After the dust settled from the US election, Bitcoin entered a phase of significant rise, repeatedly setting new historical highs and coming close to the $100,000 mark. This has been referred to as the 'shadow stock' of Bitcoin. $Strategy(MSTR.US)$ In just two weeks, it doubled at one point, with a Market Cap exceeding $100 billion. As of November 25, MSTR holds over 0.38 million Bitcoins, making it the largest holder among global companies, and it continues to accumulate.

MicroStrategy was originally an obscure software company providing data analysis services to its clients. However, starting from August 2020, the company's founder, Michael Saylor, decided to continuously purchase Bitcoin using the company's excess cash, debt, and equity financing. Since then, the company has almost become synonymous with Bitcoin in the stock market, demonstrating even greater flexibility compared to Bitcoin.

According to TipRanks Statistics, MicroStrategy's long-term ROI outperforms Bitcoin. Since the company shifted to a Bitcoin strategy, it experienced a maximum drawdown of 81%, yet still achieved an annualized ROI of 80%. In comparison, Bitcoin's annualized ROI during the same period was 60%, with a maximum drawdown of 73%.

On November 21, the well-known short-seller institution Citron stated that MicroStrategy had completely deviated from the fundamentals of Bitcoin and established a short position. That day, the company's stock price experienced severe fluctuations, initially rising over 14% but eventually closing down more than 16%.

What factors support the skyrocketing stock price? What considerations led Citron to short the stock? Let's delve into this week's [Opportunity Express].

No investment without risk?

On October 30, MicroStrategy announced plans to raise $42 billion in capital over the next three years, consisting of $21 billion in equity financing and $21 billion in debt financing, all of which will be used to purchase Bitcoin.

In November, the company issued a batch of convertible bonds that mature in 2029, which were highly sought after by investors. Initially, the company planned to raise $1.75 billion, but due to overwhelming demand, the financing limit was raised to $2.6 billion after two days, and by the final issuance on November 21, the financing scale reached $3 billion.

Convertible bonds are bonds that allow holders to convert them into company stock under specific conditions (such as after expiration). The interest rate on these bonds is 0%, with a conversion price of $672.4 per share, resulting in a premium rate as high as 55%. According to Statistics from Barron's, MSTR's convertible bonds set records this year for both the lowest financing rate and the highest conversion premium rate.

Simply put, the company raised a large amount of funds from investors without incurring borrowing costs. Moreover, many investors expect the company's stock price to continue to rise in the future. It is important to note that this was achieved in the United States where the risk-free interest rate is above 4.5%.

After financing at a low cost or even at no cost, the company will enter the public market to buy Bitcoin, stimulating the price of Bitcoin to rise. This, in turn, will further boost the company's stock price, allowing it to raise more money at a low cost to continue purchasing Bitcoin. This positive cycle is referred to as the 'Bitcoin Flywheel.'

In a recent interview, the company's leader Michael Saylor stated, 'We can make $0.5 billion in just one day. We are likely the fastest-growing and most profitable company in the United States right now.'

However, according to financial regulations, MSTR's Bitcoin earnings are not reflected in the profit statement. The net profit primarily reflects the operational situation of its original business, thus analyzing based on traditional frameworks such as PE will fail.

Benchmark Analyst stated that MicroStrategy's business pivot is one of the boldest strategies in the history of American corporations. Although the controversial strategy has led to considerable skepticism, its strong performance offers support for its effectiveness.

Short sellers are targeting.

Xianglun indicated that they remain Bullish on Bitcoin's performance but will hedge through shorting MSTR. This is not the first Institution to build a position in this manner. In March of this year, Kerrisdale Capital also stated they were long on Bitcoin while shorting MSTR stock.

This is primarily due to the fact that investing in Bitcoin has become easier with the launch of the Bitcoin ETF, however, MSTR has long had a premium relative to Bitcoin. The tracked indicator is the Net Asset Value Premium (NAV Premium), which is MSTR's total Market Cap divided by the total value of Bitcoin held by MSTR. (The revenue from the company's original Business is only at the 0.1 billion dollar level, which can be essentially ignored.)

As of November 25, this indicator is approximately 2.5 times. Under this assumption, buying MSTR means paying over 0.23 million dollars for each Bitcoin.

Source: MSTR Tracker. This content is for reference only and does not constitute any investment advice. Past performance does not predict future results, markets are risky, and investments should be made with caution.

Michael Saylor argued that these shorts do not actually understand MSTR's unique Business model. He stated that Bitcoin ETFs cannot utilize their held assets for low-cost financing, whereas MSTR can achieve returns far exceeding borrowing costs and Bitcoin's price increases in this manner.

This practice may invite imitation from other listed companies, but MSTR is already far ahead in Bitcoin holdings and has highly focused its Business on Bitcoin, giving the company a unique position. "While Apple or Google have the ability to purchase the same amount of Bitcoin, their underlying Business remains their own business, whereas ours is entirely Bitcoin," he stated. "We just inadvertently ended up in this position."

If Bitcoin's price continues to rise, MSTR's flywheel model is likely to keep functioning, and the high premium is expected to continue. But if Bitcoin's price experiences a sharp decline, this positive cycle will also be affected. "The cryptocurrency market has always had to deal with high volatility. Waking up every day is an adventure, each week brings a new drama, and every month feels like a paradigm shift," an Analyst from Pythagoras Investments stated.

Response Strategy

The volatility analysis tool shows that MSTR's current volatility is at a high position. In a risk-neutral situation, the higher the implied volatility of the underlying asset, the more premium needs to be paid, theoretically more favorable for the options seller. Path: Underlying Stocks Details > Options > Analysis > Volatility Analysis.

The implied volatility value, IV ranking, and IV percentile are theoretical estimates; actual market conditions may not always align with the theoretical information shown. Investors should exercise caution and use multiple information sources when making investment decisions, as there is no guarantee that using any tools or data provided on the application will lead to investment success or reduce investment risks.

If a decline in volatility is anticipated in the near future, but it's unclear whether it will rise or fall, consider constructing a Short Straddle or a Short Strangle.

It should be noted that MSTR's volatility has surpassed that of Bitcoin itself. When the volatility of the underlying asset is high, it may further increase, as seen in the historical short squeeze of GameStop (GME), which could result in significant losses for your Sell options strategy.

Risk Disclosure: This content does not constitute a research report, is for reference only, and should not be used as the basis for any investment decision. The information contained herein is not a comprehensive description of the securities, markets, or developments mentioned. Although the sources of information are considered reliable, the accuracy or completeness of the above content is not guaranteed. Furthermore, there is no guarantee regarding the accuracy of any statements, viewpoints, or forecasts provided in this article.

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