Microstrategy - Bitcoin Bear or Bull?

This is not financial advice.  Please perform your own due diligence.  These are my opinions only.

Microstrategy ("MSTR") will continue to acquire Bitcoin ("BTC") for its own corporate treasury during Bitcoin's projected peak price into 2025, if history repeats itself.  MSTR began its Bitcoin acquisition spree in Q3 of 2020, and has continued to buy Bitcoin for the duration of its rollercoaster ride since then, both up in 2021 and down in 2022, and up again in 2023.  Microstrategy's current holdings are 189,150 BTC purchased at an average price of $31,168 per Bitcoin.  They are obviously in the green.

MSTR is an operational leveraged proxy for Bitcoin, and it uses its income and balance sheet to acquire more Bitcoin either via debt or equity offerings--or cash flow.  This is normally dilutive to existing shareholders, but with careful and strategic acquisitions during favorable conditions (e.g., rising Bitcoin price, low interest rates), these periodic Bitcoin purchases are effectively accretive.

This "dollar cost averaging" strategy ran into perceived problems in 2022, when Bitcoin declined 78%  from its November 2021 peak.  Rumors were swirling that MSTR would have to liquidate if Bitcoin's price dipped below $20K, which it did on its way to a $15.5K cyclical bottom.  Michael Saylor was quick to respond that Bitcoin would have to drop below $5K before Microstrategy would have to liquidate its Bitcoin holdings.  And they certainly weren't in danger of going bankrupt.  In hindsight, Saylor was 100% correct.

As long as MSTR's core business intelligence software operating entity was generating cash flow, those flows and strategic deployment of its balance sheet could continue to fund future Bitcoin purchases.  My thoughts are that MSTR could continue these acquisitions throughout 2024 until 2025, as I believe Bitcoin's price will peak in Q3 2025 before starting another expected steep drawdown.  And in order to avoid any future speculation about MSTR's solvency or lack thereof, Saylor should refrain from any Bitcoin purchases in 2025 before the anticipated crash starting in the second half of 2025--just to be safe and ensure a big enough cushion to weather another inevitable crypto winter.

Meanwhile, if investors are bullish on Bitcoin until 2025, MSTR shares should increase proportionately even higher from its current price of $631 from a January 2023 bottom of $130.  It behaves like a leveraged play for Bitcoin, and will be superior to speculative performances of imminent spot BTC ETF's which should be approved any day now in early 2024. ETF's charge management fees up to 1% annually.  MSTR provides operational leverage, equivalent to yielding 2-3% annually.  That's a 3-4% positive spread in favor of MSTR over a spot BTC ETF..  This may explain why MSTR shares trade at a premium relative to its Bitcoin holdings.

Another bullish catalyst for MSTR is adoption of FASB fair value accounting for Bitcoin as a tangible asset instead of an intangible asset, which it currently is classified as.  This GAAP accounting rule kicks in for Bitcoin on December 15, 2024, but early adopters like MSTR can begin accounting for Bitcoin as an asset which doesn't impair its balance sheet due to "lowest value" accounting prior to the designated transition date.  Until fair value account is applied, MSTR's financial reporting shows repeated losses and balance sheet impairments.  This article explains why fair value accounting will encourage more companies to include Bitcoin into their corporate treasuries. 

https://blockworks.co/news/microstrategy-proposed-fasb-amendments

This chart shows how current accounting rules punish Microstrategy financial reporting.

Realistically, self-custodied Bitcoin is the optimal method to own Bitcoin, with Bitcoin custodied on centralized exchanges being a distant second due to potential for security breaches.  But for mainstream institutional and retail investors, a spot BTC ETF is the next best way to achieve exposure to the price of Bitcoin, even if it is not owning Bitcoin itself, the underlying asset.  In exchange for self-custody, the spot ETF provides convenience and ease of trading a security, without the hassles of managing one's own security keys, which can lead to loss of Bitcoin--if mismanaged.  The downside for ETF's includes this question: can investors trust the BlackRock's and Fidelity's of the world, and their respective custodial agents?  That is another topic better covered in another blog.

To clarify misleading nomenclature, a "security" carries downside risk of being zeroed out.  There are many high-profile examples of bankruptcies, with infamous cases being Lehman Brothers, Worldcom, Enron, FTX, etc., where shareholders are wiped out.  The list of body bags among smaller corporations is even larger.  By contrast, Bitcoin the actual asset, is a commodity, which ironically, reduces and eliminates the risk of it going to zero.  Bitcoin, like crude oil, gold, silver, silver, corn, wheat, natural gas, pork bellies, orange juice, etc. are commodities.  Their digital manifestations and futures contracts are traded at the Chicago Board Options Exchanges and the Chicago Mercantile Exchange, for instance.

The last BTC vehicle to address are the futures based BTC ETF's which are already listed.  They are the least optimal asset because they are subject to high slippage costs.

In summary, the order of preference, in terms of higher security and lower cost, are as follows:

Bitcoin in cold storage (offline, most secure)

Bitcoin on an exchange (convenient for trading, but exposed to potential security threat vectors)

MSTR shares (a security, convenient for trading, offers leveraged BTC exposure with no fees)

Spot BTC ETF (a security, convenient for trading, lower management fees than futures BTC ETF, GBTC Trust)

Futures BTC ETF (a security, convenient for trading, higher management fees and slippage)