETF".
Historical data shows a clear synchronous fluctuation relationship between MSTR's stock price and BTC price.
- 2020-2021 BTC bull market: MSTR's stock price rose from around $100 to over $1,000, significantly influenced by the surge in BTC price.
- 2022-2023 BTC bear market: MSTR's stock price has also fallen sharply from its high, reaching a low of $139.
Currently, MSTR's average purchase cost of BTC is around $40,000, while the BTC price is basically stable above $60,000. With the arrival of the crypto bull market, MSTR's returns are expected to have a very large upside potential.
However, is MSTR's strategy of borrowing money to buy BTC really that good?
While there are praises when the stock price rises, we can rationally analyze the following issues.
01 MSTR's strategy of investing in BTC seems to be very effective, with the stock price repeatedly rising. What are MSTR's weaknesses?
Any decision cannot have only good sides, but must also have bad sides.
The main points are:
(1) Excessive reliance on BTC: MSTR's stock performance is closely related to BTC price, making its stock price highly volatile.
(2) Business singularity: Although it has a software business, the company's main attention and market value growth are from BTC investment, and the development of its core software business has been neglected.
(3) Net losses: According to recent financial reports, MSTR has shown net losses and high operating expenses.
02 MSTR's strategy is simple, just investing in BTC. Why does MSTR have net losses and high operating expenses?
There are two main reasons:
(1) BTC price fluctuations: BTC prices are highly volatile. Even if MSTR's strategy is to hold and buy BTC, its book value will decrease with the decline in BTC price, resulting in net losses on the financial statements.
(2) Financial strategy and debt: MicroStrategy has issued debt to purchase BTC, which has increased the company's interest expenses. The high interest-bearing liabilities mean that even if the BTC price remains unchanged or slightly rises, the increase in interest expenses can still lead to net losses.
03 If other companies also follow MSTR's strategy of investing in BTC, what advantages does MSTR still have?
MSTR's strategy has no threshold, but it cannot be denied that MSTR's unique advantage lies in its first-mover advantage and operational experience in the market. New entrants need to consider their own business attributes, risk management capabilities, regulatory environment, and shareholder expectations.
MSTR's moat:
(1) First-mover advantage: MSTR is one of the first publicly traded companies to make BTC its main financial strategy. This has brought them early attention and a lower average holding cost.
(2) Brand recognition: Due to MSTR's active promotion, BTC investment has become part of its brand. When people mention MSTR, they immediately associate it with BTC.
(3) Experience and strategy: MSTR's leadership, especially Michael Saylor, has in-depth research and understanding of BTC. They have established processes and strategies for managing large-scale BTC investments.
(4) Financial structure: MSTR has optimized its capital structure to support investments in this highly volatile asset, including financing the purchase of BTC through bond issuance, which requires certain financial engineering capabilities.
(5) Market positioning: MSTR has become a proxy investment vehicle for BTC in the minds of investors, making it a ready-made choice for those who want to indirectly invest in BTC.
04 BTC spot ETFs have been listed, and investors can now directly and compliantly hold BTC. Will MSTR's appeal decrease?
First, let's talk about the most direct impact of BTC ETFs on MSTR:
(1) Increased competition: BTC ETFs provide an alternative direct investment in BTC, allowing some investors who previously invested in BTC indirectly through MSTR to switch to ETFs, as ETFs are a more direct and lower-cost investment tool. This may reduce investor demand for MSTR stock, putting downward pressure on its stock price.
(2) Change in market positioning: MSTR has been viewed by many investors as a proxy investment tool for BTC due to its large BTC holdings. With the launch of BTC ETFs, MSTR's unique market positioning may be weakened, as investors have a more direct way to invest in BTC.
(3) Liquidity and convenience: ETFs generally have high liquidity and can be traded at any time during the trading day, while holding MSTR stock requires considering the impact of the company's other businesses and the stock market's liquidity. Better convenience and liquidity may attract some investors to switch from MSTR to BTC ETFs.
(4) Risk diversification: Although MSTR holds a large amount of BTC, it is still an operating company, and its stock price is influenced not only by BTC price but also by its software business, management decisions, and other factors. ETFs can be viewed as a more pure BTC price tracking tool.
MSTR's appeal will decrease, but not too much, because it has the following advantages and differentiating factors:
(1) First-mover advantage and brand recognition: Although BTC ETFs have been listed, MSTR's first-mover advantage and Michael Saylor's reputation in the BTC community may still maintain a certain appeal, especially for investors who are optimistic about MSTR's long-term strategy.
(2) Leverage effect: MSTR's strategy of borrowing to purchase BTC effectively provides investors with a leveraged BTC investment. If BTC prices rise, this leverage effect can amplify the returns on MSTR's stock, which ETFs may not be able to directly provide.
(3) Tax and management fees: For some investors, directly holding BTC or through ETFs may involve different tax considerations and management fees, while MSTR provides a different financial structure that may still be attractive to certain investors.
In summary, the launch of BTC ETFs may indeed have a certain impact on MSTR's appeal, as investors have more choices. However, MSTR's unique positioning, its deep integration with BTC, and the company's own business strategies may continue to attract another group of investors, especially those who value its strategy and are long-term BTC holders.
Therefore, although competition has intensified, MSTR's appeal may not necessarily decline across the board. It will maintain its value among specific groups of investors.
05 If one day MSTR starts to sell its BTC, will it further depress BTC prices, leading to a spiral downward collapse?
MSTR's strategy of borrowing money to buy BTC will bring significant stock price increases in a bull market, but it will also face considerable risks in a bear market.
Because MSTR has purchased BTC through debt financing, increasing financial leverage, this may lead to financial pressure when BTC prices fall, and may result in having to sell BTC to repay debt.
However, MSTR's large-scale holdings and the support of its CEO Michael Saylor have long been seen as a shot in the arm for the BTC market.
If MSTR starts to sell, it may be interpreted by the market as a loss of confidence in the future value of BTC, causing other investors to also start selling, forming a negative market sentiment.
This negative market sentiment may trigger stop-loss selling by other holders or force loans collateralized by BTC into margin calls, further increasing selling pressure, forming a downward spiral, and even ultimately leading to a systemic stampede collapse.
Of course, whether this will really lead to a downward spiral also needs to consider a few other factors, such as as the BTC market matures and more institutions participate, the market's absorption capacity will increase, and the price sensitivity of BTC to single events may decrease.
And if MSTR sells, it may adopt a strategy (such as selling in batches or selling when there is sufficient buying demand in the market) to minimize the impact on the market.
The current BTC market is much more mature and diverse than the last bull market, so there is no need to be overly concerned.
It's just that everyone needs to be aware of this risk, and know that MSTR is one of the top five holders of BTC, and if they sell BTC, it could be the start of a bear market or an accelerator of a bear market decline.
Next, let's first welcome the arrival of the main bull market wave, and enjoy the frenzy of the bull market, and then worry about the problems of the bear market.
