MSTR and Bitcoin’s Sharp Correction

This week witnessed a sharp downturn in both the cryptocurrency market and crypto-centric stocks, with MicroStrategy (MSTR), the world’s largest corporate holder of Bitcoin, experiencing a significant drop. MSTR’s share price plummeted to $1,018 on Wednesday, marking a nearly 50% decline from its March end peak of $1,919.

Simultaneously, Bitcoin (BTC) itself wasn’t spared, falling to about $56,800, a 23% decrease from its all-time high of $73,737 on March 14. However, it has managed a rebound, climbing over $61,000 as the week closed.

For MSTR shareholders, this decline may have been jarring, yet it also indicates a return to what many analysts consider a more sustainable valuation of the stock, which had long been trading at a substantial premium over its direct Bitcoin holdings. By Wednesday, this premium had adjusted down to 67% over its BTC assets, from a staggering 175% in late March.

Markus Thielen, founder of 10x Research, communicated that he believes the stock is now trading closer to “fair value.” His firm had previously argued that MSTR’s stock price should approximate $1,000, advising new investors to focus directly on Bitcoin instead.

As of the end of the week, MicroStrategy’s market cap stood at $21.37 billion, with its balance sheet showcasing 214,400 BTC valued at $13.26 billion at current market rates.

Given MicroStrategy’s strategy of heavily investing in Bitcoin, the company is often viewed as an unofficial Bitcoin spot ETF. Unlike true Bitcoin ETFs, which have market makers and redemption mechanisms, MSTR’s stock can fluctuate significantly relative to the value of its Bitcoin holdings based on market sentiments.

The company’s unique approaches, such as issuing low-cost debt to purchase more Bitcoin or leveraging stock premiums to boost its Bitcoin per share ratio, further differentiate it from standard ETF practices.

While some critics had forewarned that MSTR’s earlier premium levels were unsustainable, supporters argue that the premium accounts for the company’s potential to increase its Bitcoin holdings per share in the future. Yet, James Butterfill, Head of Research at CoinShares, suggests that the stock’s fundamentals are currently overshadowed by its behavior as a leveraged play on Bitcoin prices, typically moving at 1.5 times the rate of Bitcoin itself.

Butterfill also noted that the recent dip was likely an overreaction to initial hawkish signals from the Federal Reserve, which later adopted a more dovish monetary policy stance. This shift is expected to bolster both MSTR and Bitcoin prices, potentially marking the low point in this cycle.

This week’s correction in MSTR and Bitcoin might have been steep, but it also reflects a market recalibration that could set the stage for more stable valuations based on adjusted expectations and the broader economic environment.