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During his first term, former President Trump was openly skeptical of cryptocurrency but went “all-in” on crypto during this campaign. He dubbed himself the “Crypto President,” and his sons launched World Liberty Financial, a cryptocurrency exchange “inspired by Donald J. Trump” that sells its own $WLFI digital token for $0.015/token.
In the few short weeks since the election, Bitcoin has surged from under $70,000 to over $100,000, a gain of almost 50% (up 140% for 2024). That’s impressive but pales in comparison with the “to the moon” performance of MicroStrategy Inc. (Nasdaq-MSTR), which soared from $227.80 on Election Day to $473.83, up 108% in 11 trading days and a stunning 650% for 2024.
Created by the mythical Satoshi Nakamoto in 2008 in the wake of the global financial crisis, Bitcoin garnered momentum from a worldwide community distrustful of governments and traditional financial institutions (“centralized finance”) and intent on establishing a global currency unencumbered by governmental oversight or manipulation (“decentralized finance” or “DeFi”). By design, Bitcoin supply is forever limited to 21 million Bitcoins, 19.8 million of which have been created.
Bitcoin traded around $7,000 at the beginning of 2020, peaked at $67,800 in November 2021 and plunged to $15,600 a year later (down 77%) in the “crypto winter” following the implosion of crypto wunderkind (and convicted felon) Sam Bankman-Fried’s FTX, admitted felon Alex Mashinsky’s Celsius Network and others that obliterated billions in value from the global digital-asset market and wiped out thousands of investors’ savings.
In hindsight, Super Bowl LVI (the “Crypto Bowl”) in February 2022 marked the apex, as commercials featuring investment gurus LeBron James, Larry David and Matt Damon stoked FOMO (fear of missing out).
We don’t know where Bitcoin falls on the investment/speculation spectrum. We’re not experts in Bitcoin, cryptocurrencies or DeFi. Bloomberg’s Matt Levine is an expert and wrote the definitive primer on crypto, “The Crypto Story—Where it came from, what it all means, and why it still matters.” We do know there are many ways to invest/speculate in Bitcoin, including an illogical one.
Enter MicroStrategy and its CEO-turned-Bitcoin-evangelist, Michael Saylor. MicroStrategy has an enterprise software business, but early in the pandemic, Saylor decided to transform the company into a Bitcoin-buying machine.
Saylor’s unorthodox idea has succeeded to the point that it has created its own “Twilight Zone,” where traditional finance rules (and common sense) are in a perpetual state of suspended animation. Indeed, Saylor’s message that MicroStrategy’s owning an increasing percentage of Bitcoin’s forever limit of 21 million Bitcoins will lead to riches beyond imagination has created a cult following among the YOLO (you only live once) crowd.
MicroStrategy owns 402.100 Bitcoins (about 2% of Bitcoins outstanding—worth more than $40 billion) and is the world’s largest corporate Bitcoin holder. MicroStrategy announced a plan in October to issue $21 billion of stock and $21 billion of bonds through 2027 to finance the purchase of more Bitcoin. The company has since issued $10.5 billion of stock and a $3 billion convertible bond (pays 0% interest and converts into stock at a whopping 55% premium).
This massive amount of equity and debt issuance has enabled MicroStrategy to increase its Bitcoin holdings 60% since Sept. 30. The company’s purchases of billions of dollars of Bitcoin have caused the price of Bitcoin to surge. With supply forever capped at 21 million Bitcoins and MicroStrategy vacuuming them up (decreasing the number of Bitcoins in circulation), the value of MicroStrategy’s Bitcoin holdings has skyrocketed along with the stock price.
MicroStrategy issues equity and/or debt, uses the proceeds to purchase Bitcoin, which causes the price of Bitcoin to rise, which makes the company’s holdings more valuable, which causes MicroStrategy’s stock price to rise, which enables MicroStrategy to sell more equity and/or debt. It appears the company has discovered an “infinite money glitch.”
The rub is, MSTR’s market value is $102 billion, while its Bitcoin holding is worth only $40 billion. Yes, the legacy software business has value, but shareholders are paying more than twice what the Bitcoin stash is worth. When Saylor transformed MicroStrategy into a Bitcoin proxy in 2020, there were no others. There are now many.
Putting it all together, MicroStrategy is a leveraged (uses borrowed money) play on a highly volatile asset (Bitcoin), trading at an illogical premium. How long can MicroStrategy’s “money glitch” continue? MSTR was just added to the Nasdaq-100 Index, so index funds will be forced to buy the stock. That said, we’ve seen this movie before, and it often ends with tears and congressional hearings.
As investment guru Mark Twain said, “Faith is believing what you know ain’t so.”•
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Kim and Lee are chief operating/compliance officer and director of research, respectively, for Columbus-based investment adviser Kirr Marbach & Co. They can be reached at 812-376-9444 or mickey@kirrmar.com and roger@kirrmar.com.
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