Microstrategy (NASDAQ: MSTR) continues its incredible run as the company sells more debt and equity to buy more bitcoin (CRYPT: BTC). Shares rose as much as 16% in trading Wednesday and 12.5% near the end of trading on Wall Street.
On Monday, the company announced that it had acquired 51,780 Bitcoin for approximately $4.6 billion at an average price of $88,627.
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On Wednesday, the company announced the pricing of $2.6 billion of 0% convertible senior notes due 2029. The notes could be converted into cash or shares at a conversion price of $672.40, depending on “the occurrence of certain events.”
Microstrategy is using its elevated stock price to sell shares and purchase Bitcoin at what the company perceives as a discount. As Microstrategy becomes a pure Bitcoin play, if the enterprise value of the company exceeds the value of Bitcoin on the balance sheet, it will issue shares to buy Bitcoin. That is the phase they are in now, and it is a feedback loop that creates 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 that there is a buy price for Bitcoin, but consider a sell price if the company’s value falls below the value of Bitcoin on the balance sheet.
While the current strategy is working, it is not guaranteed to work forever. Bitcoin is extremely volatile and it is possible that the price could fall quickly if Microstrategy stock falls. That can create a situation where the stock is below the value of the Bitcoin it holds, and the largest buyer of Bitcoin (Microstrategy) will stop buying.
And now that leverage is used in large amounts, the downside risk is as great as Microstrategy’s long-term upside potential.
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