The rise of bitcoin in the past year has captured considerable attention, and its correlation with the “Trump trade” is often cited as a primary catalyst for this surge. Notably, MicroStrategy, under the leadership of CEO Michael Saylor, emerged as a key player in the bitcoin market, amassing more than three percent of the total bitcoins in circulation. This strategic investment not only propelled the price of the cryptocurrency but also dramatically inflated MicroStrategy’s stock price, leading investors to assign a valuation more than double that of its bitcoin holdings. The phenomenon prompted some to label Saylor’s approach as an “infinite-money machine” or “infinite-money glitch.”
The divergence between the market value of MicroStrategy and its bitcoin assets raised eyebrows, particularly as this juxtaposition could not be explained by the company’s traditional software business. Supporters of Saylor’s strategy pointed towards two main ideas: the potential for bitcoin prices to escalate further—Saylor himself predicted values could reach thirteen million dollars by 2045—and MicroStrategy’s innovative practices in maximizing shareholder value. The latter involved issuing preferred stock and convertible debt, which could amplify returns for common stockholders through leveraged acquisitions of bitcoin.
However, skepticism lingered, embodied by critics like renowned short seller Jim Chanos, who questioned the longevity of such strategies. Despite warnings, MicroStrategy’s methods flourished until earlier this year when the company rebranded as “Strategy.” This change came amid discussions of a new financial strategy, yet it coincided with a significant downturn for its stock. Following a peak above $450 in mid-July, the stock plummeted, exceeding a sixty percent drop as of November.
As the stock fell, the market began to closely scrutinize the correlation between MicroStrategy’s valuation and the value of its bitcoin holdings, which decreased by only twenty-five percent in the same timeframe. The gap between its market capitalization and the value of its bitcoins narrowed, leading to a point where the total market value dipped below the value of the bitcoins they owned, a wake-up call for investors.
Amid this financial turmoil, Strategy took steps to reassure stakeholders by announcing the creation of a “dollar reserve” of $1.4 billion to fulfill upcoming dividend payments, a move not typically anticipated from Saylor. The statement hinted at the drastic measures that would be required if the market situation worsened, suggesting they might have to sell some bitcoin—an action Saylor had previously deemed unthinkable.
Additionally, concerns emerged surrounding the potential removal of Strategy’s stock from the MSCI Index, which could trigger significant capital outflows. On a tentative positive note, the price of bitcoin has shown signs of recovery, buoyed by expectations that the Federal Reserve may cut interest rates, a historical precursor to bitcoin rallies. Analysts noted a historical correlation between the Fed’s interventions in the financial system and bitcoin price increases, creating a glimmer of hope for Saylor and his supporters.
Nonetheless, the landscape has shifted since Saylor first capitalized on bitcoin investments in 2020. Competitors, including numerous public companies and investment firms, have entered the market, acquiring significant bitcoin holdings. With various Bitcoin ETFs available, notably BlackRock’s iShares Bitcoin Trust, investors now have alternative avenues for direct exposure to bitcoin, further complicating MicroStrategy’s position.
As skepticism surrounding Strategy has intensified, critics like Chanos have reiterated their cautious stance towards investing more than what an asset is worth. While a sustained rebound in bitcoin may still benefit MicroStrategy, it appears that the robotic efficiency of their once-celebrated “infinite-money machine” is faltering in today’s complex market environment.
