Will MicroStrategy's double-down on BTC lead to the next big bubble?

MicroStrategy holds nearly $37 billion worth of BTC, but its stock market valuation has exceeded $100 billion. Will this high valuation breed a bubble? This article is adapted and compiled from an article by Zack Guzman, by the editors of BlockTempo. (Background: MicroStrategy(MSTR) missed this soaring stock, my reflection and cognitive upgrade) (Background supplement: MicroStrategy again increased the position by $540 million to buy 55,000 BTC: BTC at $97,000 is not expensive!) MicroStrategy founder Michael Saylor has become one of the most outspoken supporters of BTC, boldly claiming, "There is no second best choice." Since 2020, Saylor has accumulated over $30 billion in BTC through his listed company, with a realized profit of over $14 billion, making MicroStrategy the company with the most BTC holdings. This strategy has won the praise of bitcoin maximalists, but also sparked doubts from traditional investors. However, as MicroStrategy continues to raise tens of billions of dollars - planning to add $42 billion in financing over the next three years - with a four-fold bet on BTC, external concerns are also intensifying. Will this brew another huge bubble? If the BTC price falls, how will MicroStrategy's bold move end? 1. Echo of the ghost of trading MicroStrategy's BTC strategy has similarities to one of the most notorious trades in the encryption field, the "GBTC premium trading." During the peak of this arbitrage trading, investors acquired BTC positions through the Grayscale BTC Trust (GBTC) because its trading price was higher than the value of the underlying BTC holdings. They borrowed shares of GBTC through loans and earned a premium profit after the lock-up period ended. This trade suffered a dramatic collapse in 2021 when the GBTC premium turned into a discount. Companies like Three Arrows Capital and BlockFi, which were over-leveraged or associated with over-leveraged clients, subsequently went bankrupt. A series of bankruptcies followed, including the bankruptcy of Genesis, highlighting the risks of financial strategies built on fragile market imbalances. Now, critics warn that MicroStrategy is walking a similar tightrope. However, unlike using the GBTC premium, MicroStrategy has opened up a new path for leveraged BTC trading through its own stocks and bonds - effectively transforming the company into a leveraged BTC proxy. Some periods of MicroStrategy's BTC purchasing behavior 2. The magic of convertible bonds MicroStrategy's core strategy is to raise funds through issuance of convertible bonds and stocks, as follows: Borrowing at a low interest rate (0%) MicroStrategy offers bonds with extremely low or even zero interest rates to bondholders. Offering stock appreciation potential as a return, bondholders can convert the bonds into MicroStrategy's stock when the stock price rises. This potential return has attracted many institutional investors, including Germany's largest insurance company, Allianz. The funds raised by purchasing more BTC are then used to buy more BTC, further driving up the stock price. This feedback loop has made MicroStrategy's stock performance remarkable, rising nearly 500% in 2024 alone. This strategy has been so successful that bond investors, attracted by the potential appreciation of the stock, are willing to lend tens of billions of dollars to the company at 0% interest. The argument is quite attractive: why settle for the low interest rate return on bonds when MicroStrategy can offer you the opportunity to double or even quintuple your investment? As Saylor said in a recent investor conference call, bondholders are fleeing the "actual negative return" world in pursuit of potential returns from BTC. Currently, MicroStrategy's strategy is working very well, with the rise in BTC prices creating a virtuous cycle. But what will happen if the trend of BTC reverses? MicroStrategy holds nearly 387,000 BTC, worth about $37 billion, but its stock market valuation has exceeded $100 billion. This high valuation largely depends on the assumption of continuous BTC price increases. If BTC falls, the company's stock price - essentially a leveraged bet on BTC - could plummet. It is also worth noting that leveraged ETFs like MSTU and MSTX, focused on MicroStrategy, further exacerbate market speculation based on MicroStrategy's BTC speculation. All of these factors have driven massive BTC purchases. According to Fundstrat's research, in fact, MicroStrategy's buying volume far exceeds the total inflow of all BTC ETFs earlier this month. If the market begins to doubt whether MicroStrategy can achieve its $42 billion financing goal, the BTC price may fall, further jeopardizing MicroStrategy's financing capability. Once this situation changes, the situation could deteriorate rapidly. Similar situations have occurred in FTX's financing attempts when it most needed funds, and in Terra's $40 billion collapse. Although Saylor has repeatedly emphasized that the company will never sell its BTC, if debt pressure increases and the BTC price falls, this position may be difficult to maintain. 3. Historical lessons The warning story of the GBTC premium trading is still vivid. When market conditions change, this bubble bursts, exposing the fragility of leveraged strategies. Although MicroStrategy's approach has avoided some of the pitfalls of GBTC trading - for example, it does not rely on inefficient fund structures - it still faces the core risk: if BTC prices fall, leverage may magnify losses. Saylor's firm belief in BTC may inspire confidence, but history shows that the market cannot rise indefinitely. Just as in 2023 when Terra collapsed, overconfidence in a "self-sustaining system" led to a $40 billion loss. If BTC prices fall, MicroStrategy's stock may face a similar liquidation moment. However, for those who firmly believe that the U.S. government will follow suit and include BTC in its strategic reserves, MicroStrategy's bet has the potential to become one of the greatest investments in history - either becoming famous as a "genius move," or notorious as a "disastrous failure." Related report "Will MicroStrategy's doubling down on BTC brew the next huge bubble?" This article was first published on BlockTempo, the most influential blockchain news media.