TOP STORY
😰 MicroStrategy Crashes 20% As Bitcoin Bear Market Continues

🫣 Last week, I reported on the stock market’s worst week since April, as weakening consumer sentiment, concerns over the AI bubble, and the prolonged government shutdown rattled investors.

😑 Well, this week the markets rallied at the start of the week, but then dropped again on Thursday and Friday, giving us a pretty flat week overall:

• The S&P increased +0.1%

• The Nasdaq-100 fell -0.2%

• The TSX increased +1.4%

⭐️ The good news? The US government officially reopened on Wednesday, ending the longest government shutdown in US history.

📊 You’d think this would give a boost to the markets, but the problem is the Fed is still missing key economic data needed for its interest rate decision on December 10.

⚖️ And while a month ago the odds of a rate cut in December were at 95%, now they’ve fallen to under 50%, which is bad news overall for the stock market.

📉 But while the markets were relatively flat this week, there was one area of the market that’s been struggling… Bitcoin ($BTC), down 10% since Monday morning and now down 24% since all-time highs in October.

🫣 Worse still, the popular Blossom stock MicroStrategy ($MSTR), with over 7,000 holders across both the direct stock and covered call ETFs that track the stock, crashed 20% this week and is down 50% from all-time highs. 

🤿 So let’s dive into what’s going on with Bitcoin, Microstrategy, and the crypto market in general…

🤔 So, Why Is Bitcoin Falling?

Bitcoin is in a bear market and is now officially down year-to-date after this week’s sell-off. From my research, here are the 3 key reasons:

1) 🤖 Broader Tech Sell-off + Fed Rate Cut

In many ways, Bitcoin goes hand in hand with the tech market, as investors view the two as ‘risk assets’, so with the broader dip in tech stocks over the last few weeks, Bitcoin got hit too, with one analyst saying:

The fear and greed index (which you can find on Blossom) has deteriorated into ‘extreme fear’, as worries continue to soar that the market is in an AI-bubble ready to pop.

Many were hopeful that an upcoming Fed rate cut in December would help turn things around, but with the probability of that happening falling dramatically, investors have been shifting out of high-risk assets.

2) 💧 Liquidity Issues

The next reason is a bit more technical, but according to CoinDesk and other reports, liquidity in the crypto market is “still hollow after the October crash,” when a sharp dip destroyed a ton of highly leveraged traders (wiping out over $19B in just 24 hours).

Lower liquidity makes the market more volatile, increasing the odds that relatively small shocks could trigger another wave of forced selling.

All this has also in part driven net outflows from institutional investors, with a 3-week streak of outflows, including a week with over $1B withdrawn from Bitcoin ETF, one of the worst weeks for outflows this year.

😰 3) Rumours of Michael Saylor Selling

We’re going to deep-dive into Michael Saylor and MicroStrategy in a second, but the final reason Bitcoin is falling actually has to do with him directly.

This week, rumours swirled that Saylor and MicroStrategy, the biggest corporate holder of Bitcoin, had dumped some of its Bitcoin holdings.

The rumour was spread by X account @Deltaone with over 1M followers, based on on-chain data of transfers that Deltaone and others mistook for selling activity.

While Saylor clarified that there was no truth to the rumour, it was enough to spook investors amid the already rough week. Saylor was quick to clarify, saying:

Speaking of MicroStrategy, why is the crypto treasury company down -50% in the past 6 months when Bitcoin is only down -12%? Isn’t MicroStrategy supposed to track the price of Bitcoin?

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TOP STORY CONT.
📉 Why is MicroStrategy Down 50% in 6 Months When Bitcoin Is Down Only 9%?

🔥 Over 2024, MicroStrategy ($MSTR) soared an insane 438% leading many to say the stock was ‘overheated’ and ‘detached from fundamentals’.

💡 On Dec 1, 2024, I covered the stock, outlining how it had reached a 2.4x premium to the net asset value (NAV) of its Bitcoin holdings, and shared how this essentially made MicroStrategy a leveraged Bitcoin play:

📉 Well, it turns out I was right, and as Bitcoin has fallen, MicroStrategy has fallen faster, now down 50% in the past 6 months while Bitcoin has fallen only 9%.

😬 This is because MicroStrategi’s premium to net asset value has plummeted from 2.4x to below 1x, meaning the company is now worth less than the Bitcoin it owns.

😰 The Risks of MicroStrategy

💰 Part of what’s driven MicroStrategy below the NAV is that as the stock falls, investors are starting to doubt the company’s ability to service its debt interest.

💸 Essentially, the way MicroStrategy has paid for a lot of its Bitcoin buying is via convertible bonds, aka bonds that can be converted into equity if the stock keeps going up.

🥊 When the bonds are ‘in the money’, bondholders are better off converting them to stock rather than asking for their cash back, but if Bitcoin’s price continues to decline, this massive leverage could hit MicroStrategy hard (as it did in the 2022 crypto bear market when MicroStrategy fell nearly 90%).

🛡️ Saylor’s Defence

🪙 Saylor is quick to defend his company, saying that skeptics don't appreciate BTC, digital capital, and digital credit.

👑 Saylor continues to be bullish on Bitcoin, comparing the digital asset to gold, which has a market cap over 10x the size of Bitcoin’s:

🤑 It’s worth noting that Saylors leveraged strategy, that causes big swings when market is going down, has also given investors outsized returns when the market is going up, with MSTR up +800% in the past 5 years compared to only +403% for Bitcoin.

📈 Saylor and other Bitcoin supporters also call out that frightened investors should zoom out, as just last October Bitcoin was trading at $60,000 and even at $94,000 today is delivering an incredible return.

💡 My Thoughts

Overall, my thoughts on MicroStrategy remain the same as in December 2024, the stock is a high-risk leveraged play on Bitcoin and isn’t for the faint-hearted.

That’s not to say you shouldn’t buy it if you’re bullish on Bitcoin, but know the risk you are taking on. This is especially true for holders of single-stock covered call ETFs like YieldMax’s MSTY, who may be chasing the high yield without truly understanding the risks of the underlying stock.

⚠️ Again, if you understand the risk you’re taking on and prefer income, there’s nothing inherently wrong with this fund or funds like it, but I think sometimes investors forget that at the end of the day, you’re still investing in a high-risk leveraged Bitcoin play behind the covered call wrapper.

🗓️ In any case, I hope you found my breakdown insightful and interesting! The next big event will be Nvidia’s earnings on Wednesday which I’ll be covering for you guys on Thursday in a special edition Weekly Buzz… stay tuned and fingers crossed for a good report 🤞

FROM THE BLOSSOM COMMUNITY
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