microstrategy to raise 400m to buy more bitcoin

The strategy of MicroStrategy to acquire Bitcoin using debt financing is unsustainable in the long run, according to Lionel Laurent, a columnist for Bloomberg Opinion.

Since adopting Bitcoin as a reserve asset in August 2020, Michael Saylor’s company has increased its market capitalization by approximately 50 times.

Primarily, MicroStrategy has funded its Bitcoin purchases through equity and debt capital. Laurent simplified the company’s approach as follows: raise financing, buy Bitcoin, watch the stock price rise alongside Bitcoin, and then go back to the market to repeat the cycle. Investors treat these investments as an indirect way to acquire digital assets.

While Bitcoin has risen by about 120% this year, MicroStrategy’s stock has surged by around 650%. The company is now valued 2000 times higher than its projected profit for the next year. Laurent likened the situation to a financial glitch in a video game: “profitable, exciting, and likely unsustainable.”

“This is the fun part of any glitch — the license to print massive amounts of money that seem utterly disconnected from reality,” he noted.

The expert acknowledged that MicroStrategy’s Bitcoin reserves, worth around $24 billion, far exceed the company’s debt of $4.3 billion. However, the plan to raise $42 billion in the next three years raises concerns about the sustainability of the scheme given the risks.

One of the threats to MicroStrategy, according to Laurent, is the potential for Bitcoin to fall, as the cryptocurrency has historically experienced 50% or more downturns. A crash would trigger a “vicious cycle of write-offs and asset sales” for the company.

“Even without a crypto-apocalypse, MicroStrategy’s model will face bill payments. The stock is becoming an increasingly expensive Bitcoin proxy in a crowded market of similar products — the market cap is nearly four times the value of the BTC reserves,” emphasized the columnist.

He also pointed out that Citron Research’s short position in MicroStrategy’s stock could prove to be a smart move. Since it was opened, the company’s stock has dropped by 16%, while Bitcoin has risen.

“Saylor has created his own cult in the financial markets. The question now is how blind his followers are to the risks ahead. For MicroStrategy, which has staked an astronomically large borrowing plan, […] this endless financial glitch won’t last forever,” concluded Laurent.

Reminder: Analysts at BitMEX called the likelihood of MicroStrategy liquidating its Bitcoin reserves “extremely unlikely” due to market conditions. According to their assessment, Bitcoin would have to fall to $15,000 for this to happen.