We are long bitcoin and short shares of MicroStrategy, a proxy for bitcoin which trades at an unjustifiable premium to the digital asset that drives its value. Shares of MicroStrategy have soared amid a recent rise in the price of bitcoin but, as is often the case with crypto, things have gotten carried away. The bitcoin price currently implied by MicroStrategy’s stock is now over $177k, i.e., two and a half times the spot price of bitcoin. The days when MicroStrategy shares represented a rare, unique way to gain access to bitcoin are long over. Bitcoin is now easily obtainable through brokerages, crypto exchanges, and more recently low fee ETPs and ETFs. None of the reasons commonly provided for MicroStrategy’s relative attractiveness justify paying well over double for the same coin. MicroStrategy’s trading history and basic common sense suggests the current inflated premium will contract, much as it has on prior occasions, providing a compelling opportunity for a pair trade.

MicroStrategy bills itself as a bitcoin development company. Its steady but sleepy software analytics business constitutes only 3% of the total enterprise value of the company. MicroStrategy’s value is driven by its bitcoin holdings, which were acquired predominantly though debt financings, equity linked convertible notes, and ATM equity offerings. Bulls tout management’s “intelligent” use of leverage and accretive bitcoin purchases from equity sales proceeds as reasons why shares should trade at a substantial premium. But we find the logic flawed. Leverage cuts both ways and while MicroStrategy has succeeded in increasing the amount of bitcoin held, the impact of massive dilution has also kept the amount of bitcoin per share virtually unchanged in recent years. Shareholder value creation has been overwhelmingly driven by simple bitcoin price appreciation – much as it would from owning bitcoin outright.

Other reasons cited for a substantial premium such as the ability to reinvest cash flows from the software business into bitcoin, lack of management fees, liquidity, and ease of trading all strike us as weak. Free cash flow from the software business was only $10m in 2023, enough to tack on 0.1% more bitcoin to MicroStrategy’s current holdings. The lack of management fee might be relevant if ETP management fees were 2% and the premium to spot in MicroStrategy was a modest 10%. But ETP fees are in fact only 0.25%, as is the case with BlackRock’s IBIT and Fidelity’s FBTC, and the NAV premium is 157%. IBIT, FBTC, and a raft of other vehicles offer liquidity and ease of trading that will only grow in number globally. These developments bode well for bitcoin, but represent a secular threat to MicroStrategy’s scarcity value and bloated NAV.

At 2.6x, MicroStrategy’s equity premium is exceptionally high. Since the beginning of 2021, the premium has been 2.0x or below on 94% of trading days. The historical average is 1.3x. Our thesis is not predicated on a bearish view of bitcoin or MicroStrategy, but rather a belief that the relationship between the two has grown distorted. Assuming the premium to NAV reverts to more historically consistent averages implies a 50% return.

Read our full report here.