MicroStrategy (MSTR): Trading Bitcoin Now?

Update on MicroStrategy Bitcoin Portfolio:

MicroStrategy (NASDAQ:MSTR) closed at $147.74 per share, its low for the year, yesterday (December 27). The shares have generally been trading in sympathy with Bitcoin (BTC-USD), which is not particularly surprising given the 130,000 Bitcoin the company holds are by far the biggest determinant of its value. With Bitcoin at ~$16,700, this leveraged investment by MicroStrategy in Bitcoin at an average cost of ~$31,000, as I have noted in previous articles, is massively underwater to the tune of over 45%.

What is (somewhat) surprising is the company’s announcement today (December 28) that it had added to this multibillion-dollar loss by purchasing a net 2,500 more Bitcoin at a net price of about $45 million (or ~$18,000 per unit). I say only “somewhat” surprising since I have argued that I believe MSTR Chairman using $2.4 billion of debt to buy a highly volatile asset (if one can call Bitcoin a true asset) is completely reckless and that the board of directors may be asleep or clueless in having enabled such a reckless bet to be made. If Bitcoin does not recover from these levels, the company’s equity is severely impaired. When dealing with such irresponsible risk-taking on such a large scale, I suppose one shouldn’t be surprised by continued foolishness.

However, I was fairly shocked by the nature of the purchases. The company bought and sold Bitcoin within a fairly tight window that is more indicative of a day trader’s actions than a strategic investment. It announced today that it had:

• Acquired 2,395 coins between November 1 and December 21 at an average price of $17,871 for $42.8 million total.
• Sold 704 coins on December 22 for $16,776 at an average of $16,776 for $11.8 million total.
• Bought 810 coins on December 24 for $16,845 for $13.6 million.

If anyone can provide a logical rational for essentially flipping Bitcoin like this, I’m all ears. Such trading does cut against the idea that this holding is entirely a long-term bet.

The net purchases worked out to 2,500 bitcoin that cost approximately $45 million. These trades were conducted by Macrostrategy LLC, the company’s subsidiary that previously owned 30,051 coins using margin loans that can only be 50% loan to value. However, it appears the company used equity for the purchases rather than adding to the margin loan.

Funding Bitcoin Purchases Through Share Sales:

The company also announced that between October 1, 2022 and December 27, 2022, it issued 218,575 shares at an average price of $213.16, raising about $46.4 million. This sale is part of a previously disclosed shelf that allows the company to issue $500 million of equity.

Given that the stock closed below $150 on December 27th, those purchases look fairly decent. However, the equity raise suggests two things, neither of them good for shareholders.

• The company will use spikes in the stock to raise equity.
• Raised equity will be used to buy more Bitcoin rather than deleveraging.

Basically, it appears the company is happy to dilute shareholders to add to a potentially catastrophic bet. Another potential risk is the margin provider for Macrostrategy. Crypto-backed loan providers are under tremendous pressure thanks to the FTX explosion. Should Macrostrategy’s margin provider fail, that would be another potential pressure point on MSTR.

Conclusion: MicroStrategy Remains a Terrible Investment

I continue to believe that an investment in MSTR is a terrible risk. Given the weak performance of the core software business and the amount and nature of the debt the company has taken on, the company’s equity is essentially a massive and massively underwater, leverage bet on Bitcoin. If one wants to make a bet on Bitcoin recovering, one can simply just open a margin account at a number of regulated brokerages and buy Bitcoin there. I see no reason to start nearly $2 billion in the hole.