MicroStrategy, a company that has aggressively invested in Bitcoin, has seen its stock price rise 462% this year, outperforming Bitcoin's 110% gain. However, the company's strategy of using debt to finance new Bitcoin purchases raises concerns about its vulnerability to a potential decline in Bitcoin's price. While MicroStrategy's bold moves have been successful so far, the article concludes that Bitcoin is a better long-term investment for buy-and-hold investors, as it eliminates the need to worry about the company's strategy and the cyclical nature of the cryptocurrency market.
After a huge post-election rally, Bitcoin (CRYPTO: BTC) just hit another all-time high, and is on the cusp of breaking through the $100,000 mark for the first time ever. For the year, it is now up 110%.
But what if I told you that there was a crypto stock that was absolutely crushing Bitcoin's performance this year? That's right: MicroStrategy (NASDAQ: MSTR) is now up 462% for 2024 and is doing so on the basis of an aggressive strategy that involves buying as many bitcoins as it possibly can. So which is the better buy right now, Bitcoin or MicroStrategy?
Are You Missing The Morning Scoop? Breakfast News delivers it all in a quick, Foolish, and free daily newsletter. Sign Up For Free »
MicroStrategy's Bitcoin strategy
To answer that question, you first have to understand how MicroStrategy has fundamentally changed its business over the past few years. It started in August 2020, when it became the first publicly traded company to buy Bitcoin as part of its capital allocation plan.
Four years later, MicroStrategy has the largest holdings of any publicly traded company in the world: 331,200 bitcoins, worth about $30 billion at current market prices. To put that into perspective, its Bitcoin cache is now larger than the cash holdings of either Nike or IBM .
What's especially remarkable is the pace at which it is now adding the crypto to its balance sheet. Between Oct. 31 and Nov. 10, the company added 27,000 bitcoins. Between Nov. 11 and Nov. 17, it added another 51,780 bitcoins.
And MicroStrategy has no intention to stop buying anytime soon. The company recently announced plans to add another $42 billion worth of Bitcoin over the next three years.
In short, the company has gone all-in on the cryptocurrency. It now refers to itself as a Bitcoin Treasury Company (or BTC, for short) and has created a new performance metric, known as Bitcoin Yield, to show investors just how successful its buying strategy has been. You might say that MicroStrategy is now trying to out-Bitcoin Bitcoin.
Caveats about MicroStrategy's new strategy
Before the new spot Bitcoin ETFs were launched in January, investors were buying MicroStrategy as a way to get exposure to Bitcoin. Some even referred to it as a Bitcoin proxy stock, because they weren't buying the company for its core software business. Instead, they were buying it for one reason only: the company's massive crypto holdings.
Once the new ETFs launched, that proxy strategy became relatively less attractive for investors, who wanted 1:1 exposure to Bitcoin.
So, over the past year, MicroStrategy has taken increasingly aggressive steps to show investors that it is far more than just a Bitcoin proxy stock. It has continually upped the ante in order to get as much exposure to the digital coin as it possibly can, even if it means using leverage.
Thus far, investors are loving it. You really can't argue with 462% returns, can you? According to Bloomberg, MicroStrategy is currently the second-best performing stock of 2024. And, as noted above, it has delivered returns that are more than 4x what Bitcoin has.
But here's the thing: MicroStrategy may be taking its Bitcoin strategy too far. Already, some analysts have weighed in, poking holes in several of the assumptions made by the company. The most basic of these assumptions is that the price of Bitcoin will always go up. But will it?
Crypto investors are well aware of Bitcoin's infamous volatility. In short, it can collapse in value just as quickly as it can soar, and that's what makes me nervous. What happens to MicroStrategy when the price of Bitcoin declines, especially now that the company is using debt to finance new purchases?
The cyclical nature of Bitcoin
Bitcoin tends to be very cyclical, due to halving events that take place every four years. During certain periods of this cycle, there are always companies in the Bitcoin ecosystem that will outperform it. And, likewise, during certain periods of this cycle, there are always companies in that ecosystem that will underperform it.
Just think about Bitcoin mining stocks. In 2023, some of these stocks wildly outperformed the cryptocurrency, and many investors decided to invest in them rather than Bitcoin itself. For example, consider this 2023 chart comparing Riot Platforms (NASDAQ: RIOT) and the crypto:
For the year, Riot Platforms was up 359%, while Bitcoin was only up 155%. Heading into the final week of 2023, Riot Platforms was up as much as 455%. In 2024, though, it's a completely different story. Riot Platforms is down more than 20%, while Bitcoin is up 110%.
Over the long haul, Bitcoin is the best choice if you are a buy-and-hold investor. You won't have to worry about where we are in the cycle, or how companies are continually adjusting their Bitcoin strategies. I certainly applaud MicroStrategy's bold moves, but I'm still buying Bitcoin.
Before you buy stock in MicroStrategy, consider this:
