Quiver Quantitative - The stock of MicroStrategy (MSTR) a company highly correlated with Bitcoin, experienced a notable dip, falling up to 14%, following a report from Kerrisdale Capital Management LLC. Kerrisdale announced its strategy of being long on Bitcoin while simultaneously shorting MicroStrategy shares. This decision is based on the observation that while MicroStrategy's stock has surged, primarily due to its substantial Bitcoin holdings, its growth has significantly outstripped Bitcoin’s own rise. Bitcoin’s recent trading above $71,000 marks a 3.5% increase, yet MicroStrategy’s strategy of acquiring more Bitcoin through debt has led its stock to trade at a premium relative to the digital asset.
Kerrisdale’s report challenges the rationale behind MicroStrategy’s high premium. It argues that the proliferation of new ways to invest directly in Bitcoin, such as through brokerages, exchanges, and spot exchange-traded funds, has diminished MicroStrategy's unique appeal as a Bitcoin investment vehicle. Despite MicroStrategy’s stock witnessing a remarkable ascent this year, increasing over 200% alongside Bitcoin’s record rally, Kerrisdale believes that the premium is unjustifiably high. This perspective is grounded in the idea that MicroStrategy’s share value boost is more attributable to Bitcoin’s price appreciation rather than intrinsic company performance.
Market Overview: -MicroStrategy Stock Slumps: Shares of MicroStrategy Inc. (MSTR), a company heavily invested in Bitcoin, fell sharply after short seller Kerrisdale Capital revealed a bearish position on the stock. -Bitcoin Proxy Trade in Question: Kerrisdale argues MicroStrategy's premium valuation compared to Bitcoin is unjustified and poised for correction. -Increased Bitcoin Accessibility: The emergence of alternative investment vehicles for Bitcoin exposure weakens MicroStrategy's unique selling proposition.
Key Points: -Short Seller Rationale: Kerrisdale advocates "long Bitcoin, short MicroStrategy" strategy, suggesting the stock's premium to Bitcoin is unsustainable due to readily available Bitcoin investment options through brokerages, exchanges, and ETFs. -MicroStrategy's Defense: The company hasn't publicly addressed the short seller report, but previously touted its Bitcoin holdings strategy as a store of value. -Premium Erosion: Kerrisdale highlights the potential for MicroStrategy's premium to Bitcoin to contract, mirroring past trends, presenting a profitable opportunity for short sellers.
Looking Ahead: -Uncertain Future for MicroStrategy Premium: MicroStrategy's future performance hinges on whether it can maintain its premium valuation relative to Bitcoin. -Investor Risks: This episode underscores the double-edged sword of the premium – fueling gains during Bitcoin rallies but also amplifying losses in downturns. -Short Seller Scrutiny: Kerrisdale's short position puts pressure on MicroStrategy to justify its premium and navigate evolving trends in Bitcoin investment options.
The dynamics of leverage in MicroStrategy’s strategy are a critical point in Kerrisdale’s argument. While the company’s approach has effectively increased its Bitcoin holdings, Kerrisdale highlights that the consequent dilution has maintained a nearly constant Bitcoin-per-share ratio over the years. Therefore, the value increase for shareholders is primarily tied to Bitcoin's price appreciation, much like owning Bitcoin directly. However, Kerrisdale warns that this leverage can be a double-edged sword, impacting the stock both positively and negatively.
Despite the inherent risks and volatility, betting against MicroStrategy has proven costly for short sellers, with S3 Partners LLC reporting over $4 billion in paper losses for them this year. MicroStrategy’s strategy continues to make it a significant player in the cryptocurrency market, but as the Bitcoin landscape evolves, its position faces new challenges and scrutiny.
This article was originally published on Quiver Quantitative