at the price of Bitcoin (Cryptocurrency: BTC) It's no wonder that companies that are heavily leveraging the price of cryptocurrencies are soaring. Case in point: micro strategy (NASDAQ:MSTR) is up more than 200% year-to-date thanks to an aggressive Bitcoin buying campaign that has ramped up significantly in 2024.
MicroStrategy currently owns 214,246 Bitcoins. This is just over 1% of all Bitcoins that will ever exist. That's a surprisingly high number.
Given that MicroStrategy shows no signs of stopping to buy more cryptocurrencies, it's time to ask, “Do companies actually hold so much Bitcoin that it's not a good investment?”
Decline of “proxy stock” effect
In 2023, investors looked at MicroStrategy the same way they saw a giant spot Bitcoin exchange-traded fund (ETF). This was a huge accomplishment at a time when investors didn't really have a spot Bitcoin ETF as an investment option.
The result was a mad scramble to find the perfect “stand-in stock” to benefit from the soaring token price. Investors had two basic options. Bitcoin mining stocks or companies like MicroStrategy that have a lot of digital currencies on their balance sheets. This helps explain the incredible rise in the value of his MicroStrategy, which has risen nearly 500% over the past 12 months.
But all that could change with the new Spot Bitcoin ETF now available for trading. Investors can now choose between proxy shares and the digital currency itself.
Any guesses as to which is the more attractive investment right now? With over $30 billion surging into new spot Bitcoin ETFs over the past three months, MicroStrategy's appeal has been significantly eroded . Over time, we will likely continue to see a decline in the proxy effect as investors begin to move more money from MicroStrategy to spot Bitcoin ETFs.
Is MicroStrategy overrated?
There is one more factor to consider. That is the gap between a company's stock market valuation and the valuation of the Bitcoin it owns. Heading into 2024, MicroStrategy was considered a proxy stock for Bitcoin, so there was an almost direct 1:1 correlation between the two valuations.
As a result, we simply add up the value of a company's Bitcoin holdings using the current market price and that is the company's value.
But now consider what's going on with MicroStrategy's stock market valuation. The company currently trades at a significant premium to its crypto holdings. All you need is some simple calculations behind the scenes. Assuming the market price of Bitcoin is $70,000, the value of the company's cryptocurrency holdings is approximately $15 billion. However, the company's stock market valuation has now ballooned to $32 billion.
Given that there has been no substantive change in the company's core business (enterprise software), what this seems to suggest is that based on where investors think Bitcoin price is heading, This means they are paying a significant premium to MicroStrategy. Quite simply, he could be expecting the price to more than double at its current level.
From my point of view, this is a huge potential problem. If the price of a cryptocurrency does not double as expected, the consequences could be dire.
How much Bitcoin is too many Bitcoins?
Of course, there is nothing wrong with holding Bitcoin on your balance sheet. it doesn't matter. The problem is that MicroStrategy seems to be doing too much.
The company is currently issuing bonds to finance purchases of cryptocurrencies as they trade near all-time highs. In a two-week period in March, the company issued more than $1 billion in convertible debt to buy more Bitcoin.
This probably would have been an effective strategy back when investors thought of MicroStrategy the same way as a giant Bitcoin ETF. But times have changed. Investors can now buy real Bitcoin ETFs. To me, that seems like a much better option than trying to invest in companies that seem overvalued.
I'd feel better if MicroStrategy actually went back to what it does best, which is enterprise software, and stopped worrying about being the world's largest corporate owner of Bitcoin.
Should you invest $1,000 in MicroStrategy now?
Before purchasing MicroStrategy stock, consider the following:
of Motley Fool Stock Advisor Our analyst team has identified what they believe Best 10 stocks What investors can buy right now…and MicroStrategy wasn't among them. These 10 stocks have the potential to generate impressive returns over the next few years.
stock advisor provides investors with an easy-to-understand blueprint for success, including guidance on portfolio construction, regular updates from analysts, and two new stocks each month.of stock advisor Since 2002, the service has more than tripled S&P 500 returns*.
See 10 stocks
*Stock Advisor returns as of March 25, 2024
Dominique Basurto has a position in Bitcoin. The Motley Fool has a position in and recommends Bitcoin. The Motley Fool has a disclosure policy.
This company owns 1% of all Bitcoin, but can you still buy it? Originally published by The Motley Fool
