Short MicroStrategy, Long Bitcoin: Kerrisdale Capital Warns of Overvaluation

MicroStrategy shares tanked 11% on Thursday after a short seller warned that the company is overvalued. According to Kerrisdale Capital, a hedge fund, investors wishing to obtain exposure to Bitcoin should invest in a spot Bitcoin ETF rather than MicroStrategy shares.

The investment firm buys Bitcoin and shorts MicroStrategy stock as an arbitrage trade. They stated that this approach aims to exploit the “unwarranted premium” valuation that MicroStrategy holds compared to Bitcoin. As per Kerrisdale Capital’s calculations, MicroStrategy trades at a valuation of $177,000 per Bitcoin it owns.

“Nothing on MicroStrategy’s relative attractiveness justifies paying well over double for the same coin,” Kerrisdale Capital said. “MicroStrategy’s trading history and basic suggest the current inflated premium will contract, much as it has on prior occasions, providing a compelling opportunity for a pair trade.”

Investment Firm Advises Investors to Short MicroStrategy Stock

Kerrisdale Capital, a New York City-based investment firm, released a report criticizing MicroStrategy while suggesting investors take a bullish stance on Bitcoin. They sub-titled the report “Know When to HODL, Know When to FODL,” a play on the “hold on for dear life” acronym that is a favourite of crypto investors.

GM. We're short $MSTR and long bitcoin. Report avail at https://t.co/XDg6uAJDRa. Crypto trades often get carried away and $MSTR is no exception. The BTC price implied in $MSTR shares is now over $177k, an unjustifiable 2.6x the spot price of BTC. (1/6)

— Kerrisdale Capital (TradFi) (@KerrisdaleCap) March 28, 2024

The company has a negative position on the business intelligence company but is optimistic about Bitcoin, expressing clear opinions on the former. With the rising prominence of Bitcoin, MicroStrategy’s stocks have seen a consistent upward trend recently.

Kerrisdale expresses discomfort with this situation, stating that

The Bitcoin price currently implied by MicroStrategy’s stock is now over $177,000, i.e., two and a half times the spot price of Bitcoin. The days when MicroStrategy shares represented a rare, unique way to gain access to Bitcoin are long over.

Kerrisdale Capital, a New York City-based investment firm

The investment firm also pointed out that MicroStrategy’s original business, software analytics, currently comprises only 3% of its enterprise value.

MicroStrategy’s Stock: More Than Just a Proxy for Bitcoin?

Short sellers often attract significant attention due to their harsh critiques of the stocks they are shorting. However, Kerrisdale presents several valid arguments regarding MicroStrategy, particularly regarding how some investors view its shares as a substitute for direct Bitcoin ownership. The company’s heavy reliance on Bitcoin’s performance, which constitutes most of its assets, may not sit well with many investors.

MicroStrategy has not yet officially responded to the Kerrisdale report.