MSTR is a terribly overvalued company, their financials are insane, and their CEO Michael Saylor is a nut. I will admit upfront I am incredibly biased. But if you're still curious, strap yourselves in, because you're in for a wild ride.
tl;dr MicroStrategy is a dying business intelligence company that has been contorted into a Bitcoin ETF in all but name. They have taken out massive loans worth nearly twice their June 30, 2020 aggregate market value of $907 million and sunk it all into buying and holding Bitcoins. It's utter lunacy, and it's going to blow up Soon™.
Also, I eat crayons for a living and this is not financial advice.
1. What are Bitcoins?
Bitcoins (BTC) are magic internet beans that sketchy people use to acquire illegal goods and services, sketchier people use to launder dirty money and get paid for ransomware, and bagholder crypto enthusiasts buy and hold because numbers go up. One magic bean is currently valued in excess of $48,500, and recently reached an all time high of $58,641 on Feb 21, 2021.
2. What are Tethers?
Tethers (USDT) are magic internet bean settlement tokens ostensibly backed 1:1 by USD. The are created by Tether Inc. from a combination of drug cartel institutional investor deposits and increasingly from thin air, and were first introduced on the trading platform Bitfinex. Tether and Bitfinex are incidentally run by the same people. To date, there are 36,431,133,054 Tethers propping up the crypto ecosystem, which by Tether Inc's own admission is only around 74% backed. However, according to the New York Attorney General, none of it is backed. Keep this in mind. It'll be important later.
Tethers allow crypto trading platforms to settle trades without worrying about old fashioned banking concepts such as KYC (Know Your Client) and AML (Anti-Money Laundering), requirements one would usually need to meet in order to establish a working relationship with a bank, in order to process customer deposits and withdraws. Tethers have become so popular in the crypto ecosystem, the vast majority of Bitcoin trades now occur in USDT. Just take a look at the money flow from/to Bitcoin in the last 24 hours. See how much of that is taken up by USDT compared to USD? Tethers are the engine that drives the crypto markets.
Tether Inc. has essentially become the Central Bank of Bitcoin. Completely unbacked USDT get printed in the billions, USDT only exchanges use Tethers to drive up BTC prices, degenerate gamblers with FOMO jump into BTC/USD exchanges, buy Bitcoins with real dollars, then take them to USDT exchanges that allow for margin trading on x100 leverage. It's insane. But who cares? Magic beans go up.
3. What is MicroStrategy?
Alright, well and good, but what does any of this have to do with Wall Street? Well, MicroStrategy is, or was, a business intelligence company that has been stagnant for years. According to their 10-K for 2020, MSTR had an aggregate market value on June 30, 2020 of approximately $907.0 million. Their share price has been hovering around $100-$140 from 2006 to mid 2020, and their EBITDA in that time has been very stagnant.
In late 2020, MicroStrategy was sitting on about half a billion dollars of cash reserves. Because its CEO Michael Saylor is a madman who controls over 70% of the voting shares, he pushed the company to spent 85% of this reserve, or $425 million, on Bitcoins. Remember, this is a company valued at $907 million before it started going hog wild with Bitcoins. It then continued to issue bonds and use the money to buy even more Bitcoins. To date, MSTR has now spent $2.196 billion dollars to purchase 91,064 Bitcoins, at an average price of $24,119 per coin.
Unless you're a bitcoin maximalist, I would venture this looks like utter insanity. And even if you are, why does a company that has nothing to do with crypto need that many Bitcoins? But regardless, the move has done wonders for MSTR stock prices in the short term. When Saylor first bought in during August 2020, BTC prices were at $11,653, and MSTR was around $140. Bitcoin rocketed to its $58,641 ATH in Feb 21, 2021, and a little bit before then on Feb 7, MSTR reached its own ATH of $1,315 a share. In fact, the price of BTC and MSTR are now closely moving together. With BTC falling $10,000 in a month, MSTR has also lost over 50% in value from its ATH. Given all this, I believe MSTR is now a Bitcoin ETF in all but name, but one that comes with all the baggage of a slowly dying software company, which possibly makes it even more volatile than an already volatile cryptocurrency.
To summarize, MSTR is a company with a current market cap of $6.19 billion, a P/E ratio of 158.25, and a book value per share of $57.69. It has also spent almost 2.2 billion dollars, much of it borrowed, to buy Bitcoins, and is currently trading at $620 per share, down from an ATH of $1,315 less than a month ago. Just... think about all that for a minute.
4. What Happens Next?
Remember that NYAG judgment against Tether on Feb 23, 2021? It was ruled that Tethers were unbacked, Bitfinex were forbidden from doing business with New Yorkers, and they were fined 18.5 million, which Tether promptly transferred. Cute. But more importantly, this is what MSTR prices looked like the day before the judgment. Tether is increasingly coming under scrutiny, and when this giant game of crypto musical chairs finally ends, it's going to take MSTR down with it. Bitcoins are in the middle of another speculative bubble, which might already be popping even without any new legal challenges against Tether. All of this is going to blow up soon, and now is the time to make a play against MSTR. Here's how someone (not you, obviously) can get in on the action.
- My name is actually pronounced "Donger": Short MSTR, pay the fees, and close the position when the price has dropped enough to make it worthwhile. Tech stocks are experiencing a market correction right now anyway, so there's probably money to be made regardless of the accuracy of this DD.
- I like risk. This is fine: MSTR put options expiring on Jan 20, 2023. Pick your strike price and wait it out. 22 months is lots of time to get out the popcorn and watch the fireworks.
- I eat crayons for a living: MSTR put options expiring on Dec 17, 2021. Strike price goes as low as $85, and the premiums are comparatively tiny. A calculated gamble that MSTR crashes and burns before then can net a hefty return, but if the timing is off, or the company manages to not completely botch the landing, the options can still expire worthless even thought the underlying thesis is correct.
- I have a crayon in each nostril and I'd like more: MSTR put options expiring on Apr 16, 2021. Strike price also starts at $85, and premiums are even cheaper. This is pure YOLO territory. The timing will more than likely murder this trade, just like it did this hedge fund.
5. Bonus Material
Back in the halcyon days of March, 2000, MSTR announced it had misrepresented its financials for the previous two years. The event caused a spectacular single day crash of 62%. This giant spike you see on the left was the last rally and crash caused by such shenanigans, adjusted to today's dollars. MSTR was fined by the SEC for fraud, but no one went to jail over it, so this isn't even their first rodayew. Now, two decades later, here we are again.
All of this is why I'm betting against MSTR with $85 PUT options expiring on Dec 17. It's dumb and risky, but I'm riding this one all the way to the Marianas Trench.
6. Further Reading
I can't claim much credit for what I just wrote. All of these ideas have been covered better by others, and I'' list them here. I consider the following essential reading for anyone interested in MSTR and their connection to Bitcoins.
The Bit Short: Inside Crypto’s Doomsday Machine, for understanding how Bitcoins and Tethers are traded.
The next BTC crash could be something to behold, for more on the Bitcoin ecosystem, and its connection to MSTR.
Bitcoin fixes Microstrategy (or does it?), for information on MSTR's Bitcoin position specifically, and what it means for the company.
Glassdoor reviews of MicroStrategy for funsies.
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