Title: Revealing the Risks of Investing in Strategy (MSTR): Examining the Bitcoin Scheme Unveiled
The stock of the company now known as Strategy (MSTR), previously MicroStrategy, experienced a significant surge throughout 2024 due to its association with Bitcoin. Strategy has been actively acquiring bitcoins, issuing stock and debt to fund further acquisitions, and recently offering preferred stock for additional purchases. The company’s primary focus has shifted towards being a vehicle for Bitcoin investment rather than a diverse business entity under a single brand.
However, the unique structure and management approach championed by CEO Michael Saylor have introduced several risks for investors in Strategy. This article highlights three major risks that potential investors should be cautious of before diving into this Bitcoin proxy.
1. Discrepancy between Market Cap and Net Asset Value:
One of the most prominent risks for investors is the significant divergence between Strategy’s market capitalization and its net asset value. The company’s net asset value stood at $43.72 billion by the end of 2024, adjusted for the fair market value of its Bitcoin holdings. In contrast, the total market capitalization reached $71.2 billion at the same time, indicating an overvaluation of approximately 63%. This means that investors are paying a premium of around 63% to own Bitcoin indirectly through Strategy stock, rather than investing in the cryptocurrency itself or a Bitcoin ETF.
Strategy’s management is capitalizing on this disparity by leveraging stock sales to fund additional Bitcoin acquisitions. The company raised $15.1 billion through stock sales in the fourth quarter of 2024 and an additional $2.4 billion by February 2, 2025, with the potential for a further $4.3 billion in stock sales. These funds are channeled back into Bitcoin purchases, allowing Strategy to exploit the overvaluation of its stock and accumulate more Bitcoins. While this strategy benefits shareholders in the short term, it raises concerns about the sustainability of the company’s operations if the stock loses its inflated value.
2. Debt Burden and Profitability Challenges:
Strategy has resorted to issuing convertible debt to bolster its stock price, despite facing financial challenges and operating losses. Convertible bonds offer lower interest rates and the option to convert them into stock at a later stage, which can be advantageous for companies with limited cash flow. Strategy currently has six series of convertible debt with interest rates ranging from 0% to 2.25%, indicating its reliance on debt financing to sustain its operations.
If you are considering an investment in Strategy, it is crucial to be aware of these risks and seek advice from a financial advisor to make informed decisions.
The company also recently issued convertible preferred stock, which functions similarly to a bond. However, it had to do so at a significant discount, despite the preferreds offering a high 8 percent coupon. The issuance of both bonds and preferred stock means that the company must regularly pay interest. Unfortunately, Strategy’s underlying business appears to be weak. For instance, in 2024, it incurred an operating loss exceeding $60 million, excluding write-offs on digital assets like Bitcoin. Yet, it faced interest expenses of around $62 million for the year, indicating that its operations did not generate sufficient cash to cover these expenses. Consequently, the interest payments were funded solely through existing cash reserves or new financing.
This situation underscores a critical weakness within Strategy – its reliance on access to capital markets to sustain its growth trajectory. Should the company struggle to secure funding for its expansion endeavors, the question arises of whether investors will maintain the stock’s inflated valuation. Furthermore, if Strategy needs to liquidate bitcoins or stock to address its convertible debt, will it be able to do so at favorable prices? The answers to these quandaries hinge on future market conditions, with Bitcoin’s inherent volatility exacerbating the risks.
Bitcoin’s innate volatility is widely recognized, a characteristic shared by most cryptocurrencies. Unlike stocks, cryptocurrencies lack the backing of tangible assets and cash flows from an underlying business. Their value is solely underpinned by traders’ demand, driven by the anticipation of selling them later for a profit. Consequently, due to their reliance on traders’ sentiment, cryptocurrencies exhibit high levels of volatility.
When combined with Strategy’s lofty valuation – where the stock surpasses the actual value of its assets – Bitcoin’s volatility could spell ruin for the company in the event of a significant decline. Theoretically, a 1 percent drop in Bitcoin’s price might translate into a 1.62 percent decrease in Strategy’s stock value. In anticipation of a Bitcoin downturn, traders might rush to divest their holdings in the stock, particularly given its inflated value and substantial downside risk.
Bitcoin’s history of extreme price fluctuations – having plummeted by over 60 percent in a single calendar year on three separate occasions – suggests that another significant drop is inevitable. The looming question remains whether such a decline would be severe enough to obliterate Strategy. Only time will reveal the answer.
In conclusion, Strategy currently stands as a popular stock choice, buoyed by Bitcoin’s ongoing rally. However, not every trendy stock warrants investment consideration. It is advisable to seek guidance from a financial advisor before making significant investment choices. For Strategy to uphold its valuation, it must continue acquiring more Bitcoin. Given the stock’s leveraged nature, any downturn in the cryptocurrency market could unleash severe repercussions on Strategy and other heavily leveraged Bitcoin investments.
Editorial Disclaimer: All investors are urged to conduct thorough independent research on investment strategies before finalizing any investment decisions. Additionally, investors should bear in mind that past investment performance does not guarantee future price appreciation.
