Thanks to investor enthusiasm over MicroStrategy’s innovative approach of purchasing bitcoin amid its repeated record highs, the company’s shares have surged over 400% since this year’s commencement. Despite its alignment with bitcoin movements, the stock’s volatility mirrors the cryptocurrency’s notorious swings.

Investors benefit from leveraging strategies used by MicroStrategy to enhance their bitcoin acquisitions, which are financed through additional debt or share issuance. This confidence in bitcoin’s favorable horizon has led analysts to remain positive; yet, some investors worry about the sustainability of the stock’s phenomenal rise.

Since the commencement of 2024, MicroStrategy has more than quadrupled its stock value due to bitcoin’s unprecedented climb above $100,000 under the anticipated supportive policies of the new administration and Congress.

Previously a lesser-known entity among investors, MicroStrategy has now become a notable player, with financial professionals reconsidering their asset allocations to include this standout company.

The ongoing optimism among analysts suggests potential growth for MicroStrategy shares, underpinned by both bitcoin’s positive trajectory and the company’s active strategy. However, reservations exist concerning the broad stock price increases, partly attributed to reliance on leverage.

MicroStrategy’s shares typically echo the oscillations of bitcoin because of its strategic cryptocurrency investments. The leverage-based approach has produced stock gains significantly surpassing bitcoin’s own rise of approximately 125% this year.

In 2020, MicroStrategy, yet to see any quarterly profits this year, ventured into bitcoin by buying it at around $11,000. Interestingly, seven years prior, then-CEO Michael Saylor had doubted bitcoin’s viability.

During a recent interview with CNBC, Saylor, who now chairs the company, described MicroStrategy as a firm focused on bitcoin treasury operations. The company’s acquisition total is 444,262 BTC, initiated by 45 separate purchases since 2020, representing more than 2% of the global bitcoin supply.

MicroStrategy evaluates its bitcoin investment success through a specific measure known as bitcoin yield, interpreted as the fluctuation in bitcoin ownership per outstanding company share.

By last year’s conclusion, MicroStrategy’s bitcoin reserves were at 189,150 BTC, with roughly 207,636 shares assumed outstanding, giving a ratio of 0.91. By December 23, with the company’s soaring bitcoin holdings reaching 444,262 BTC and outstanding shares at 280,828, the ratio advanced to 1.576. Consequently, the yearly percentage shift in these ratios, or bitcoin yield, was 73.1%.

This month, through a regulatory filing, MicroStrategy revealed that the yield “helps in further understanding of the company’s choices in bitcoin purchases funded by new common stock or convertible instruments issuance.”

The company opts to issue equity for its bitcoin strategies.

“In leverage situations, issuing $3 billion in debt secured by $600 million in bitcoin, we see a five-year term without interest. This allows purchase of $3 billion in bitcoin, thereby realizing $2.4 billion upfront in arbitrage gains. Over five years, investment doubles or quadruples, capitalizing on an asset outpacing the S&P,” Saylor illustrated in a CNBC segment.

Bernstein analysts convey, “MicroStrategy is a leveraged bet on Bitcoin.” Bernstein upgraded its stock price target to $600, up from the previous $290, with the current trading sitting near $360.

Analysts highlight the extended debt duration offers the company some protection against immediate repayments or bitcoin price volatility. In cases where share issuance is necessary to meet convertible debt, equity dilution remains minimal, according to Bernstein.

Concerns Over Long-Term Viability

Doubts persist regarding MicroStrategy’s sustainable performance.

Citron Research, a short-seller still upbeat on bitcoin, initiated a hedge by shorting MicroStrategy, essentially wagering on a stock price decline.

In a November X post, Citron Research remarked, “Admiration for @saylor is due, yet it’s apparent $MSTR is in a bubble,” claiming the company’s trading volumes lack alignment with bitcoin’s fundamental value.

Galaxy Digital’s CEO, Mike Novogratz, recently projected to CNBC that bitcoin-linked stocks like MicroStrategy could experience sharper corrections due to their leverage compared to bitcoin itself.

Update, Dec. 23, 2024: This article incorporates news of MicroStrategy’s latest bitcoin acquisition.