Bitcoin (CRYPTO: BTC) is rising, so corporations highly tied to it are too. For instance, MicroStrategy (NASDAQ: MSTR) is up over 200% year-to-date due to its aggressive Bitcoin purchase effort, which increased in 2024. MicroStrategy holds 214,246 bitcoins, over 1% of all Bitcoin. Amazingly big number. Since MicroStrategy keeps buying Bitcoin, it's time to ask: Can a corporation possess too much to be a good investment?
Decreased "proxy stock" effect Investors saw MicroStrategy as a huge spot Bitcoin ETF in 2023. Investors profited when spot Bitcoin ETFs weren't available. The race was on to discover the best "proxy stocks" to profit from the token's price explosion. Bitcoin mining stocks or MicroStrategy with large Bitcoin holdings were the two main possibilities for investors. This explains MicroStrategy's 500% gain in value in the past year.
Trading spot Bitcoin ETFs could change everything. Investors can now choose a proxy stock or digital currency. Which investment is currently most appealing? Over $30 billion has poured into Bitcoin ETFs in the past three months, eroding MicroStrategy's appeal. As investors move more money away from MicroStrategy and into spot Bitcoin ETFs, the proxy-stock effect may continue to erode.
MicroStrategy overpriced? Another reason is the difference between the company's stock market valuation and its Bitcoin holdings. MicroStrategy was seen as a proxy stock for Bitcoin, therefore their valuations were practically identical in 2024. The company's value was calculated by adding up the value of its Bitcoin holdings at current market values.
Think about MicroStrategy's stock market valuation. The corporation trades at a premium to its crypto holdings. Simple back-of-the-envelope math is enough. Using a $70,000 Bitcoin market price, the company's crypto holdings are worth $15 billion. The corporation is now worth $32 billion on the stock market.
Since MicroStrategy's primary business (enterprise software) has not changed, investors are assigning a high premium to the company based on where they anticipate Bitcoin will go. The price may quadruple from its current level. I see that as a major issue. If crypto prices don't double as projected, it might be terrible.
How much Bitcoin is too much? Keeping Bitcoin on the balance sheet is fine. Not the issue. However, MicroStrategy appears to be overdoing it. The corporation is borrowing to buy bitcoin at record highs. The corporation issued almost $1 billion in convertible debt to buy Bitcoin over two weeks in March.
That may have worked when investors saw MicroStrategy as a huge Bitcoin ETF. However, times have changed. Real Bitcoin ETFs are available. That sounds better than investing in an expensive company. If MicroStrategy focused on enterprise software instead of being the world's largest corporate Bitcoin owner, I'd feel more comfortable.
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