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Bitcoin Proxy MicroStrategy Faces Uncertainty as ETFs Threaten its ‘Premium’

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“MicroStrategy’s strategic move to invest in Bitcoin proxies raises questions about their ability to maintain their ‘premium’ position in the market, especially with the imminent threat of ETFs looming.”

MicroStrategy Inc. Chairman Michael Saylor’s strategy of buying Bitcoin may face challenges as the possibility of exchange-traded funds (ETFs) holding the cryptocurrency becomes more likely. Saylor has transformed MicroStrategy into a Bitcoin proxy for equity investors by accumulating over $5.5 billion of Bitcoin since mid-2020. During this time, MicroStrategy’s shares have tripled as Bitcoin’s value surged, outperforming the S&P 500 Index. However, with the potential approval of ETFs investing directly in Bitcoin by the US Securities and Exchange Commission, investors and analysts are questioning whether MicroStrategy’s shares will continue to command a premium. MicroStrategy itself has raised this concern in a recent filing.

The company stated that if its shares are seen as an alternative-to-Bitcoin investment vehicle and trade at a premium to its Bitcoin holdings, the premium may be eliminated, causing the share price to decline. Saylor started buying Bitcoin in 2020 to reduce the company’s cash holdings amid inflation concerns and stagnant software business revenue. He stepped down as CEO to focus on the Bitcoin aspect of the company’s dual strategy. TD Cowen analyst Lance Vitanza estimates that MicroStrategy’s shares currently have a premium of around 30% due to its significant Bitcoin holdings. However, if the SEC approves ETFs in the coming months, Vitanza predicts the premium could shrink to 15% to 25%.

Vitanza believes that the approval of ETFs will trigger a rally in Bitcoin’s price, which will offset the reduction in the premium by boosting the share price. He also highlights MicroStrategy’s attractiveness due to its underlying software business and the ability to borrow against its Bitcoin holdings to purchase more Bitcoin. Vitanza anticipates that the creation of a spot ETF will result in tens of billions of dollars being invested in Bitcoin. While the premium embedded in MicroStrategy’s stock may decline, the increase in Bitcoin’s price will more than compensate for it.

In terms of financial performance, MicroStrategy is expected to report third-quarter revenue of $125.8 million, similar to the previous year’s period. Earnings before charges, such as taxes, are estimated to be $25.3 million, with EBITDA at $8.2 million. The company’s upcoming quarterly results will provide further insights into its performance.

Overall, the potential approval of Bitcoin ETFs poses a challenge to MicroStrategy’s strategy of holding significant Bitcoin holdings. However, analysts like Vitanza believe that despite a reduction in the premium, the rally in Bitcoin’s price and MicroStrategy’s underlying business strength will continue to make it an attractive investment option.

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