Huge news rocked the cryptocurrency sector last week. After many years of waiting, the Securities and Exchange Commission (SEC) approved investment companies to start listing Bitcoin ETFs that people can buy or sell to get exposure to the world's largest cryptocurrency. Now, there are numerous ETFs that anyone reading this can buy and sell, such as the iShares Bitcoin Trust ETF.
While new ETFs will make it easier -- for better or worse -- for people to get exposure to Bitcoin, this could spell trouble for certain companies in the crypto space. One is Coinbase, which earns large trading fees when people buy or sell crypto on its platform. Another is MicroStrategy (MSTR 3.38%), a software company that has pivoted in recent years to bet big on the future of Bitcoin. Here's why these new ETFs may have just ruined MicroStrategy's Bitcoin pivot, and why it may spell trouble for the stock in 2024.
MicroStrategy: Unprofitable software, betting on Bitcoin
MicroStrategy came of age during the dot-com bubble. It sells business intelligence software, although it hasn't seen much success in recent years. Despite the huge boom in software-as-a-service (SaaS) companies over the past decade, MicroStrategy's software segment has struggled. Revenue has stagnated for years, and in fact, it's actually down compared to 10 years ago.
The segment is not consistently profitable, either. Over the first nine months of 2023, MicroStrategy has posted an operating loss of $72 million on just $372 million in revenue.
Yet MicroStrategy's stock is up over 250% in the last five years. Why? One word: Bitcoin. The company's former CEO, Michael Saylor, made a huge pivot to treat MicroStrategy as an investment vehicle for Bitcoin. According to its latest update, the company held 189,000 Bitcoin on its balance sheet, which has a value of $7.77 billion at the time of this writing. Given the enthusiasm for cryptocurrencies among a good chunk of the world's population, it is unsurprising to see MicroStrategy's shares up so much in the past few years.
ETFs spell trouble for its strategy
Before these ETFs, it was much harder for people to get exposure to Bitcoin without paying high trading fees. On platforms like Coinbase, you might have to pay 1% or more of your purchase in trading fees, which can add up if you are frequently buying and selling shares. MicroStrategy, as a separate publicly traded company that you can buy through commission-free brokerages, ended up as a bit of a loophole for investors looking to get exposure to Bitcoin. Why pay a 1% fee to Coinbase when you can get the same Bitcoin exposure by owning MicroStrategy?
Well, that loophole looks unnecessary today with these new ETFs, some of which have annual fees as low as 0.20%. Now, anyone can easily get exposure to Bitcoin as simply as they would for a publicly traded company. With the software business losing money and probably worth little -- if anything at all -- to shareholders, shareholders in MicroStrategy are likely questioning their investment in the company.
If you add back the debt, the math doesn't make sense
Let's say MicroStrategy was equivalent to a Bitcoin ETF. We can even add that you have confidence in Phong Le as the CEO and that you want to bet on him over the long term. Even if this were the case, MicroStrategy looks overvalued.
| Key Figure | Value |
|---|---|
| MicroStrategy Net Asset Value | $5.7 billion |
| MicroStrategy Market Cap | $7.6 billion |
| MicroStrategy Premium (discount) to Net Asset Value | $1.9 billion |
Table by Author.
Its Bitcoin holdings are currently worth $7.77 billion. Its market cap is roughly $7.6 billion at the time of this writing, which is slightly less than the spot value of Bitcoin on its balance sheet. But to buy this Bitcoin, MicroStrategy has taken out long-term debt worth $2.1 billion, which has an estimated annualized interest expense of $35.5 million. MicroStrategy will have to pay this debt back eventually (in dollars, I might add). Subtract this from its Bitcoin holdings, add back the $45 million in cash on the balance sheet, and MicroStrategy's net asset value held on its balance sheet is under $6 billion -- much lower than its market cap. And it still has an unprofitable software company and these interest payments that it will have to deal with every year going forward.
Investors are paying a significant premium when buying MicroStrategy if they want to get exposure to Bitcoin. With much easier methods emerging in these Bitcoin ETFs, it is likely that MicroStrategy shares will run into trouble in 2024. Avoid this stock right now -- there are much better ways to get exposure to Bitcoin these days.
