Many companies have already adopted the tactics of Michael Saylor’s Strategy and regularly add Bitcoin to their balance sheet.
To buy BTC on a regular basis, Saylor’s Strategy must regularly attract new investment by selling its bonds or shares. As a result, the success of the company’s strategy depends on its ability to sell stock (MSTR) to investors.
Some financial specialists believe that Saylor’s key strength, the fact that Strategy is traded on NASDAQ, is also his main weakness. One of those specialists is Jim Chanos, the famous short-seller.
Chanos called Saylor a “wonderful salesman” and criticized the use of preferred stock to finance Bitcoin purchases. Short-seller believes that Strategy, which has a market cap of around $100 billion, is significantly overvalued compared to BTC it holds on the balance sheet. In this light, he believes that a pair trade makes sense – shorting MSTR and buying BTC.
The key pillar of his idea is that the spread between Strategy’s market cap and the value of BTC it holds will shrink as investors realize that each subsequent issue of MSTR preferred stock or convertible bonds dilutes them even more. In this scenario, investors will find out that the premium for MSTR stock is not justified and sell it, sending its price to lower levels.
To explain his idea, Chanos offered an interesting example. Imagine your house increased in value from $450,000 to $500,000. You argue that it is worth $1.5 million because it is worth $500,000 plus 20 times $50,000.
Here, Chanos used an “ordinary” P/E ratio that is often applied to stocks. It should be noted that P/E ratios vary widely between companies, and the number used by Chanos was used to highlight the key part of his logic.
In response, Saylor accused Chanos of misunderstanding his business model. According to Saylor, Strategy is the “largest issuer of Bitcoin-backed credit instruments in the world”.
Does Chanos’ idea have merit? Pair trades often pose significant risks to investors despite the fact that they are originally designed to reduce them. The key problem is that both positions may go “against” the investor. For example, the spread may grow larger instead of narrowing.
In the case of the proposed short of MSTR stock and the simultaneous purchase of BTC, the key thing to keep in mind is that demand for MSTR stock is a function of demand for Bitcoin.
The price of Bitcoin has weathered the recent storms, including Trump’s tariff wars and geopolitical developments in the Middle East. In case the price of the world’s main cryptocurrency continues to rise, demand for MSTR stock will grow. The spread between its market cap and the value of BTC it holds may increase, bringing real pain to the unfortunate short seller.
Retail investors should stick to simple and proven strategies that are not time-sensitive rather than try to construct complex investment structures. Trades like the ones proposed by Chanos are better watched from the outside, with a bag of popcorn.