In a stunning divergence, shares of MicroStrategy (MSTR), the company that has become synonymous with Bitcoin investment, plummeted 16% on Thursday even as the cryptocurrency soared to new record highs near $100,000. The sharp decline in MicroStrategy’s stock has raised eyebrows among investors and analysts, who are now questioning the company’s lofty valuation and its increasing reliance on Bitcoin’s performance.
Bitcoin’s Rally Fails to Lift MicroStrategy
While Bitcoin enthusiasts celebrated the cryptocurrency’s latest milestone, MicroStrategy shareholders found themselves on the losing end of the trade. The business intelligence software company, which has become more well-known for its massive Bitcoin holdings than its core operations, saw its shares tumble by as much as 20% intraday before closing down 16.2%.
The steep drop came as a surprise to many, given MicroStrategy’s close ties to Bitcoin. The company, under the leadership of CEO Michael Saylor, has amassed a war chest of roughly 331,000 bitcoins, worth approximately $32.5 billion at current prices. This strategy has transformed MicroStrategy into a proxy for Bitcoin, with its stock price largely driven by the cryptocurrency’s fluctuations.
Valuation Concerns Mount
However, the recent divergence between MicroStrategy’s stock and Bitcoin’s price has led some analysts to sound the alarm about the company’s valuation. Citron Research’s Andrew Left, a former MicroStrategy bull who once recommended the stock as a way to gain exposure to Bitcoin, now argues that the company’s valuation has “completely detached from Bitcoin fundamentals.”
“MicroStrategy’s [valuation] has completely detached from Bitcoin fundamentals.”
– Andrew Left, Citron Research
Left, who has since hedged his position by shorting MicroStrategy stock, points out that the company’s market capitalization recently surpassed $100 billion, more than three times the value of its Bitcoin holdings. This discrepancy has led some to question whether MicroStrategy’s stock price has entered bubble territory.
Parabolic Rise Meets Parabolic Short
Technical analysts have also raised red flags about MicroStrategy’s stock. Renowned chartist Bracco noted that the company’s shares had met his “criteria for a textbook parabolic short.” He cited several factors, including:
- Three consecutive days of double-digit percentage gains
- Major overnight gaps higher
- Dollar trading volume surpassing that of mega-cap stocks like Nvidia and Tesla
- Heavy trading in a leveraged ETF dedicated to MicroStrategy stock
The Bitcoin Feedback Loop
Some observers argue that MicroStrategy’s sky-high valuation is the result of a self-perpetuating feedback loop. As the company’s stock price rises, it can raise more capital at favorable terms, which it then uses to purchase more Bitcoin. As Bitcoin’s price appreciates, MicroStrategy’s stock surges even higher, and the cycle repeats.
However, this virtuous circle can quickly turn vicious if sentiment shifts. A steep correction in either MicroStrategy’s stock or Bitcoin’s price could force the company to reassess its strategy and potentially unwind some of its positions, further exacerbating the decline.
The Bottom Line
While MicroStrategy’s bet on Bitcoin has paid off handsomely so far, the recent disconnect between its stock price and the cryptocurrency’s value has raised concerns among investors and analysts. Some fear that the company’s reliance on Bitcoin has left it vulnerable to the whims of an unpredictable and volatile asset class.
As one Wall Street Journal columnist put it: “If you want to speculate that Bitcoin is heading higher, buy some. To go long MicroStrategy’s stock is to wager that bizarrely inefficient markets will become even more so.” For now, MicroStrategy remains a bellwether for the cryptocurrency market, but its latest stumble serves as a reminder of the risks inherent in such a concentrated bet.
