How will MicroStrategy, which is buying Bitcoin crazily, die? And why Meitu’s stock price is not rising

Wu Shuo Author | Tan Shu

Editor of this issue | Colin Wu

On March 12, the US business software company MicroStrategy announced that it had purchased another 262 bitcoins for $15 million, with the average price reaching a staggering $57,146. MicroStrategy said it now owns about 91,326 bitcoins, purchased at a price of $2.21 billion, with an average price of $24,214 per bitcoin. At the current price, the value of the bitcoins held is more than $5 billion, with profits approaching $3 billion.

Over the past seven months, MicroStrategy’s purchases have shown no signs of stopping. According to the company’s publicly disclosed [documents](1), MicroStrategy stated that Bitcoin is the company’s primary value reserve option and has no intention of selling Bitcoin, intending to “hold it for 100 years.”

MicroStrategy's massive purchase of Bitcoin has attracted some imitators, among which Tesla is the most famous, having purchased $1.5 billion worth of Bitcoin this year. Prior to this, Musk had discussed the possibility of buying Bitcoin in bulk with Saylor on Twitter. In addition to Tesla, Twitter CEO Jack Dorsey's payment company Square also bought a large amount of Bitcoin.

Cai Wensheng's Meitu also became the "first person to try" in Asia. He announced that he spent $17.9 million to buy 379 bitcoins and $22.1 million to buy 15,000 ethers on March 5. On March 17, Meitu announced that it had purchased another $50 million worth of bitcoin and ether, and tried to create the image of "the first listed company to buy a large amount of ether."

However, after the news was released, Meitu's stock price did not seem to fluctuate and remained below 3 Hong Kong dollars. Of course, after a careful investigation of MicroStrategy, we found that its executives were constantly selling their shares to cash out, and the company also had a rich history of scandals (Meitu and Cai Wensheng are similar). This not only makes us wonder whether there is a solid demand for institutions to enter the cryptocurrency market, or is it a bubble?

Microstrategy and Michael Saylor

What is the background of MicroStrategy, which has bought a large amount of Bitcoin? MicroStrategy was founded by Michael Saylor in 1989 as a business software company, and the company's past is not very glorious.

According to a report on the website of The New Republic (2), in 2000, MicroStrategy had to pay a fine of US$11 million to the SEC for false accounting, of which Michael Saylor himself paid US$8.2 million. Despite this, Michael Saylor still serves as the company's CEO to this day.

At the end of 2020, Michael Saylor transferred 50,000 shares of MicroStrategy to Alcantara LLC, a company he controlled. This move also aroused public suspicion, because according to regulations, company executives need to disclose to the public in a timely manner when they reduce their holdings of company stocks, so many executives often operate stocks through non-listed companies they control. Michael Saylor's move to transfer stocks is also suspected of evading supervision. Recently, MicroStrategy executives have also continued to cash out, causing the stock price to fall.

Is a Bitcoin ETF listed in the United States far away?

Since the Winklevoss brothers applied to the SEC for a Bitcoin ETF in 2013, countless companies have made similar attempts, but all have ended in failure. The reason is that the SEC believes that Bitcoin is extremely opaque and its price is easily manipulated.

However, not only are more and more institutions accepting Bitcoin, some regulatory agencies have also opened their arms to it. In February, Canada launched the country's first Bitcoin ETF, ahead of the United States. So, will the attitude of the U.S. regulatory authorities change as a result?

Regardless of the SEC's attitude, the arrival of Bitcoin ETFs seems inevitable. Even if the SEC does not approve any company's Bitcoin ETF, companies like MicroStrategy can turn their stocks into Bitcoin ETFs through a "curve-saving" approach.

Currently, MicroStrategy's market value is nearly $6 billion, and the 91,064 bitcoins held by the company are worth $4.6 billion, which means that 76% of MicroStrategy's stock value comes from bitcoin. If the growth rate of bitcoin prices exceeds the growth rate of the company's commercial software business in the long term, this ratio will gradually increase. When it approaches 100%, MicroStratedy's stock will be a de facto Bitcoin ETF. From a regulatory perspective, such a fait accompli will be accepted by then. In JPMorgan Chase's latest JPMorgan Chase cryptocurrency risk exposure basket, MicroStrategy accounts for up to 20%.

Risks that cannot be ignored

Judging from MicroStrategy's Bitcoin investment, this part of the investment is quite successful, because its holding cost is US$24,119, and the current price of Bitcoin is above US$50,000. In other words, Bitcoin needs to lose half of its current value to cause Microstrategy to lose money on this part of its investment.

However, the risks faced by Microstrategy are not limited to the decline in the price of the currency. The greater risk comes from the decline of its own stock. In December 2020, MicroStrategy just announced the issuance of $400 million in convertible bonds to buy Bitcoin. [Citigroup](3) immediately adjusted its rating to "sell", causing the company's stock to fall 13.9% the next day. It can be seen that Wall Street is not optimistic about a company betting too much cash on a volatile asset such as digital currency.

Another example is Tesla. After Tesla bought $1.5 billion worth of Bitcoin, the company’s stock price has fallen by more than $200 billion. There are already calls in the market for Musk to sell Bitcoin to buy back the company’s stock(4).

However, Bitcoin assets only account for a very small part of Tesla, and for companies like MicroStrategy, if the price of the currency falls in the future, its stock price will also fall. The fall in stock price will increase the difficulty of the company's financing, making it impossible for it to purchase coins by issuing convertible bonds or issuing new shares to maintain the price of the currency, thus creating a vicious cycle and eventually even leading to the company's bankruptcy. Judging from the history of Bitcoin over the past decade, it is not impossible for the price of the currency to be bearish for a long time. If this happens, the stock price of companies holding Bitcoin will be highly correlated with the trend of the currency price, which will further increase the volatility of Bitcoin. Bitcoin has proven its resilience, but whether listed companies holding a large amount of Bitcoin can escape this disaster is unknown.

[1]:https://ir.microstrategy.com/news-releases/news-release-details/microstrategy-adopts-bitcoin-primary-treasury-reserve-asset

[2]:https://newrepublic.com/article/160773/bitcoin-price-boom-michael-saylor-microstrategy

[3]:https://www.theblockcrypto.com/linked/87054/citi-microstrategy-stock-downgrade-bitcoin

[4]: https://finance.yahoo.com/news/tesla-sell-bitcoin-buy-back-050117982.html