Following the conclusion of the U.S. presidential election, Bitcoin embarked on a bullish run, repeatedly setting new all-time highs and at one point nearing the $100,000 mark. $MicroStrategy (MSTR.US)$ , often dubbed a Bitcoin proxy stock, saw its value double in just two weeks, with its market capitalization surpassing $100 billion on November 20.

As of November 25, MSTR held over 380,000 Bitcoins, the largest holding by any global corporation, and continues to accumulate more.

MicroStrategy, once a low-profile software company focused on data analytics, changed its strategy in August 2020 when founder Michael Saylor opted to use excess cash, debt, and equity financing to buy Bitcoin continuously. Since then, the company has become synonymous with Bitcoin in the stock market, demonstrating even greater volatility than the cryptocurrency.

According to TipRanks, MicroStrategy's long-term returns have outperformed Bitcoin. Despite experiencing a maximum drawdown of 81%, the company has achieved an 80% annualized return since pivoting to a Bitcoin strategy. In comparison, Bitcoin's annualized return during the same period was 60%, with a maximum drawdown of 73%.

On November 21, renowned short-seller Citron Research claimed that MicroStrategy had completely deviated from Bitcoin fundamentals and established a short position. The company's stock experienced significant volatility that day, initially rising over 14% before closing down more than 16%.

What factors drove the stock's meteoric rise, and what compelled Citron to short it? Let's delve into this week's Opportunity Mining.

Profit without cost?

On October 30, MicroStrategy announced plans to raise $42 billion over the next three years, half through equity financing and the other half through debt financing, all earmarked for bitcoin purchases.

In November, the company issued a batch of convertible bonds due in 2029, which were highly sought after by investors. Initially planning to raise $1.75 billion, the company increased the amount to $2.6 billion due to overwhelming demand, ultimately reaching $3 billion by November 21.

Convertible bonds allow holders to convert them into company stock under certain conditions, such as at maturity. These bonds were issued with a 0% interest rate and a conversion price of $672.4 per share, boasting a 55% conversion premium.

According to Barron's, MSTR's convertible bonds set records for the lowest financing rate and highest conversion premium of the year.

Essentially, the company secured significant funds from investors with no borrowing costs, even as the U.S. risk-free rate exceeded 4.5%.

After securing low or no-cost financing, the company buys bitcoins on the open market, driving up its price. This, in turn, boosts the company's stock price, enabling further low-cost fundraising for more bitcoin purchases, a positive feedback loop dubbed the Bitcoin "flywheel."

In a recent interview, CEO Michael Saylor stated, "We may very well be the most profitable company in the U.S. growing the fastest right now. There are not many companies making $500 million a day."

According to financial criteria, MSTR's Bitcoin gains are not reflected in its profit and loss statement. Net profit mainly reflects its original business operations, making traditional analysis frameworks like price-to-earnings ratios ineffective.

Benchmark analysts describe MicroStrategy's business pivot as one of the boldest strategies in U.S. corporate history. While controversial, the strategy's strong performance has lent credibility to its effectiveness.

Short-selling assault

Citron Research asserted that while it remains bullish on Bitcoin, it is hedging through a short position in MSTR. This is not the first institution to construct such a position. In March, Kerrisdale Capital also declared a long position in Bitcoin while shorting MSTR stock.

This strategy leverages the ease of investing in Bitcoin through ETFs, while MSTR has historically traded at a premium to Bitcoin.

The key metric here is the Net Asset Value (NAV) Premium, calculated by dividing MSTR's total market capitalization by the total value of its Bitcoin holdings. Notably, revenue from the company's original business is minimal, around $100 million.

Source: MSTR Tracker. Past performance does not guarantee future results. This is for information and illustrative purposes only. It should not be relied on as advice or recommendation.

As of November 25, this metric stood at 2.5 times. Under this assumption, investing in MSTR is akin to paying over $230,000 for each Bitcoin.

However, Michael Saylor argues that these short-sellers fail to understand MSTR's unique business model. He points out that Bitcoin ETFs cannot leverage their holdings for low-cost financing, whereas MSTR can achieve returns far exceeding borrowing costs and Bitcoin's appreciation.

Saylor believes this approach may encourage other public companies to follow suit, but MSTR's Bitcoin holdings are already far ahead, with a business model heavily centered on Bitcoin.

"While Apple or Google could afford to buy as much - in fact more - bitcoin, they would be an issuer where the majority of its underlying business was still Apple or Google, whereas MicroStrategy is 150% bitcoin," said Saylor.

If Bitcoin prices continue to rise, MSTR's flywheel model could keep spinning, maintaining its high premium. However, if Bitcoin prices crash, this positive loop could face disruption.

"Every day you wake up to an adventure, every week is a new drama, and every month is like a paradigm shift", commented a Pythagoras Investments analyst.

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