MicroStrategy’s strategy of buying Bitcoin using debt financing is not sustainable in the long term. This opinion was expressed by columnist Bloomberg Opinion Lionel Laurent.
Michael Saylor’s company has increased its capitalization by approximately 50 times since August 2020, when it accepted the first cryptocurrency as a reserve asset.
MicroStrategy primarily uses equity and debt capital to purchase digital gold. The expert described in a simplified manner the company’s action plan: attracting financing, buying cryptocurrency, rising stock prices along with Bitcoin, and returning to the market to repeat the cycle. Investors view the investment as an indirect purchase of a digital asset.
At the same time, Bitcoin has added about 120% since the beginning of the year, while MicroStrategy quotes have increased by about 650%. The company is valued at 2,000 times next year’s projected earnings. Laurent compared the situation to a financial glitch in a video game: “profitable, exciting and probably unsustainable.”
The expert admitted that MicroStrategy’s current bitcoin reserves, worth approximately $24 billion, are an order of magnitude greater than the debt on its balance sheet of $4.3 billion. But plans to raise $42 billion in the next three years raise the question of the sustainability of the scheme, taking into account the risks.
Laurent considers one of the threats for MicroStrategy to be the likely fall of the cryptocurrency, which has historically been characterized by drawdowns of 50% or more. The collapse would trigger “a vicious cycle of write-downs and sales of the company’s assets.”
In this regard, he noted that Citron Research’s short position in MicroStrategy shares may be a wise move. Since its opening, the company’s quotes have fallen by 16%, and the rate of the first cryptocurrency has increased.
Previously, BitMEX analysts called it “extremely unlikely” that MicroStrategy would liquidate its Bitcoin reserves due to market conditions. According to their estimates, the asset must collapse to $15,000 for this to happen.
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Source: Cryptocurrency
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