decrypt.co
Bitcoin’s price crunch earlier this week led to a massive correction for crypto and crypto-centric stocks across the board, with MicroStrategy (MSTR) among those hit hardest. Shares in the world’s largest corporate Bitcoin holder fell to just $1,018 on Wednesday, nearly half of their $1,919 peak value at the end of March.
Meanwhile, Bitcoin (BTC) fell to roughly $56,800 over the same span, representing a 23% drop from its all-time high of $73,737 on March 14. It has since rebounded over $61,000 to close out this week.
While painful for MSTR holders, the overall pullback also signals a healthy correction for the stock, which has traded for a massive premium over its underlying BTC holdings for months. As of Wednesday, the premium (excluding company debt) fell to +67% of its BTC, versus +175% in late March.
“I think the stock is now closer to fair value,” said Markus Thielen, founder of 10x Research, in a message to Decrypt. In late March, his firm argued that MSTR should be trading closer to $1,000 per share, and that new investors should probably stay with Bitcoin.
As of Friday, MicroStrategy’s market cap was $21.37 billion, while its balance sheet contains 214,400 BTC worth $13.26 billion, based on current market prices.
Since MicroStrategy invests nearly all of its money into BTC, the firm has been likened to a de facto Bitcoin spot ETF—funds that issue shares directly backed by a fixed amount of BTC. However, since MicroStrategy doesn’t actually have market makers or redemption mechanisms like official Bitcoin ETFs, the stock can easily trade at a premium or discount to its underlying BTC holdings depending on market sentiment.
The company can also use special strategies that real ETF issuers cannot, such as issuing cheap debt to acquire more BTC, or selling the stock while it trades at a premium to increase the company’s BTC per share ratio.
With the MSTR premium exploding earlier this year, critics warned that MSTR traded at “unjustifiable” levels and was due for a correction bringing it closer to its actual balance sheet value. MicroStrategy’s faithful claim the premium is justified, pricing in the company’s ability to acquire more BTC per share in the future.
Others, however, say that fundamentals like that don’t mean anything right now.
“MSTR essentially works as a leveraged play on Bitcoin prices, with it typically moving 1.5x the Bitcoin price,” said James Butterfill, Head of Research at CoinShares, to Decrypt. “Ultimately the fundamentals mean less for MSTR, more important is the view on monetary policy and the consequent direction of Bitcoin prices.”
Butterfill added that Bitcoin’s recent correction was likely an “overreaction” to potentially hawkish guidance from FOMC on Wednesday, and is now trending back up after the central bank took an unexpectedly dovish monetary policy stance.
That stance “should continue to support both MSTR and Bitcoin prices, with us likely having seen the short-term floor in prices,” Butterfill said.
Edited by Ryan Ozawa.