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Microstrategy will be reflexive on the way up and on the way down

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From fidenza by Geo Chen

There has been a lot of discussion about Microstrategy in my crypto chats, so I wanted to share my thoughts on how this insane feat of financial engineering is going to play out. If I have gotten any of the facts wrong, or if you disagree with my views, feel free to share your comments (I’m bracing for them haha).

I have to start by saying I am still bullish crypto, and those who follow me know that I’ve been mostly long BTC through this cycle. MSTR could certainly keep going up and even double from here. I’m definitely not going to short this rocket ship. However, what Saylor is doing is creating reflexivity on the way up, and eventually on the way down. This is the scenario I see playing out:Today the market believes in the magic of Saylor's “intelligent leverage” and is buying MSTR and expanding its premium. Because the market cap of MSTR is a multiple of the value of its BTC holdings, Saylor is issuing billions in convertible debt that converts into equity at higher prices, and using that debt to fund purchases of BTC. The premise is that this allows investors to get more exposure to BTC per share, while pushing up the price of BTC and therefore MSTR. However, MSTR needs the premium to NAV to stay very positive so he can issue more shares at increasing prices. Each issuance of convertible notes needs to be bigger than the previous one, and therefore MSTR accumulates BTC at an accelerating rate, bringing its cost basis closer and closer to the current market.

At some point, the premium or BTC (or both) will stop going up and top out due to a mature crypto cycle and unsustainable blowoff top dynamics. At that point, MSTR's most recent convertible note issuance, which likely will have been the biggest it has done so far, will fail to reach its conversion price, resulting in the issuance remaining as debt (and therefore leverage) instead of share issuance. Perhaps Saylor will attempt to issue more convertible debt as the market is in the process of topping in an attempt to support the market and his stock price. This will result in him piling on even more leverage at the top of the market while pulling his BTC cost basis even higher.The market will eventually catch on to how precarious this is, and start closing the premium at the same time BTC is likely topping out. The most recent shares that converted at the high will be the first to panic sell. There are also 2x leveraged ETFs on MSTR with several billion in AUM that add more leverage to the MSTR system. As the premium closes, MSTR's ability to issue more shares will be impaired as reflexivity works against them. At some point the sell pressure may potentially push MSTR's premium to a discount to their NAV as the market smells blood in the water. Some in the market will see this as a bargain, but this will actually be a value trap as the market will be selling both MSTR and BTC to force them to capitulate sell to raise cash to fund their debt. The threat of MSTR having to sell their massive holdings of BTC will be enough to trigger the next crypto winter.

Bookmark this post and come back to it in 6-12 months as I believe MSTR will be the Terra/LUNA of this cycle and be the undoing of this great bull market.

This is a free post so feel free to share it. My paid subscription price goes up from $30/month or $300/year to $35/month or $350/year on Dec 1. Those who are currently subscribed or subscribe before Dec 1 will stay at the current, cheaper price.

Disclaimer: The content of this blog is provided for informational and educational purposes only and should not be construed as professional financial advice, investment recommendations, or a solicitation to buy or sell any securities or instruments. The blog is not a trade signaling service and the author strongly discourages readers from following his trades without experience and doing research on those markets. The author of this blog is not a registered investment advisor or financial planner. The information presented on this blog is based on personal research and experience, and should not be considered as personalized investment advice. Any investment or trading decisions you make based on the content of this blog are at your own risk. Past performance is not indicative of future results. All investments carry the risk of loss, and there is no guarantee that any trade or strategy discussed in this blog will be profitable or suitable for your specific situation. The author of this blog disclaims any and all liability relating to any actions taken or not taken based on the content of this blog. The author of this blog is not responsible for any losses, damages, or liabilities that may arise from the use or misuse of the information provided.

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