MSTR vs. BTC

After the election, arsenic everyone but for muggles know, the terms of BTC rallied to each clip highs (ATH) conscionable abbreviated of $100,000. At the clip of this writing, it’s hovering astir $98,000. An absorbing question past is: what happened to Michael Saylor’s MicroStrategy (MSTR) during this period?

The publically traded stock, synonymous with its unconventional and risk-on co-founder arsenic good arsenic the terms of BTC, besides rallied to post-election ATH — arsenic 1 mightiness expect — exceeding $500.

Then past week, it took a precipitous ~22% abbreviated selling-inspired deed based disconnected of a study expressing concerns astir the company’s valuation. The sound astir the banal piqued my interest. I was funny to excavation successful and spot what imaginable marketplace opportunities mightiness exist, oregon astatine slightest recognize the worth of owning MSTR vs BTC.

This graph is simply a spot misleading. The main crushed MSTR has outsized gains to BTC is that MSTR is highly levered. Very highly levered. It has acquired 386,700 BTC for astir $22 billion, which represents an unsurprising ~99.5% of its equilibrium sheet. To execute this, the institution has raised $9 cardinal successful debt, immoderate with zero interest. If their BTC holdings are collateralized by this debt, they could look a challenging repayment successful a terrible BTC downturn. They besides raised $4.6 cardinal successful equity for these BTC purchases. With an mean BTC terms of ~$56,500, appreciation factors heavy into the marketplace cap.

The correlation betwixt MSTR and BTC is comparatively high, utilizing some Pearson and Spearman correlation coefficients, astatine astir 65% utilizing 12 months of regular closing terms data. Remove leverage and the correlation is beauteous linear. Generally, travel the terms of BTC and the terms of MSTR volition follow. The correlation is strong, but not truthful beardown for respective reasons. MSTR runs a precise profitable concern quality (BI) cognition that generates yearly revenues astir $500 million. This makes it 1 of the largest players successful the BI space. It’s a banal with a existent concern and prone to terms moves based connected the underlying business. BTC leverage is the cardinal though, creating a 2.5x volatility to BTC.

Arguably, MSTR is not a bully proxy for BTC and unless you’re comfy with the accrued leverage and volatility, it’s besides not a comfy concern opportunity. Just bargain a BTC ETF. You tin leverage BTC perpetual contracts oregon BTC ETFs to get a akin hazard illustration to MSTR. But if you privation the leverage, it’s astir apt amended to fto Michael Saylor instrumentality the hazard and arsenic an investor, conscionable ain the terms risk. But it isn’t a replacement.

Given the beardown correlation and MSTR’s oversized vulnerability to BTC, is determination a commercialized here? Let’s look astatine mean reversion. The melodramatic MSTR rally earlier its large driblet past week pushed the z-score to astir 4 modular deviations (4σ). Looking astatine the graph, however, historically determination haven’t been galore mean reverting opportunities. A ample portion of this tin beryllium attributed to the caller usage of leverage to adhd to its position, truthful the narration betwixt the 2 assets is present overmuch antithetic than before.

MSTR has the quality to merchantability different ~13 cardinal successful equity, which could widen the ratio further. One tin reason that MSTR is importantly overvalued to BTC and an adjacent further narrowing of the dispersed could occur.