Why does MicroStrategy, a US listed company, keep buying Bitcoin?

Original article by Biraajmaan Tamuly
Compiled by the Carbon Chain Value Original Team

• On August 11, MicroStrategy announced that it had invested $250 million in Bitcoin, which sounded the clarion call for institutional investors to enter the Bitcoin market;

• On September 8, MicroStrategy announced that it would invest another $175 million to purchase Bitcoin, bringing the company's investment in Bitcoin to $425 million.

• On December 21, MicroStrategy announced that it would purchase approximately 29,646 bitcoins for US$650 million in cash (including fees and expenses).

Many people have questioned why this Nasdaq-listed business intelligence software industry giant has been buying Bitcoin again and again in recent times. At first, everyone thought that MicroStrategy's purchase of Bitcoin might be to bring incremental profits to the company, but if you pay attention to the company's performance in the stock market, you will find out what a "good deal" MicroStrategy's purchase of Bitcoin is!

MicroStrategy is investing more and more in Bitcoin

According to a report released by Ecoinometrics, MicroStrategy may be trying to raise another $400 million to invest in Bitcoin. What does this mean from a fundamental perspective? In fact, by investing in Bitcoin, MicroStrategy will not only consider the profitability and asset preservation of its cash reserves, but also the price of their stock will rise with the investment in Bitcoin! As shown in the figure below (Source: Google Stock), it shows the stock price trend of MicroStrategy from August 2020 to the present, and August was the time when the company first disclosed the purchase of Bitcoin.

Next, let’s take a look at another analysis chart from Ecoinometrics, as shown below:

This chart shows the growth trends of Bitcoin, MicroStrategy, and the Nasdaq stock market in 2020. You will find that since MicroStrategy purchased Bitcoin, its stock price trend has almost been consistent with the upward trend of Bitcoin, both showing a parabolic rise.

• Before investing in Bitcoin, that is, from 2019 to August 2020, MicroStrategy's stock price trend was basically similar to that of the Nasdaq stock market, with a correlation of up to 51%.

• After investing in Bitcoin, MicroStrategy's stock price began to soar, and the correlation with the Nasdaq stock market seemed to disappear! Soon, the correlation between MicroStrategy and the Nasdaq stock market flipped, and at the time of writing, MicroStrategy's stock price was 52% correlated with Bitcoin, while the correlation with the Nasdaq stock market was only 21%.

This situation seems abnormal, but it is reasonable, because according to MicroStrategy and its chief executive Michael Saylor, the entire market is still in the early "accumulation stage" of Bitcoin, and many other institutional investors have been paying attention to Bitcoin's strong value storage ability. For example, Tesla founder Elon Musk recently posted a Bitcoin cartoon on his personal Twitter, in which the protagonist suffers from the low productivity of the current world. At this time, someone suggested that Bitcoin could be tried. Michael Saylor responded: "If you want to bring $100 billion in benefits to shareholders, please replace the US dollars on Tesla's balance sheet with Bitcoin, and then other companies on the S&P 500 will follow your example. Over time, assets will reach $1 trillion." Elon Musk then questioned whether Bitcoin can support such a large transaction volume. SBF, founder of the cryptocurrency derivatives exchange FTX, responded: "Bitcoin supports such a large transaction, and FTX or other over-the-counter trading platforms are happy to assist in executing this transaction. Basically, this transaction will have a certain market impact, but we may process $25 billion in transactions every day, which means that $100 billion may take about a week to complete."

At least judging from MicroStrategy's investment in Bitcoin, they have achieved a win-win situation in both the currency market and the stock market!

Is it safe for institutions to invest heavily in Bitcoin?

To be fair, MicroStrategy’s Bitcoin investment plan is indeed very aggressive, which is somewhat disturbing because if the Bitcoin market falls into a long bear market after the bull run like in 2017-2018, it will cause "damage" to MicroStrategy and other companies that have invested heavily in Bitcoin.

Of course, it is important to point out here that the economic landscape of Bitcoin has changed dramatically. After reaching its first high on November 24, Bitcoin has basically consolidated and has not seen a significant drop since then. Why? Well, this may be the result of the participation of institutional investors, who have absorbed the potential selling pressure shown by retail investors.

Not only that, other institutional investors have also begun to follow MicroStrategy's path. Regulated Bitcoin investment service providers such as BitGo and Grayscale are also currently increasing their Bitcoin investments on behalf of institutional investors (it should be noted that investing in Bitcoin with Grayscale and BitGo may result in a premium in related transactions). The fact that Grayscale also absorbed a large amount of Bitcoin in 2020 shows that their customers' demand for Bitcoin is increasing every day.

Compared with other institutional investors, the biggest difference of MicroStrategy is that it is very frank. They have made their Bitcoin investment plans public. I believe that in the near future more and more institutional investors will also disclose their huge Bitcoin investment information - there is no doubt that this is a good thing for the cryptocurrency market, isn’t it?