Tag: MSTR

Microstrategy cornering the Bitcoin market

A moment of market history was when the Hunt Brothers attempted to corner the market on silver (Silver Thursday), which occurred from 1979 to 1980.

If the article is accurate, the Hunt Brothers at one point controlled a third of the world’s privately available silver supplies, primarily using futures contracts.

The collapse of the scheme occurred when the highly leveraged Hunt Brothers could not post sufficient equity to keep their margin loan going.

Fast forward 44 years and we have the situation with Microstrategy and Bitcoin, which appears to be an analogous situation.

On March 11, 2024 via Form 8-K, Microstrategy announced they had purchased 12,000 Bitcoin, during the period between February 26, 2024 and March 10, 2024, for $822 million, mostly with the proceeds of an $800 million convertible debt offering (0.625% coupon, maturing March 15, 2030, convertible into equity at $1498/share). After this filing, Microstrategy owned 205,000 Bitcoins purchased at a cost of $6.91 billion.

I will note this date range of the purchased Bitcoin appears to line up exactly with the rise from $53,000 per Bitcoin to around the $67,000 we see today:

This wasn’t enough.

On March 15, 2024, Microstrategy closed another convertible bond offering, $525 million (0.875% coupon, maturing March 15, 2031, convertible into equity at $2327/share). Unlike the previous offering, this offering claimed to be used for general corporate purposes and the purchase of additional Bitcoins.

With the stock price (after a 15% drop as of the writing of this article) at about $1,500 a share, they are obviously continuing to leverage themselves to the hilt in order to keep the price of Bitcoin high. The liquidity of Bitcoin itself is somewhat questionable – throwing $820 million into Bitcoin over 10 trading days is enough to spike it around 30-40% in value. Microstrategy is clearly trying to keep as much gasoline onto the Bitcoin fire as it can, as its market valuation is tied to the hip with it. The primary owner and chairman, Michael Saylor, is dumping stock like crazy while the going is good.

My only question is when will this house of cards collapse?

The answer is strange – it depends on whether the stock collapses. It may not happen soon. The looming debt maturity was going to be in 2025 with a $650 million convertible note, but it is likely that it will be converted at approximately $398/share. The next looming debt maturity are the 2027 notes, which has a conversion price of $1432/share, which is much closer to the current stock price.

As long as the company can keep the stock price up and be able to avoid raising cash (presumably by selling Bitcoin!) in order to pay for the maturity, this can go indefinitely.

The cycle would be: issue equity or convertible debt financing -> purchase bitcoins -> raise the price of bitcoins -> higher MSTR stock valuation -> issue equity or convertible debt financing

The question will eventually be settled by somebody with deeper pockets than Microstrategy that decides to short enough Bitcoin and also Microstrategy stock to get an even larger payoff in the subsequent collapse. They would need to force Microstrategy to sell its Bitcoin.

What, stocks can go down too??

The jaw-boning of the central banks (every word out of the Bank of Canada and Federal Reserve are both to the tone of interest rates to rise forever) have finally had their desired impact – a suppression of demand in the asset markets, which will likely transmit itself to the overall economy, lessening inflation rates.

They’ll probably shut their mouths at some point in time when enough damage has been done. This is reminding me of the trading that occurred during the year 2000 in the Nasdaq – an incredibly volatile year, and the Federal Reserve at that time had the issue of how to withdraw its liquidity stimulus that it pumped into the market in 1999 (remember Y2K?).

Most of the technology starlings, including Shopify (TSX: SHOP), and the like are all sharply down over the past half-year. Psychologically speaking, for those that have held the stock anytime from April 2020 to today, they are now underwater. For those that bought in 2021, they are down roughly 75% on average. How much pain can they take before cutting out?

This is the challenge of investing in companies with projected cash flows in the far future – with Shopify, you have to take a shot in the dark as to when you’ll actually achieve a return on investment (i.e. the company generates positive cash flows which can be subsequently distributed to investors):

This re-rating of Shopify’s future non-earnings, coupled with the speculatively suppression of higher interest rates, clearly has had a very negative effect.

I am just picking on Shopify because it is Canadian, but this is also exhibited by all sorts of other technology darlings of the past. Today, for example, Palantir (PLTR) has been hammered 20%, on the basis of a very tepid quarterly earnings report (which more or less reported a break-even quarter which had all sorts of ‘adjustments’ to claim a positive free cash flow balance).

