The remarkable Bitcoin (BTC 0.44%) buying spree of MicroStrategy (MSTR 0.04%) that started in August 2020 shows no signs of stopping anytime soon. On Sept. 13, the company announced another $1.1 billion in Bitcoin purchases, bringing the company's total Bitcoin holdings to $14.6 billion. The company now owns more than 1% of all Bitcoin in the world, and actually owns more Bitcoin than the U.S. government.
Buoyed by all this Bitcoin buying, MicroStrategy has skyrocketed in value. The company's stock is up more than 100% this year, compared to 40% for Bitcoin and less than 20% for the S&P 500. Obviously, MicroStrategy's all-in Bitcoin strategy has paid off so far. But is this something individual investors should be emulating?
How much higher can Bitcoin go?
At the core of MicroStrategy's Bitcoin buying strategy is a gigantic number: $13 million. That's the estimated future value of a single coin in the year 2045, according to Michael Saylor, founder and executive chairman of MicroStrategy. That price target of $13 million is way beyond the $1.5 million price prediction for Bitcoin that Ark Invest's Cathie Wood made in January.
If you do the math, a price tag of $13 million works out to a compound annual growth rate (CAGR) of 30%. In other words, Bitcoin would need to deliver returns of 30% a year, every year, for the next 21 years, to hit a price of $13 million.
CRYPTO: BTC
Key Data Points
That might seem unlikely, but Bitcoin is already up 40% this year, and it was up 150% last year. And during the period from 2011 to 2021, Bitcoin was the best-performing asset in the world, delivering annualized returns of 230%. So, it's certainly not out of the realm of possibility that, over a short enough time horizon, Bitcoin could generate 30% returns.
But what about over the long haul? Demanding that Bitcoin generate annualized returns of 30% is a big ask, especially given Bitcoin's propensity to have major market meltdowns every few years. Remember 2022? Bitcoin plunged 65%, and some investors were convinced that it was going to zero.
According to Ark Invest, there have been at least five different periods in Bitcoin's history when there has been a drawdown of 77% or higher. So let's put it another way: Bitcoin might generate 30% returns for the next few years, and then in one very bad year, it could collapse in value by 77%. You'd be wiped out.
The danger of an all-in strategy
The key to MicroStrategy pumping up its stock market returns has been a strategy of buying as much Bitcoin as possible. It's gotten to the point where investors no longer view MicroStrategy as an enterprise software company. Instead, MicroStrategy is a Bitcoin proxy stock. Before the launch of the new spot Bitcoin ETFs in January, for example, people were buying MicroStrategy to get Bitcoin exposure.
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If you consider the size of MicroStrategy's Bitcoin holdings ($14.6 billion) and compare it to MicroStrategy's overall stock market value ($26 billion), you'll see why. The company's Bitcoin holdings account for more than half of its valuation! For an individual investor, that would be equivalent to having more than half of your portfolio's value locked up in Bitcoin.
Moreover, as part of its all-in strategy, MicroStrategy is using convertible debt to finance Bitcoin purchases. The company just announced its third debt offering of 2024. The goal is to raise $700 million from investors to buy even more Bitcoin.
While this might be oversimplifying things, it would be similar to an individual investor using a low-interest-rate credit card to buy as much Bitcoin as possible. Yes, you'd be on the hook for the monthly credit card payments, but your Bitcoin holdings will presumably skyrocket in value so much that it will be worth it.
How much Bitcoin is too much Bitcoin?
Thus, when it comes to MicroStrategy's Bitcoin strategy, I have mixed feelings. On one hand, it could be a genius-level move if the price of Bitcoin performs as some expect during the next 20 years and it becomes the most valuable asset in the world. On the other hand, the strategy seems to break all the fundamental rules of investing.
For example, the strategy doesn't seem to include any diversification. While I can see Bitcoin accounting for half of your overall crypto holdings, it's harder to argue that Bitcoin should account for half of your entire portfolio. The rule of thumb right now is that Bitcoin should only account for 1% of your entire portfolio. If you are super aggressive, you might bump that up to 2% or 3%. But 50%?
It's OK to load up on Bitcoin, but make sure you're diversifying along the way. That might be the best way to benefit from Bitcoin's extraordinary performance, while also protecting yourself from the downside risk of a major crypto market meltdown.
