Accurate strategy (NASDAQ:MSTR) It has become one of the most valuable stocks in Nasdaq By following a simple strategy: buy Bitcoin (Crypto: Bitcoin).
The stock has risen in tandem with bitcoin’s gains this year, which came with the broader bull market, the launch of bitcoin spot trading funds (ETFs), and optimism that the new Trump administration will adopt cryptocurrency-friendly policies. As you can see from the chart below, both MicroStrategy and the cryptocurrency have risen this year.
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MicroStrategy is unique in the stock market because it essentially operates like a leveraged Bitcoin ETF. CEO Michael Saylor, one of the digital currency’s biggest evangelists, began buying it for his company in 2020, and held 252,220 BTC as of the end of the third quarter.
However, one well-known short seller now says MicroStrategy is overvalued and its model is unsustainable. Citron Research’s Andrew Left posted his thesis on X, saying that while his firm was bullish on MicroStrategy in 2020 as a way to invest in Bitcoin, it has now reversed its stance.
Citron said MicroStrategy’s value has completely decoupled from the cryptocurrency’s performance. Citron noted that he remains bullish on Bitcoin but was hedging that bet with a short position in MicroStrategy.
The company’s stock fell 16% last Thursday when Citron published its short report.
Left True MicroStrategy’s fundamentals have become disconnected from Bitcoin’s value. It has a small software company, but it’s essentially insignificant in terms of its valuation — its market capitalization was $94.8 billion as of November 22. It now identifies itself as a Bitcoin treasury company.
But its Bitcoin holdings don’t justify that valuation either, because based on its market cap and those holdings, the company is worth $375,864 per token, which is nearly four times the price of the cryptocurrency — $98,807 — at the time. Of writing. The value of Bitcoin on its balance sheet is now $22.4 billion.
Currently, MicroStrategy is making $49,441 per Bitcoin, with an average purchase price of $39,266. In total, she earned $12.5 billion from her Bitcoin purchases.
The company also has $4.2 billion in long-term debt as it continues to borrow money and sell shares to buy cryptocurrencies.
MicroStrategy trades like a leveraged Bitcoin ETF because the company is constantly increasing its exposure to cryptocurrencies, making it a big bet on the rise in Bitcoin’s price. Holding Bitcoin directly or through an ETF does not allow you to do this, as the exposure is fixed.
The valuation of the bitcoins held by MicroStrategy can be considered a target price for the digital currency as it will need to reach this level for the company’s stock price to make sense.
Saylor is borrowing money and diluting shares to buy Bitcoin, which increases the risk. If the price of Bitcoin collapses, MicroStrategy could become insolvent, although the cryptocurrency would have to fall sharply from its current price for that to happen.
If Bitcoin collapses, investors may also lose confidence in MicroStrategy and dump the stock.
Left makes a good point about MicroStrategy, but that alone won’t send the stock down. For it to fall significantly, Bitcoin would have to fall as well, and predicting the cryptocurrency’s movements is basically impossible.
Bitcoin has surged recently thanks to the Trump administration’s plans to embrace it, but it’s also possible that the election and subsequent inauguration could serve as a buy-on-rumor or sell-on-the-news moment, sending the digital currency lower. Digital code.
Bitcoin is a high-risk asset that is traded mostly based on sentiment, and has no fundamentals. In many ways, this makes cryptocurrency the ideal asset to create an account Bubble ever since It can theoretically be pumped forever. There is no real basis for the claim that it is overvalued or undervalued.
Whether selling MicroStrategy shares is the right decision or not will depend on what happens with Bitcoin. If you’re bullish on Bitcoin, holding some MicroStrategy makes sense because it will likely outperform Bitcoin if the cryptocurrency’s price continues to rise.
However, if Bitcoin starts to head south, MicroStrategy investors should prepare for the stock to collapse.
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Jeremy Bowman He has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global. The Motley Fool has Disclosure policy.
Short seller Andrew Left criticizes MicroStrategy. Is Michael Saylor’s Bitcoin Stock in Trouble? Originally published by The Motley Fool