With the price of Bitcoin (BTC -2.16%) soaring, it's no surprise that companies highly leveraged to the price of the cryptocurrency are also soaring. Case in point: MicroStrategy (MSTR 3.38%) is up more than 200% year to date, thanks in large part to its aggressive Bitcoin buying campaign that has ramped up significantly in 2024.
MicroStrategy now owns 214,246 bitcoins, or slightly more than 1% of all Bitcoin that will ever exist. That's a staggeringly large number.
Given that MicroStrategy shows no signs of stopping when it comes to buying even more of the cryptocurrency, it's finally time to ask: Can a company actually own too much Bitcoin to be a good investment?
The erosion of the "proxy stock" effect
In 2023, investors viewed MicroStrategy much like a giant spot Bitcoin exchange-traded fund (ETF). That paid off big when investors didn't actually have spot Bitcoin ETFs as an investment option.
As a result, there was a mad scramble to find the perfect "proxy stocks" to benefit from the surge in the token's price. Investors had two basic options: Bitcoin mining stocks or a company such as MicroStrategy with vast holdings of the digital currency on its balance sheet. That helps to explain the phenomenal rise in the value of MicroStrategy, which is up about 500% during the past 12 months.
But with the new spot Bitcoin ETFs available for trading, everything could change. Investors can now choose between a proxy stock and the digital currency itself.
Any guesses as to which is now the more attractive investment? During the past three months, more than $30 billion has surged into the new spot Bitcoin ETFs, and that has very much eroded the appeal of MicroStrategy. Over time, it is likely that we will continue to see the erosion of the proxy-stock effect, as investors begin to shift even more of their money away from MicroStrategy and into the spot Bitcoin ETFs.
Is MicroStrategy overvalued?
There's another factor to take into account, and that's the gap between the stock market valuation of the company and the valuation of the company's Bitcoin holdings. Heading into 2024, there was almost a direct 1:1 correlation between the two valuations, since MicroStrategy was viewed as a proxy stock for Bitcoin.
As a result, you simply added up the value of the company's Bitcoin holdings using current market prices, and that was the value of the company.
But now consider what's happening with MicroStrategy's stock market valuation. The company is now trading at a hefty premium to its crypto holdings. Some simple back-of-the-envelope math is all that's needed. Using a Bitcoin market price of $70,000, the value of the company's crypto holding is roughly $15 billion. But the stock market valuation of the company has now ballooned to $32 billion.
Image source: Getty Images.
Given that there has not been a substantive change to the core business of the company (enterprise software), what this seems to suggest is that investors are attaching a hefty premium to MicroStrategy, based on where they think the price of Bitcoin is headed. Quite simply, they could be expecting the price to more than double from its current level.
From my perspective, that's a huge potential problem. If the price of the crypto fails to double as expected, that could be disastrous.
How much Bitcoin is too much Bitcoin?
Of course, there's nothing wrong with holding Bitcoin on the balance sheet. That's not the problem. The problem is that MicroStrategy seems to be overdoing it.
The company is now issuing debt to finances purchasing the crypto at a time when it is trading near all-time highs. During a two-week period in March, the company issued more than $1 billion in convertible debt to buy more Bitcoin.
Maybe that would have been an effective strategy back when investors viewed MicroStrategy much like a giant Bitcoin ETF. But times have changed. Investors can now buy real Bitcoin ETFs. To me, that seems like a much better option than trying to invest in a company that appears to be overvalued.
I would feel a lot more comfortable if MicroStrategy actually got back to doing what it does best -- enterprise software -- and stopped worrying about being the largest corporate owner of Bitcoin in the world.
