Original Title: "Will Muddy Waters Capital Short Microstrategy Again and Lose?"
Original Author: shaofaye123, Foresight News
On November 21, Muddy Waters Capital tweeted that it was shorting Microstrategy's stock, pitting a Wall Street legend against what is touted as the strongest US stock for 2024. Will Muddy Waters Capital lose again? This article will give you a behind-the-scenes look at these two legendary companies.
Muddy Waters Capital, a short-selling giant, has always been a mysterious presence in the capital markets, with its footprints across multiple cycles. In 2012, its short position on Qihoo 360 and Sohu damaged their reputations. In 2021, it was forced to cover its short position on GameStop. In 2022, it even shorted Ethereum, which had a market cap of $130 billion.
After Muddy Waters Capital announced its short position on Microstrategy yesterday, Microstrategy's stock price plummeted, at one point falling 30% from the day's high.
Muddy Waters Capital's Short-Selling History
Muddy Waters Capital, a highly influential short-selling firm in the US, was founded in 2001. Within 6 years, it had targeted 20 Chinese concept stocks, causing 15 of them to plummet more than 80% and 7 to delist. At that time, Muddy Waters Capital was riding high and began shorting Evergrande. In its report, it wrote, "Evergrande's demise is inevitable; the only uncertainty is the timing." Eventually, Evergrande collapsed, confirming Muddy Waters' prediction.
Muddy Waters was then at the peak of its influence. In 2021, GameStop came into the sights of various institutions for shorting. As the world's largest gaming retail chain, GameStop's offline business seemed to have been abandoned by the market, with major companies taking away its market share. The short-sellers appeared poised for another big win. But the "Roaring Kitty" phenomenon sparked an epic short squeeze on Wall Street. The identity behind "Roaring Kitty" was Keith Gill, but this was unknown at the time. Fueled by "Roaring Kitty" and the WallStreetBets community, retail investors drove the stock price from $19.95 to over $39.91, more than doubling. Muddy Waters, seeing the stock as severely overvalued, couldn't sit still. On January 19, it officially released a short report on GME and berated the retail investors who had bought at high prices as fools. The retail investors fought back, and with Elon Musk tweeting "Gamestonk!", the stock price briefly soared to $483. In this battle, Muddy Waters lost 100%, closing out its position at $90, while another fund, Melvin Capital, lost a staggering $6.8 billion.
After this incident, Muddy Waters announced that it would abandon its 20-year short research and no longer publish short reports, and would instead focus on providing long trading opportunities for individual investors, seemingly marking the end of the short-selling firm era. Major capitals were all defeated, and the retail investors' victory over Wall Street seemed complete, but Robinhood's decision to pull the plug caused the stock price to plummet. In the end, it was still a victory for the few.
Thereafter, Muddy Waters did not stop shorting as it had claimed. In 2022, it shorted Ethereum, which had a market cap of $130 billion, and Ethereum's market cap has since tripled.
Microstrategy, the Strongest US Stock for 2024
Microstrategy, a company more legendary than Muddy Waters Capital, is a top-level conspiracy.
Microstrategy was founded in 1989 by Michael Saylor, Sanju Bansal, and Thomas Spahr. Initially, Microstrategy was just a consulting firm focused on multidimensional modeling and simulation. In his younger days, Saylor was not optimistic about Bitcoin, even mocking virtual currencies in 2013. But starting in 2020, Microstrategy began exploring alternative assets beyond cash, using its financial assets to purchase over 121,000 BTC, gradually becoming the world's largest publicly traded company holder of Bitcoin. Microstrategy has systematically invested heavily in Bitcoin, including taking on debt to increase its Bitcoin holdings. In just two years, it has already booked over $15 billion in paper profits, with trading volume exceeding that of Nvidia on its best day.
So what is Microstrategy's strategy? How does it leverage such huge profits?
Simply put, Microstrategy is now a company that specializes in buying BTC. By purchasing Bitcoin, it drives up the price of Bitcoin, which in turn boosts its own stock price. It then borrows again to buy more Bitcoin, causing the Bitcoin price to soar further, pushing its stock price up even higher. This flywheel effect inevitably evokes memories of the Luna collapse, which still haunts many. Furthermore, Microstrategy is currently trading at a 300% premium to Bitcoin, meaning its investors are effectively paying $250,000 per Bitcoin, when the market price is less than $100,000.
Short or Long, Who Will Win?
Seizing this opportunity, Muddy Waters Capital has stepped in again, tweeting on November 21:
"Nearly 4 years ago, Muddy Waters was the first to tell readers that MicroStrategy (MSTR) was the ultimate Bitcoin play, setting a $700 target.
Fast forward to today: MSTR has rocketed to over $5,000 (adjusted). Hats off to Michael Saylor's visionary Bitcoin strategy.
Now, with Bitcoin investment easier than ever, MSTR's trading has completely detached from Bitcoin fundamentals. While Muddy Waters remains bullish on Bitcoin, we have hedged our position by shorting MSTR.
We have great respect for Saylor, but even he must know MSTR is overheated."
In fact, Muddy Waters is not the first to suggest shorting MSTR to hedge a long Bitcoin position. In March this year, another well-known institution, Kerrisdale Capital Management, proposed a similar strategy - going long on Bitcoin but shorting MSTR's stock.
The short-sellers are back in action, and Microstrategy's stock price has plunged. Is this another Hunter family saga or will the uptrend continue? Foresight or another misstep?
Looking at the data, the trading volume of MSTZ (a 2x inverse MSTR ETF) surged on November 21, approaching $1.53 billion, compared to a previous daily average of $84 million. From a fundamental perspective, Microstrategy is now trading at a 300% premium to Bitcoin, and with the upcoming ETF, buying BTC will become more convenient. In the long run, MSTR may lose its "unique premium".
However, there are still many supporters (source: @0x_Todd) who are bullish on MSTR:
- Microstrategy is not Luna, it has a much thicker safety cushion. Recent statistics show Microstrategy's average Bitcoin cost is $49,874, which is close to 100% unrealized gains - an extremely thick safety cushion.
- Microstrategy uses bonds and stock sales to increase its Bitcoin holdings. Microstrategy's leverage is over-the-counter, without any margin calls. The angriest creditors can only convert their bonds to MSTR shares at the designated time, and then angrily dump them on the market.
- The next debt repayment deadline is not until February 2027, over 2 years away. Even if MSTR is crushed to zero, it still doesn't need to be forced to sell those Bitcoins, because the earliest debt it owes won't mature until February 2027.
- The only soft threat currently is the Bitcoin whales, but the whales would prefer a win-win outcome.
