MicroStrategy, the business intelligence firm with an insatiable appetite for bitcoin, sent ripples through the market this week after announcing a $500 million convertible debt offering. The company plans to use the proceeds to fuel its ever-growing bitcoin treasury, a strategy that has propelled its stock price to dizzying heights but also introduced significant risk.

The news unsettled investors, with MicroStrategy’s stock price tumbling 1.5% in pre-market trading. The concern? The added debt burden and the company’s unwavering commitment to a volatile asset class over its core software business. Bitcoin itself wasn’t immune to the jitters, experiencing a modest 0.7% price dip.

MicroStrategy Announces Proposed Private Offering of $500 Million of Convertible Senior Notes $MSTR https://t.co/5K8TqAi1D7

— Michael Saylor (@saylor) June 13, 2024

MicroStrategy Stock: More Bitcoin Than Business?

This isn’t the first time MicroStrategy’s bitcoin obsession has caused a stir. Since CEO Michael Saylor first declared bitcoin the company’s primary treasury reserve asset in 2020, the stock has become a dance partner to the cryptocurrency.

Michael Saylor. Source: Business2Community

Over the past three years, the correlation coefficient between MicroStrategy’s stock price and bitcoin is a staggering 0.90. In layman’s terms, when the price of bitcoin goes up, MicroStrategy’s stock tends to follow suit, and vice versa. This tight coupling stands in stark contrast to the company’s peers in the software sector, whose fortunes are far less reliant on the whims of the cryptocurrency market.

As of today, the market cap of cryptocurrencies stood at $2.39 trillion. Chart: TradingView.com

This symbiosis has its advantages. Year-to-date, MicroStrategy’s stock has skyrocketed by more than 150%, significantly outperforming both Bitcoin and the broader market (S&P 500). However, it also exposes the company to significant downside risk. A major correction in the bitcoin market could send MicroStrategy’s stock price plummeting.

The company’s latest move is in line with its long-term objective of adopting Bitcoin as its treasury reserve asset, even though it is contingent upon market conditions.

MicroStrategy is the largest publicly disclosed Bitcoin holder, with 214,400 BTC, valued at nearly $14 billion. In 2020, the business started to amass the top cryptocurrency, utilizing it as a reserve asset.

Debt Deal Raises Questions About Long-Term Strategy

The decision to issue debt to acquire more bitcoin raises a critical question: is MicroStrategy doubling down on a winning bet, or is it piling on risk in a market known for its boom-and-bust cycles? The company claims the convertible debt structure offers financial flexibility, but it also saddles them with additional interest payments. This could strain their finances, especially if the price of bitcoin stagnates or falls.

While Saylor remains a vocal bitcoin evangelist, some analysts are urging caution. The long-term viability of this strategy hinges on bitcoin’s continued ascent. Investors are likely to scrutinize MicroStrategy’s future debt offerings and bitcoin acquisitions with a more critical eye.

Featured image from Experian, chart from TradingView