As Bitcoin pulls back, MicroStrategy will still use the proceeds from the sale of approximately $561 million in stock to increase its Bitcoin holdings. Its chairman said, "Every day is a good day to buy Bitcoin."
MicroStrategy announced the additional purchase of 5,262 bitcoins, continuing to increase its holdings for the seventh consecutive week.
According to a filing submitted to the U.S. Securities and Exchange Commission (SEC) on Monday, the company sold approximately $561 million worth of stock in the equity issuance market and then used the proceeds to increase its Bitcoin reserves.
The average price of the bitcoins purchased last week was about $106,613, slightly lower than the historical high of about $108,500. Since then, the world's largest cryptocurrency has dropped 14%.
MicroStrategy now holds a total of 444,262 bitcoins, costing $27.7 billion, with an average price of $62,257. The company has become the largest corporate holder of Bitcoin.
MicroStrategy's Bitcoin holdings are impressive, but its chairman Michael Saylor is playing a risky game—leveraging to buy as much Bitcoin as possible.
Interactive Brokers' chief strategist Steve Sosnick pointed out last week, "His strategy is to issue convertible bonds and use the proceeds to buy Bitcoin. This is essentially the definition of leveraged trading—borrowing money to buy financial assets."
#MicroStrategy stated in October that it plans to issue approximately $42 billion in stock and debt over the next few years to purchase Bitcoin of equivalent value. Since then, the company has acquired nearly 200,000 bitcoins, increasing its average cost basis from $39,266 in October to around $62,257 now.
Sosnick said, "This approach works very effectively when the asset's price moves in your favor, and Bitcoin has performed quite well. But if it moves in the opposite direction, this approach can crash in an unpleasant way."
Although MicroStrategy holds approximately $41 billion in unrealized gains related to its Bitcoin bet, the significant drop in the cryptocurrency may pose risks for the company, especially considering that its underlying software business is not consistently profitable and it has raised over $7 billion in convertible debt.
Sosnick emphasized that MicroStrategy benefits from a "self-fulfilling feedback loop." It buys more Bitcoin, helping to push prices up, then sells more debt and stock to buy more Bitcoin, further driving up prices.
"Such things never last forever and often end badly— the question is when? The short-term answer seems to be not yet," Sosnick said.
According to Sosnick, as long as the hype and upward momentum of Bitcoin and MicroStrategy continue, the latter's stock price will remain high. However, even a small Bitcoin pullback can have a significant impact on MicroStrategy's stock.
In late November, Bitcoin fell 9%, while MicroStrategy's stock dropped nearly 40% from peak to trough. Admittedly, the volatility of the past week has subsided. At the current Bitcoin pullback, MicroStrategy's stock has shown less volatility, declining about 17%.
MicroStrategy's Saylor continues to promote Bitcoin. He told CNBC last week that buying Bitcoin is like buying land in Manhattan hundreds of years ago.
"We will continue to buy at high prices forever. Every day is a good day to buy Bitcoin," Saylor said before mentioning a long-term target price of $13 million for Bitcoin.
As of now, Saylor's risky strategy has paid off. The billionaire's wealth has soared this year, thanks to his MicroStrategy shares, which have risen 442% so far this year.