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The ongoing churn in the crypto market has had an interesting effect on the stock price of Strategy, Inc (ticker: MSTR) – formerly known as “MicroStrategy” – a business intelligence and mobile software company that is also the largest institutional holder of Bitcoin: its total market capitalization is currently running at a substantial discount1 – nearly 12-14% – relative to the value of its Bitcoin holdings.
The uncertainty over its relative attractiveness to key market investors over the course of several developments form the basis of this bearish trend in the company’s stock.
ETF Outflows Possible?On the 11th of August 2020, the company announced2 the adoption of Bitcoin as a “Treasury Reserve” asset with the purchase of 21,454 bitcoins at an aggregate purchase price of $250 million, inclusive of fees and expenses. The reasoning given was that it was a dependable store of value and an attractive investment asset superior to cash. Since then, the company had progressively gone on to plough more of its earnings into purchasing the cryptocurrency. As of the 1st of December, Strategy Inc held 650,000 BTC.
The effect of this has been very strong correlations emerging between the company’s stock price and the price of Bitcoin:
Source: Leverage Shares analysis
The combination of market flavour from the company’s business operations vis-à-vis the company’s ever-increasing Bitcoin stack is an unwieldy mix, leaving the stock open to moments of significant uncertainty from investors. The net effect of Strategy Inc’s decision over the years since has increasingly masked the sum total of its core business operations and paved the way towards the company effectively transforming into a Bitcoin vehicle trading on major stock exchanges – and eligible for inclusion into index-based ETFs around the world.
Passive investment vehicles’ impact on stock prices came to a head in October when index provider MSCI proposed3 that any company wherein digital assets constitute half or more of total assets would be ejected from its Global Investable Market Indexes – thereby making them wholly ineligible to be included in any “regular” MSCI index-based ETF. MSCI is officially under consultation over the matter, with a decision likely to be arrived at during their index review in mid-January.
Strategy’s stock volatility – largely due to the sheer size of its BTC holdings – is a matter of concern for index providers who keenly value the relative stability of a stock to shocks from outside its core business or from events not directly related to equity markets as a whole. On the 19th of November, JPMorgan warned its clients via a note4 that around 18% of its market capitalization is held in passive ETFs:
Source: JPMorgan; image redesign by Leverage Shares
All told – at the value MSTR was at in November – this would translate to around $9 billion being sold by ETF issuers if major index providers were to remove MSTR’s eligibility for inclusion.
While this is one factor for consideration that investors are likely considering for their current bearishness, another factor lies in the ongoing efforts by the U.S. administration to “institutionalize” the crypto market.
Why Hold a Proxy At All?The upcoming (or recently proposed) additions to the Digital Asset Market Clarity Act (often referenced as the CLARITY Act) and related regulatory reforms could have several important — and potentially transformative — effects on the crypto market. By resolving long-standing regulatory ambiguity between the CFTC and the SEC and bringing about a rules-based, predictable regulatory regime, it creates an on-ramp for stablecoins and payment-style digital assets to become more mainstream. Even tokenized real-world assets wrapping real estate, debt, and funds become more viable and evolve from pure speculation into “financial infrastructure/asset-management” territory.
The creation of a regulated crypto market integrated with traditional finance — e.g., stablecoins or tokenized securities regulated via the GENIUS Act that will be used for cross-border payments, holding corporate treasuries, or building institutional portfolios – potentially dries up the speculative froth that has been part and parcel of Bitcoin’s historic trends, which could pare down to yield a $115-130,000 level in the next 2-3 years and effectively stabilize to becoming a digital proxy for gold.
The “institutionalization” of Bitcoin, however, creates a quandary for a company that is so squarely considered mostly as a proxy for Bitcoin: why hold the “proxy” when one can easily hold the Real McCoy?
Beyond StrategyWhile the twin effects of CLARITY and GENIUS creates a regulated crypto and stablecoin market, the consequences on all other nations – be they ally, foe or neutral – are far-reaching: in the short- to medium-term, stablecoin demand could prop up the U.S. dollar, which has been flagging in international demand (from a variety of factors) by drawing in usage from nations with comparatively weaker or less liquid currencies. Going by sheer number of dollars out there in the world today, this means every currency would be affected.
The stability potentially implied into Bitcoin via these laws, however, brings in long-term pressures on the U.S. dollar as well: why hold the “good as gold” – a paradigm that the U.S. has espoused over its currency and dollar assets ever since it ended the gold standard – when one can hold “digital gold”? This is a potentially ominous long-term consequence for the currency and currency assets (such as government bonds) of practically every nation in the Developed Markets bloc who have seen debt levels rise well beyond the economic reach or growth potential within their economy.
It is almost a given that virtually every other nation’s central bank and economic ministry would be working on measures to limit the effects of CLARITY and GENIUS; however – given the U.S. administration’s history of interactions with the world at large over the course of the year – it’s uncertain as to whether the U.S. administration would be wholly inclined to take into account other nations’ concerns at this point.
While the declination of Bitcoin’s price and the prospect of index ejection hammers away at the stock price, the market’s reaction to the stock is but a microcosm of the concerns the leaders of other economies might be currently wrestling with.
Professional investors in Europe might consider the +3X Long MicroStrategy ETP (MST3) and the -3x Short MicroStrategy ETP (MSTS) during bullish and bearish runs in the stock respectively.
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