Saylor's 'Glitch in the Matrix' Has MicroStrategy Stuck in a While Loop
In Michael Saylor's endless arbitrage game, why should he or anyone stop?
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In computer programming, there is a concept known as the "while" loop, which is a piece of code in an algorithm that repeats a task over and over again until a condition is met. It seems MicroStrategy MSTR is a stock that is stuck in that code.
Many "fundamental" observers are trying to short the stock as it is trading at a multiple times ahead of its core net asset or book value. Yet there is no reprieve.
Why is that?
MSTR is a 3x plus leverage play on Bitcoin, where CEO Michael Saylor has found a glitch in the matrix that allows him to borrow money for essentially nothing and pay out absolutely nothing to its lenders, giving him the dough to buy more Bitcoin.
He is issuing debt via convertible bonds at 0% coupon for 55% premium. But even at those prices, there is more demand that can be met. Seems like an endless arbitrage game, so why should he or anyone stop?
We all know the story of Bitcoin. As it is becoming a mature asset class and being adopted by institutions like BlackRock BLK and other funds, in a world of limited supply of just 21 million tokens, price has no ceiling in the window of time that people need to and want to own it.
Bitcoin is the favored pick of the fiat currency debasement cult of traders, but make no mistake, it is a risk on liquidity trade on steroids. We all saw what happened to Bitcoin in August this year when the Dollar/Yen trade unwound. At a time of real economic stress or geopolitical conflict, gold, while not as "shiny" as Bitcoin, is the store of value in that respect.
The other fundamental story is Bitcoin's halving cycle that occurs every four years and how it tends to rally into a post-election period. Coupled with President-elect Trump being Bitcoin friendly in his policies, even suggesting a strategic Bitcoin reserve, one can understand why estimates currently range from $250,000 all the way to even $1 million.
MicroStrategy holds Bitcoin essentially, and as the price of Bitcoin goes up, so too does its valuation. But the multiple is not just a function of the price of Bitcoin, it is way more. The company borrows cheap money to buy more Bitcoin, that takes the value of its shares higher, which allows it to borrow more to buy more. It is a never ending vicious up cycle.
Given the dividend and coupon yield to its shareholders, and some institutions that are not able to trade actual Bitcoin futures given their mandates, i.e. Swiss National Bank for example, they can trade in this name to get exposure to an asset that is skyrocketing. When there is endless demand and limited supply, therein lies your answer.
Those running fundamental premium to NAV models still quoting how MSTR trades at 3x+ are getting burnt shorting it as the liquidity is just not there in the name to go against the tide.
What goes up must come down, but timing is important. As the price of Bitcoin rises, the MSTR share price will move much more than its intrinsic value. To make matters worse for the shorts, if it moves high enough, it could potentially even be included in the broader S&P 500 and Nasdaq indexes. Then comes the cavalry of the passive funds to push this further into the stratosphere. Job done.
MSTR is certainly stuck in a while loop, and only the price of Bitcoin falling or regulation can end this. We all know the latter will not happen as the big boys are all long and hodling it.