Don’t get me started on the effect of rising interest rates on cryptocurrency, where you’re going to have every investor on the planet realize that Bitcoin has a carrying cost (why hold onto BTC for zero yield when you can give your money to the Bank of Canada for a year and get 2.5% out of it for nothing?). You don’t hear too much about the scarcity of available Bitcoins these days! We’ll see if Michael Saylor at Microstrategy (MSTR) is forced to liquidate his stack of 129,218 Bitcoins and if so, that will be the margin call of the year for sure. One look at MSTR’s balance sheet and you do not need to be a Ph.D in corporate finance to figure out that his leverage situation is even more precarious than Elon Musk’s reliance on Tesla stock being sky-high.

In these environments, however, the best cliche used to describe things is that babies get thrown out with the bathwater. There are companies out there in the technology field which get lumped in with all of the ETF selling (go look at the holdings of ARKK here!) that do have value (beyond the obvious such as the Microsofts of the planet which will continue to have vast earnings potential due to their wide moats).

However, current free cash flows speak volumes. Companies trading under 5 times free cash flows are going to make mints for their shareholders by continued purchases of their own equity, and for those companies generating cash, shareholders should be cheering for continued lowering prices to generate excess future returns. Those that have prudently managed their balance sheets will be in a much better position to be opportunistic.

Finally, a word for those thinking that commodity investing is a one-way ride – in markets, nothing ever is! Yes, this includes Toronto residential real estate. There has been a lot of what I call ‘energy tourists’ and they have latched onto many of these stocks during earnings time (fossil fuel companies in Q1 have reported insane amounts of profits). There is an urge by many to over-trade and to shift portfolios away from quality into more speculative names (various < 50,000 boe/d with operations of more questionable characteristics) in order to torque up their return profiles. In a rising market, it is the lower quality companies that tend to exhibit the higher percentage gains, while in a flat or declining market, it is the quality firms that will have the sticking power. Stick with quality. It will let you sleep better at night in times like these, much more so than a pre-build contract for a 450 square foot Toronto condominium.

This will be interesting – Bitcoin

Bitcoin is taking a dive:

Today’s price action so far:

This looks like a margin-propelled crash with today’s 20% takedown. From peak (US$65,000) to trough today is just over a 50% haircut, and not many people have the intestinal fortitude to handle such a drop – especially when they are leveraged.

The question going on in my mind is cross-margining – have people collateralized loans with their Bitcoin holdings? If so, what else are they going to be forced to sell as a result of today’s price drop?

Always be conscious that a trade involves a swap of asset for cash; the amount of cash nor the amount of asset changes on net. Only the valuation of the asset in question changes.

Now you have the people speculating on BTC from the middle of February to yesterday all underwater; the people that speculated from the beginning of 2021 to the middle of February are roughly in a break-even position; while you still have a dedicated ‘fan base’ holding prior to that – all trading against each other in one massive zero-sum game. The only person that really doesn’t have much choice in the matter is Microstrategy (MSTR), who’s CEO cannot possibly reverse his decision as right now he appears to be willing to be the last bagholder.

Bitcoin Bubble #2

My goodness – Microstrategy adopts a treasury policy where half of their cash ($250 million) is invested in bitcoin:

MicroStrategy® Incorporated (Nasdaq: MSTR), the largest independent publicly-traded business intelligence company, today announced that it has purchased 21,454 bitcoins at an aggregate purchase price of $250 million, inclusive of fees and expenses. The purchase of Bitcoin cryptocurrency was made pursuant to the two-pronged capital allocation strategy previously announced by the company when it released its second quarter 2020 financial results on July 28, 2020.

The company addressed the first prong, which called for returning a portion of its excess cash to shareholders, when it announced today that it had launched a cash tender offer for up to $250 million of MicroStrategy’s class A common stock via a modified Dutch Auction offer. By acquiring 21,454 bitcoins, MicroStrategy addressed the other prong of its capital allocation strategy, which called for investing up to $250 million in one or more alternative investments or assets.

This is the first instance I can think of a company that doesn’t specialize in the field (i.e. an ETF dedicated towards purchasing bitcoins or mining them) that has thrown bulk quantities of cash into Bitcoin.

What’s even more amazing is that their stock went up about 10% on this news (in conjunction with the Dutch Auction Tender they proposed on the same day). I’m guessing the bulk of it was due to the dutch auction rather than the bitcoin acquisition, but who knows?

Will other companies follow suit and diversify their US cash holdings into alternative assets? If so, things will get quite interesting – and will likely inflate the price of Bitcoin. I also don’t know if this had anything to do with the huge drop in gold today, but I also note that long-term US bond interest rates took quite a leap as well. Interesting times we live in.

Finally, if you feel like you are missing out, take solace that the best store of value historically has been in ownership of competently managed businesses that will continue to produce goods or services that will be in demand for the foreseeable future.