Saylor bets the bitcoin bottom as MicroStrategy shorts subside

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In a filing published last Friday, MicroStrategy has announced it will be issuing and selling up to $500 million worth of its stock to buy more bitcoin. This announcement comes after a number of traders significantly decreased their short bets against MicroStrategy — although some funds like Bireme Capital remain structurally bearish.

MicroStrategy had a record of 51% shares sold short by early August, but shorts today stand at 34%. Short sellers who went short MicroStrategy shares late last year or early this year could have made a killing. However, some funds like Granite Shares seem to have got wrecked shorting MicroStrategy even though they were short since last February with the stock tumbling 24% since then. 

So far, MicroStrategy has bought a total of 129,699 Bitcoin for a total of $3.795 billion (an aggregate price of $29,200 per bitcoin) making it at least 23% down on its bitcoin holdings. This isn’t the first time that MicroStrategy has used its stock to buy bitcoin.

In December 2020, the company released $650 million in convertible senior notes to buy bitcoin, followed by another $1.65 billion in February 2021, divided into two sales, both maturing in 2027. MicroStrategy’s stock float has also increased by more than 12% in volume since it started buying Bitcoin in 2020.

Read more: Morgan Stanley Bitcoin bet: Up with MicroStrategy, down with Grayscale

Bireme Capital argues that the real value of a MicroStrategy share is $29 with the company’s true worth at $330 million. It makes this assessment because it argues that the company’s main risk is that it doesn’t make enough money to pay its debt interest payments, eventually forcing it to sell its bitcoin and depress the value of the stock.

Its second major risk lies in potential future lawsuits for breaching the fiduciary trust of shareholders by leveraging the company to buy bitcoin. The third risk identified by Bireme Capital is that MicroStrategy would get margin called over its $205 million Silvergate bitcoin-backed loan when the price of bitcoin goes to around $5,000. It does, however, say that this scenario is unlikely. 

Betting on a bitcoin bottom right now can also mean betting on a bottom on the stock market to which bitcoin is potentially correlated. According to JP Morgan, net inflows to bitcoin funds and ETFs were as low as January 2020 levels last May.

However, Glassnode, an analytics company focused on bitcoin and cryptocurrency has noted that long-term holders are at an all-time high and actually accumulating with more than 50% of holders in profit. Bitcoin started on a bullish tone this week, having spiked by more than 4% between the start of the weekend and the beginning of the week, reaching up to $22,400 on Monday.

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