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Bitcoin's rally earlier this week led to a major correction in crypto and crypto-centric stocks across the board, with MicroStrategy (MSTR) among the worst hit. The world's largest corporate bitcoin holder fell to $1,018 on Wednesday, half of its peak of $1,919 in late March.
Meanwhile, Bitcoin (BTC) fell to $56,800 during the same period, representing a 23% decline from its March 14 high of $73,737. More than $61,000 was returned to close this week.
While painful for MSTR holders, the overall return represents a healthy correction as the stock has traded at a huge premium over months of BTC holdings. As of Wednesday, the premium (excluding the company's debt) has fallen to +67% BTC, compared to +175% at the end of March.
“I think the stock is now close to fair value,” Markus Thielen, founder of 10x Research, said in an email to Decrypt. In late March, his firm argued that MSTR should be trading around $1,000 per share and that new investors should probably stick with Bitcoin.
As of Friday, MicroStrategy has a market capitalization of $21.37 billion, and its balance sheet holds 214,400 BTC worth $13.26 billion at current market value.
Because MicroStrategy invests all of its funds in BTC, the firm is similar to a Bitcoin spot ETF, a fund that issues stocks backed by a certain amount of BTC. However, since MicroStrategy doesn't actually have market makers or redemption mechanisms like official Bitcoin ETFs, the stock can easily trade at a premium or discount to its original BTC holdings depending on market sentiment.
Additionally, the company may use special strategies that real ETF issuers cannot, such as issuing cheap debt to get more BTC or selling the stock while it trades at a premium to increase the company's BTC per share ratio.
When the MSTR premium was exploding earlier this year, critics warned that the MSTR was trading at “unfair” levels and due to a correction it was closer to its true balance value. MicroStrategy's fiduciary claim is that the price is right, a price that will allow the company to earn more BTC per share in the future.
Others say that such fundamentals do not mean anything these days.
“MSTR essentially acts as a leveraged play on Bitcoin prices, typically moving 1.5x the price of Bitcoin,” James Butterfill, head of research at CoinShares, told Decrypt. “Ultimately fundamentals mean less to MSTR, more important is the outlook on monetary policy and the direction of Bitcoin prices.”
Butterfill added that Bitcoin's recent correction may have been “too bitter” in response to possible guidance from the FOMC on Wednesday, and is now on the rise again after the central bank took an unexpectedly accommodative monetary policy stance.
That position “is likely to see a short-term floor in price, which should continue to support both MSTR and Bitcoin prices,” Butterfill said.
Edited by Ryan Ozawa.
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