MicroStrategy, the business intelligence firm with an insatiable appetite for bitcoin, sent shock waves through the market this week after announcing a $500 million convertible debt offering. The company plans to use the profits to fuel its growing bitcoin treasury, a strategy that has driven its share price to dizzying heights but has also introduced significant risk.
The news rattled investors, and MicroStrategy's share price fell 1.5% in premarket trading. The worry? The additional debt load and the company's unwavering commitment to a volatile asset class over its core software business. bitcoin” target=”_blank” rel=”noopener nofollow”>bitcoin The company itself was not immune to the jitters and experienced a modest 0.7% price drop.
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MicroStrategy Announces Proposed Private Offering of $500 Million in Convertible Senior Notes twitter.com/search?q=%24MSTR&src=ctag&ref_src=twsrc%5Etfw” rel=”nofollow noopener” target=”_blank”>$MSTR https://t.co/5K8TqAi1D7
—Michael Saylor (@saylor) twitter.com/saylor/status/1801202266768326895?ref_src=twsrc%5Etfw” rel=”nofollow noopener” target=”_blank”>June 13, 2024
MicroStrategy Stock: More bitcoin than Business?
This isn't the first time MicroStrategy's bitcoin obsession has caused a stir. Since CEO Michael Saylor first declared bitcoin the company's top treasury reserve asset in 2020, the stock has become a dance partner of the cryptocurrency.
Michael Saylor. Source: Business2Community
In the last three years, the correlation coefficient between MicroStrategy stock price and bitcoin is a staggering 0.90. In simple terms, when the price of bitcoin rises, MicroStrategy stock tends to do the same, and vice versa. This tight coupling stands in stark contrast to the company's peers in the software sector, whose fortunes are much less dependent on the whims of the cryptocurrency market.
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As of today, the market cap of cryptocurrencies stood at $2.39 trillion. Chart: TradingView.com
This symbiosis has its advantages. So far this year, MicroStrategy shares have soared more than 150%, significantly outperforming both bitcoin and the broader market (S&P 500). However, it also exposes the company to significant downside risk. A major correction in the bitcoin market could send MicroStrategy's stock price tumbling.
The company's latest move is in line with its long-term goal of adopting bitcoin as its treasury reserve asset, although it depends on market conditions.
MicroStrategy is the largest publicly disclosed bitcoin holder, with 214,400 btc, valued at nearly $14 billion. In 2020, the company began accumulating the main cryptocurrency, using it as a reserve asset.
Debt deal raises questions about long-term strategy
The decision to issue debt to acquire more bitcoin raises a critical question: Is MicroStrategy doubling down on its winning bet or piling on risk in a market known for its boom-and-bust cycles? The company claims that the convertible debt structure offers financial flexibility, but also imposes additional interest payments on them. This could affect your finances, especially if the price of bitcoin stagnates or falls.
While Saylor remains a strong bitcoin evangelist, some analysts advise caution. The long-term viability of this strategy depends on the continued rise of bitcoin. Investors are likely to examine MicroStrategy's future debt offerings and bitcoin acquisitions with a more critical eye.
Featured image from Experian, TradingView chart
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