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Kerrisdale Capital's BTC play: Betting on crypto and against MicroStrategy's overvaluation!


Kerrisdale Capital's bitcoin play, microstrategy, financial news

Kerrisdale Capital, a prominent investment fund, has made a significant move by adopting a dual investment strategy involving cryptocurrencies and stocks. They have chosen to take a long position in Bitcoin, indicating their belief in the cryptocurrency's future appreciation.


Concurrently, they have taken a short position in the shares of MicroStrategy, a company known for its substantial investment in Bitcoin. This strategic decision hinges on a critical observation: the shares of MicroStrategy are trading at a substantial premium compared to the actual value of the Bitcoin it holds. This disparity suggests that the market valuation of MicroStrategy is not entirely reflective of its Bitcoin holdings, thereby presenting a potential overvaluation risk.


Kerrisdale's approach is underpinned by a deep analysis of market dynamics and valuation discrepancies, reflecting their nuanced understanding of the interplay between cryptocurrency assets and stock market valuations.



Delving deeper into the valuation aspect, Kerrisdale Capital's analysis draws attention to what they perceive as an unjustifiable rally in MicroStrategy’s stock prices, particularly in relation to the actual performance of Bitcoin. They argue that the rise in MicroStrategy's share price isn't proportionate to the appreciation in Bitcoin's value, which forms the fundamental asset of the company's investment strategy.


The firm's current market valuation is observed to be twice as high as the actual value of the Bitcoins it possesses. This suggests a significant overvaluation, with MicroStrategy’s operational aspects beyond Bitcoin holdings accounting for only a minor portion of its overall business.


Based on these insights, Kerrisdale posits that a more realistic valuation of MSTR shares should be in the range of $700 to $800, assuming a market scenario where the Bitcoins owned by MicroStrategy are appraised correctly. Contrasting this with the prevailing market conditions, the company's valuation implies a staggeringly high Bitcoin price of about $177,000 per unit.



These observations, based on data as of December 31, 2023, underscore a growing distortion in the relationship between MicroStrategy's stock value and the underlying Bitcoin asset, raising questions about market rationality and investor perceptions.


Historically, MicroStrategy has been seen as an indirect conduit for stock market investors to gain exposure to Bitcoin, serving as a unique investment vehicle in this domain. However, the investment landscape has evolved with the advent of Exchange-Traded Funds (ETFs) specializing in cryptocurrencies. These ETFs, characterized by their low management fees (around 0.2%), have provided investors with a more direct and cost-effective means of investing in Bitcoin. This development has diminished the appeal of using MicroStrategy as a proxy for Bitcoin investment, as identified by Kerrisdale.


The fund's thesis is pivoted around the notion that the premium, or the excess valuation of MicroStrategy's shares over its net asset value in Bitcoin, is due for a correction. They foresee this premium aligning back to historically consistent averages, which were significantly lower than current levels. The premium, which has been at an unusually high level of 2.6x since the beginning of 2021, was historically about 1.3x on average. Kerrisdale's investment rationale is not rooted in a bearish stance on either Bitcoin or MicroStrategy but is rather based on the belief that the market has distorted the valuation relationship between the two.



The situation where MicroStrategy's performance in the stock market significantly outstrips that of Bitcoin is not a new phenomenon. This pattern has been observed for some time, suggesting a disconnect between the company's stock performance and the underlying value of its Bitcoin holdings. Kerrisdale Capital’s report, released during a period of intense market activity, suggests that investors might be overly optimistic about MicroStrategy's future prospects, perhaps reacting too quickly to market trends without adequate consideration of underlying fundamentals.


This does not, however, negate the possibility of continued investor interest in MicroStrategy’s shares. Kerrisdale itself may have strategically capitalized on this situation, potentially closing its positions at a profit following the publication of its report, which coincided with a notable drop in MSTR's stock value (nearly 14%). MicroStrategy's CEO, Michael Saylor, is known for his aggressive Bitcoin acquisition strategy, famously described as buying 'at any price.’ This approach ensures that MicroStrategy remains a significant player in providing market exposure to Bitcoin's volatile nature.



The company's strategy is less about acquiring Bitcoin at low prices and more about consistent purchasing, reinforcing its position in the market. This strategy has also garnered the attention of retail investors, particularly on platforms like Reddit, where MicroStrategy has become a popular topic.


There is a curious interplay here between Kerrisdale's analytical, calculated approach and the more sentiment-driven, community-based investment strategies seen on forums like WallStreetBets. This raises an interesting question: will these retail investor communities engage in a financial tug-of-war with Kerrisdale, given the latter's more analytical and less sentiment-driven investment decisions?


29.03.2024



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