MicroStrategy's Bitcoin Gamble: Premium Concerns and Liquidity Risks

On March 28, the Dow Jones Industrial Average closed higher while the Nasdaq index closed lower. The Nikkei Stock Average fell by 604 yen in the previous weekend. In the US, MicroStrategy's stock has risen 150% since the beginning of the year due to its ownership of a large amount of Bitcoin. However, a report by Kerrisdale Capital points out that MicroStrategy's market capitalization exceeds the value of its Bitcoin holdings, indicating an overvaluation. The premium of Bitcoin to the value of MicroStrategy's Bitcoin holdings is also high, reaching 1.92 times. Kerrisdale Capital believes that MicroStrategy's stock price is overvalued and recommends a pair trading strategy by going long in Bitcoin and shorting MicroStrategy's stock.

MicroStrategy's Bitcoin Holdings: A Closer Look at the Premium and Potential Risks

On March 28, the Dow Jones Industrial Average closed 47.2 points higher than the previous day, while the Nasdaq index closed 20 points lower. Meanwhile, the Nikkei Stock Average fell by 604 yen from the previous weekend to 39,765 yen. Experts attribute these fluctuations to factors such as profit-taking and pension fund rebalancing.

MicroStrategy's Bitcoin Investment and Valuation

Among U.S. stocks with significant exposure to crypto assets, MicroStrategy has garnered attention for its substantial investment in Bitcoin and subsequent stock price appreciation. However, a report by investment management firm Kerrisdale Capital has raised concerns about the company's valuation and potential risks.

According to Kerrisdale, MicroStrategy's market capitalization of nearly $29 billion significantly exceeds the $15 billion market value of its Bitcoin holdings. This implies that the company's stock price may be overvalued. To capitalize on this perceived overvaluation, Kerrisdale has adopted a pair trading strategy, going long on Bitcoin and shorting MicroStrategy's stock.

Data from mstr-tracker indicates that the MSTR/BTC ratio has reached a level higher than the all-time high recorded in June 2021, suggesting a premium for MicroStrategy's stock relative to its underlying Bitcoin holdings. This premium has been attributed to factors such as Bitcoin's historical price volatility and the perceived risk of selling Bitcoin during periods of market stress.

Historical Performance and Premium Dynamics

Kerrisdale notes that during Bitcoin's significant price surge from $15,000 to $45,000 between November 2020 and February 2021, MicroStrategy's stock price also experienced a substantial increase. At the time, the BTC NAV premium reached 3.9x. However, as Bitcoin's price continued to climb in the following months, MicroStrategy's stock price underperformed. The premium has since declined to 1.3 times the three-year average.

Leveraged Financing and Potential Liquidity Risks

Kerrisdale also expresses concerns about MicroStrategy's reliance on debt financing to fund its Bitcoin purchases. The company has issued convertible bonds, resulting in a leveraged position that could pose liquidity risks if forced to repay the debt by selling Bitcoin during a market downturn.

Cryptocurrency Market Dynamics

In the cryptocurrency market, Bitcoin (BTC) has recently risen to $70,909, indicating a bullish sentiment. Despite facing resistance around $73,800, strong buying interest has helped maintain its upward momentum. Analysts believe that further positive news or a favorable outcome in the upcoming U.S. PCE (Personal Consumption Expenditures) report could push Bitcoin towards $74,000.

Other major cryptocurrencies, such as Ethereum (ETH), Solana (SOL), and Dogecoin (DOGE), have also experienced gains, reflecting a broader positive market sentiment.

Bitcoin ETF Flows and Institutional Interest

Data from BitMEX Research shows a slowdown in Bitcoin ETF flows at the end of March, indicating a potential reduction in selling pressure. This may be due to tax-related selling by U.S. investors and rebalancing by financial institutions.

Despite this temporary decline in liquidity, institutional interest in Bitcoin remains strong. With the review period for large broker-dealers to allow wealth advisors to allocate client assets to Bitcoin ETFs expected to end soon, major financial giants such as Morgan Stanley, Bank of America, and Goldman Sachs are poised to enter the market.

This influx of institutional capital could significantly impact Bitcoin's price and volatility, providing a positive outlook for the second quarter of 2024.

CoinPost App and Market Reporting

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