Reporters from the Wall Street Journal and Bloomberg calling me to ask about Michael Saylor’s bitcoin strategy is a sign that the markets are not entirely lost to speculative fervor.
During the conversations, I was relieved to hear that those reporters understood fundamentals and that MicroStrategy (MSTR) buying bitcoin is not a real corporate strategy. Let me repeat: there’s no fundamental value to MSTR investors from the company investing in bitcoin…expect to speculate on bitcoin. If you want to speculate on bitcoin, then it’s much less risky to buy bitcoin directly rather than owning it through MSTR.
Here’s the math. Let’s say you buy bitcoin at today’s market price. The three most likely outcomes are:
- Bitcoin does not go up or down much.
- Bitcoin goes up a lot
- Bitcoin goes down a lot.
In the first scenario, if you own bitcoin directly you gain/lose nothing. If you own MSTR, you likely gain nothing, but you still carry the risk that MSTR might drop because the company has no earnings and no real expectation for future earnings because the CEO leveraged the business to buy bitcoin.
In the second scenario, if you own bitcoin directly you gain a lot. If you own MSTR, you likely gain a lot, but not as much because so much of MicroStrategy’s bitcoin purchases are funded by debt, which has to be paid back before you get your bitcoin. Pus, you still carry the risk that MSTR might drop because the company has no earnings and no real expectation for future earnings because the CEO leveraged the business to buy bitcoin.
In the third scenario, if you own bitcoin directly you lose a lot, but you still have your bitcoin, albeit at an above-market price. If you own MSTR, you likely lose everything because MicroStrategy’s bitcoin are now valued above market, which means all the debt funding those purchases could be underwater. Because the debt holders get their money back before anything goes to equity holders, there is likely nothing left over for equity holders once the debt holders get paid. If the value of the stock is tied this tightly to the value of bitcoin, then there’s nothing left for equity holders since MicroStrategy has no earnings and no real expectation for future earnings because the CEO leveraged the business to buy bitcoin.
In other words, it makes no sense to buy MSTR to get bitcoin exposure, which means it makes no sense to buy MSTR for any other reason. Here’s what the Wall Street Journal quoted me saying about MSTR:
“It’s symptomatic of a market that has become obsessed with believing in get-rich-quick schemes,” Trainer said. “If you like bitcoin, go buy bitcoin. But don’t invest in a company that’s losing money and also buying bitcoin, because then you’ve sort of doubled your risk.”
You can always trust me to tell you the unvarnished truth because I want my clients to be successful. New Constructs is not about luring unsuspecting investors into speculative schemes that line the pockets of Wall Street insiders. We’re about giving you the best research in the business based on proven-superior fundamental data that we work extremely hard to get.
Speaking of picking stocks, did you know we’re launching a family of funds with Bloomberg?
We have three indices in production now with Bloomberg’s Index Licensing Group. You can get more details on them here.
- Bloomberg New Constructs Core Earnings Leaders Index (ticker: BCORE:IND)
- Bloomberg New Constructs 500 Index (ticker: B500NCT:IND)
- Bloomberg New Constructs Ratings VA-1 Index (ticker: BNCVA1T:IND).
The takeaway here is that there are a lot of folks who think our stock picking is second to none. You do not have to take my word for it.
I hope you’ll take the time to get to know us better because you have more confidence that you can trust us.
This article was originally published on December 4, 2024.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
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