Shares of MicroStrategy stock (MSTR 3.13%) were rising yet again this week. The company that has staked its entire future on Bitcoin rose 11.9% this week, according to data from S&P Global Market Intelligence. With Bitcoin getting close to an all-time high, investors are making bets that the future of MicroStrategy is bright. The stock is up 500% in the past year.
Here's why MicroStrategy's stock was up yet again this week.
Using debt to buy Bitcoin
MicroStrategy pivoted in the last few years from a niche software business to using all its capital and taking on massive amounts of debt to purchase Bitcoin. That's its entire business strategy. And so far, this strategy has worked, as its shares are up 1,000% in the last five years, and its market cap is close to $30 billion. Earlier this month, it raised more convertible notes -- $600 million worth -- to increase its debt-fueled bet on Bitcoin.
Investors in MicroStrategy are likely betting the company is a great way to get exposure to Bitcoin. But this logic may be flawed due to the stock's extreme premium to the actual Bitcoins it holds on its balance sheet. According to a recent short report from Kerrisdale Capital, MicroStrategy has recently traded at close to 2.5 times the actual value of the Bitcoins it holds, which makes little sense given the small size of the company's software subsidiary.
The investment firm has decided to short MicroStrategy while simultaneously getting long Bitcoin in order to bet on this divergence. While retail investors should be hesitant about shorting any company, this is a clear example of how professional investors see MicroStrategy as overvalued.
NASDAQ: MSTR
Key Data Points
There are better ways to get exposure to Bitcoin
With the launch of Bitcoin exchange-traded funds (ETFs), there are now much easier ways to get exposure to Bitcoin if you so desire. New ETFs have annual management fees of around 0.25%, which will barely eat into investment returns. It doesn't make sense for long-term, buy-and-hold investors to buy MicroStrategy to get exposure to Bitcoin if the actual Bitcoin on the balance sheet is worth a lot less.
MicroStrategy has done well in recent years. But it only has a small operating business and is truly just a bet on Bitcoin. When you can make a bet on Bitcoin at a significantly cheaper price by simply buying a different asset or investment vehicle like an ETF, why would anyone buy MicroStrategy at this price? It doesn't make sense. Stay far away from MicroStrategy for the time being. There are better ways to get exposure to Bitcoin.
