The Landscape

MSTR Out of Whack

MicroStrategy (MSTR) is a company that essentially does nothing but own Bitcoin. A few years ago the company figured out a workaround to the SEC not allowing a true Bitcoin ETF. The workaround? Just convert your already publicly traded company's business to buying bitcoin. The SEC couldn't tell the company what to do with their cash, so almost overnight they became a de facto Bitcoin ETF.

Today the company owns 205,000 Bitcoin. That's really all they do. They issue convertible bonds to raise cash (diluting current shareholders) and use the money to buy Bitcoin. Easy.

But somehow the Wall Street Bets crowd (remember Gamestop?) has it in their heads that they are going to do it again. Here's what has happened...

Whenever MSTR stock would become overvalued, traders would short it and buy Bitcoin at the same time. This is called arbitrage. Because MSTR is nothing but Bitcoin, when it is priced too high, traders can both buy and sell Bitcoin at the same time. Buy Bitcoin for $50,000, and sell MSTR for $51,000, for example. It makes perfect sense. The arbitrage opportunity wouldn't even exist if people understood what was going on. Both BTC and MSTR would rise and fall an equal percentage day after day. 

But that's not what has happened. Since February, MSTR stock has risen 255%, while Bitcoin has risen just 58%.

To put this another way, let's say MSTR is a can of Coke, and Bitcoin is a larger bottle of Coke. The can cost $1.00 on Feb 1st, and the bottle cost $2.00. Now, six weeks later, the smaller can of Coke cost $3.55 and the bottle cost $3.16. Would you really buy the can? It wouldn't make any sense, right?


MSTR stock has risen 255% since February 1, while Bitcoin has risen just 58%.

MSTR, as of March 10th, owns 205,000 Bitcoin, worth ~$14 Billion. The company's market cap, by comparison, is ~$30 Billion. By this simple measure the stock is overpriced by double right now, at $1780, when it should be closer to $900.

There is an opportunity, but as a non-billionaire I can’t figure out how to do it. July at the money 1780 puts are $565.00 ($56,500 each), and would need a 32% correction just to reach break-even. Unless you happen to buy them at the top tick you could easily see losses of $20-$40,000 per contract in a very short time, and if Bitcoin happens to take off to, say $100,000 during that time period, you almost certainly would lose the full $56,500.

The trade here is to buy Bitcoin (or even an etf like IBIT) and short MSTR. But only the most well-heeled investor with a huge risk appetite can afford to do it (either by shorting MSTR stock, which would cost a small fortune, or by buying puts, which have very high volatility and premium).

It's simply not a trade that anyone is able to make without putting $100,000 at total risk. Which means Wall Street is the only one making it, and they are certainly salivating. This is pure arbitrage, and they are playing against a team that doesn't have nearly enough capital to compete with them. 

But what about Gamestop? The Wall Street Bets crew did it once before. 

The difference this time is that the MSTR shorts actually aren't short. They are perfectly hedged. They buy Bitcoin, and sell MSTR (which is nothing but Bitcoin). It may be their easiest trade ever.

Does that mean MSTR will fall tomorrow? No. There's no telling just how far hype can push it before buyers run out of money.

What it does mean is that at some point, probably quite soon, the differential between MSTR's recent 255% rise and BTC's 58% rise will come together. They will meet, and where they meet will only depend on the actual price of Bitcoin. Could be higher than here, could be lower, but either way, the winners will be the rich funds that were able to buy Bitcoin and sell MSTR. Perfect arbitrage. 

Barring an immediate Bitcoin price jump to $150k+ this is a recipe for disaster for anyone who has paid more than ~$900 for MSTR.

If you own MSTR, consider placing a sell stop order somewhere not too far below the current price to make sure you get out with a profit. If it continues to go up for a while, great! Raise your stop. But when the bottom falls out on this it is going to happen fast. Don't be the last one off the train.

MSTR is nothing but an unofficial overpriced Bitcoin ETF. IBIT is an actual Bitcoin ETF (orange line is Bitcoin).

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