The MicroStrategy Bubble: A Cautionary Tale
A Major Short-Term Top in the Making?
In retrospect, it was inevitable. MicroStrategy (MSTR) shares have been on a wild ride since their inclusion into the Nasdaq-100 index, with a decline of nearly 30% from their late November record high. The once unknown enterprise software company turned juggernaut Bitcoin Development Company has seen its stock price skyrocket, with a near eight-fold increase in 2024 and over a 50-bagger since it began buying bitcoin (BTC) in August 2020.
The Rise of the Rocketing Stock Price
One of the earliest signs of a potential top was the rapid rise in MicroStrategy’s stock price. At its peak of $543 in late November, MSTR was up nearly eight-fold in 2024 and more than a 50-bagger since the company began buying bitcoin (BTC) in August 2020. This unprecedented growth raised eyebrows among investors and experts alike.
The Evangelism of Michael Saylor
Founder and Executive Chairman Michael Saylor has been at the forefront of promoting MicroStrategy’s prospects and evangelizing for Bitcoin. His constant appearances on financial news, podcasts, and social media platforms were undeniable, but subtle changes in his attitude also hinted at a potential bubble. The introduction of the ‘bitcoin yield’ key performance indicator, reminiscent of made-up internet bubble metrics like ‘page views,’ was one such sign.
The Habit of Teasing Announcements
Saylor’s habit of teasing announcements of sizable new bitcoin purchases on Sundays before official regulatory filings on Mondays also raised suspicions. This practice, coupled with the constant promotion of MicroStrategy’s prospects, may have contributed to the creation of a virtuous circle, where perception and reality became intertwined.
The Emergence of Copycats
Despite years of success with its bitcoin treasury strategy, other publicly traded companies were slow to adopt similar approaches. However, this year saw a significant increase in the number of corporates embracing the Saylor vision, including small-cap medical device maker Semler Scientific, Japan hotel operator Metaplanet, and several bitcoin miners.
The Theory of Reflexivity
Investor perception and its effect on prices is a constant two-way street, as George Soros’ magnum opus on trading, the Theory of Reflexivity, explains. Perception can not only influence prices but create its own reality. This virtuous circle, where investor belief in a stock’s future performance leads to increased buying, which in turn drives up the price, was evident in MicroStrategy’s remarkable gains.
The Breakdown of the Virtuous Circle
However, as Soros also cautioned, something that cannot go on forever will eventually stop. The Theory of Reflexivity highlights the importance of recognizing when these virtuous circles are about to break and getting out or even betting against them. Herb Stein’s Law, which states "if something cannot go on forever, it will stop," was equally applicable to MicroStrategy shares.
A Troubling Negative Divergence
Looking back, there were signs that the MicroStrategy bubble was forming three weeks before its peak at $543. The stock lost ground despite bitcoin’s continued rise through late November and early December, indicating a troubling negative divergence. At the current price of around $300, MSTR has suffered a peak-to-trough drop of 45% in about five weeks.
A Remarkable Performance
While the bears may argue that the plunge has far to go, the bulls would point out that during MSTR’s run since August 2020, the stock has suffered similar scary short-term declines and always resolved higher. However, as Soros might remind us, prices can go further (both upward and downward) than most could possibly expect.
Conclusion
In conclusion, the MicroStrategy bubble is a cautionary tale of how investor perception and reality can become intertwined. While the company’s remarkable gains are undeniable, the signs of a potential top were there for all to see. As Soros would say, prices can go further than expected, both upward and downward. The future of MSTR shares remains uncertain, but one thing is clear: the virtuous circle that drove its rise may be about to break.
