Microstrategy (MSTR 10.05%) continues its incredible run as the company sells more debt and equity to buy more Bitcoin (BTC 2.75%). Shares were up as much as 16% in trading on Wednesday and are up 12.5% near the end of trading on Wall Street.
On Monday, the company announced it had acquired 51,780 Bitcoin for approximately $4.6 billion at an average price of $88,627.
On Wednesday, the company announced the pricing of $2.6 billion of 0% convertible senior notes due in 2029. The notes could convert into cash or stock at a conversion price of $672.40, depending on “the occurrence of certain events.”
The all-in bet on Bitcoin
Microstrategy is using its lofty stock price to sell shares and acquire Bitcoin at what the company perceives to be a discount. As Microstrategy becomes a pure Bitcoin play, if the enterprise value of the company exceeds the value of the Bitcoin on the balance sheet, it will issue shares to buy Bitcoin. That’s the phase they’re in right now, and it’s a feedback loop, creating demand for Bitcoin, which increases the value of the balance sheet.
This is an arbitrage strategy that will work until it doesn’t. Microstrategy has shown there’s an acquisition price for Bitcoin but note a sale price if the enterprise value falls below the Bitcoin value on the balance sheet.
Microstrategy’s dangerous game
While the current strategy is working, it’s not guaranteed to work forever. Bitcoin is extremely volatile, and it’s possible the price falls rapidly if Microstrategy’s stock drops. That can create a situation where the stock is underwater on the value of Bitcoin it holds, and the biggest buyer of Bitcoin (Microstrategy) will stop buying.
And with leverage now being used in big numbers, the downside risk is just as big as the upside potential for Microstrategy long term.
Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
