Due to the reduced Bitcoin purchases by MicroStrategy, its stock price has fallen 45% from its November high.
Author: André Beganski
Source:Decrypt
Compiled by: Ada, MetaEra
One of the hottest Bitcoin trades of 2024 is in a slump as the new year begins.
As of Thursday, MicroStrategy's stock price has fallen 45% from its November high, dropping from a six-week peak of $543 to $300.
The Virginia-based software company aggressively invested in Bitcoin last year, purchasing billions of dollars worth of the cryptocurrency through stock and bond issuances. On Monday, MicroStrategy made another move, buying an additional $200 million worth of Bitcoin, bringing its total holdings to 446,400 Bits, worth around $43 billion.
Since reaching its peak, MicroStrategy has made five Bitcoin purchases, but the amount has decreased each time. For example, after buying $5.4 billion worth of Bitcoin on November 25, Monday's purchase was the smallest since August. Clearly, this scale of purchases is not enough to stem the downward trend in its stock price.
MicroStrategy has established itself as the world's largest corporate Bit holder - since 2020, the company has adopted Bit as an innovative way to support its balance sheet. But the company's recent high-risk bet on Bit has also drawn attention on Wall Street.
By issuing $7.3 billion in convertible bonds (a form of debt that can be converted into equity), the company was able to purchase more Bit than ever before. At the same time, the company's valuation has exceeded the $43 billion value of its Bit holdings, with a current market cap of $73 billion.
According to data from MSTR Tracker, investors are paying a premium to buy MicroStrategy stock to gain Bit exposure, with the stock currently trading at 1.6 times the value of its Bit holdings. While investors can get pure Bit exposure through spot ETFs or by buying Bit directly, this premium reached as high as 3.4 times in November.
Over the past year, MicroStrategy's stock price has risen 334%, outpacing Bit's 116% gain. This has led Bernstein analysts to believe that MicroStrategy is "building a case for its premium," while proving the company's ability to increase its Bit holdings per share.
However, 10X Research wrote in a report on Thursday that with MicroStrategy's implied stock price of $200,000 per Bit, it seems "stock investors are no longer willing to support MicroStrategy at a higher stock price relative to its Bit holdings."
"This shift highlights the growing rationality of investors, who previously bought into the unofficial narrative of MicroStrategy as a 'leveraged Bit investment company,'" 10X Research added.
Leveraged investment products do exist, allowing traders to gain greater exposure to an asset or benchmark market. But with MicroStrategy's valuation soaring last year, some believe the company's value relative to its Bit holdings is unsustainable.
In November, the influential investment firm Citron Research disclosed a short position on MicroStrategy, while maintaining a long position on Bit. Citron had previously supported MicroStrategy but said the company has "completely detached" from Bit's fundamentals.
Despite the ongoing questions about MicroStrategy's premium, the company was added to the Nasdaq 100 index last month, finding a new home in this index tracking the top tech companies. Analysts say this could lead to billions of dollars flowing into MicroStrategy's stock.
After MicroStrategy's inclusion in the index, it was praised by Bit enthusiasts, and a few days later, Bit's price soared to $108,000. Since then, Bit's price has fallen 10%, with a more significant decline in MicroStrategy's stock price.
