BY MARK SEBASTIAN
December 8, 2024
Long term, when you look at the world’s governments balance sheets…the bull case is mostly made.
If I buy it now and wait 10 years…I strongly believe I’ll have made money.
But near term I think the case is a bit different…is there potential for Bitcoin to move higher in the near term…yes there is…it could be 110,000 or 120,000 by the end of the year.
I love the liquidity in the Bitcoin ETFs as well.
Here is what scares me….crypto goes through what they call Crypto Winters every few years….
We might be approaching one…
Why?
MSTR..Microstrategy.
Let me walk you through what scares me…
MSTR is issuing zero coupon convertible bonds currently to the tune of about 7.5 billion dollars of it….to buy bitcoin.
To the bond holders…they love it…why…there is a volatility arbitrage play in the convertible bonds that is SUPER juicy.
A convertible bond is essentially Debt plus a call option….the investors buying these bonds are selling the optionality in the open market to create massive income.[
Plus as debt holders they are senior to the stock holders.
Now this might make sense to you because you think Bitcoin is going up….but now lets pretend that instead of BTC…MSTR was using this debt to buy an equity like AAPL.
How would you feel about that…it is probably the safest stock in the market…but does a company issuing debt to hold an investment sound like a great idea?
But…for now…the play is working for everyone….the bond arb guys….mstr…mstr stock holders…bitcoin holders…
But what if Bitcoin drops 10%…what if it drops 20%…what happens to that debt?
What if the Trump inauguration ends up being a sell the news event and Bitcoin tumbles…
MSTR is the key here…if Bitcoin continues its slow rise….MSTR is going to be fine…but if it gets knee capped at somepoint and this companies debt comes into play…
MSTR will be FORCED to sell its holdings….which will trigger more sales….its a legitimate threat to what I believe is a good long term investement.
MSTR aside though…I like the asset…but…is it overbought near term….this is where we turn to the queen of the candles….If she likes it…I have a trade.
We cannot talk about Microstrategy (Ticker: MSTR) without talking about Bitcoin and … it has happened … Bitcoin has traded $100,000 … and then some!
Here it is on the five minute chart:
Within thirty minutes of trading $100,00, BTCUSD traded $104,000 on big volumes.
The euphoria didn’t make it through the day though as the beloved crypto currency had a massive reversal trading back down below $100,000 creating a bearish shooting star candle:
My support resistance level for BTCUSD is a close above or below $97,476..
Looking at MSTR chart, you can see how the stock has been exceptionally volatile ever since November 11, 2024 having larger swings than BTCUSD even:
After topping out at $543 with a major reversal that day, MSTR has been struggling to get a rally going again.
As BTCUSD made its reversal on Thursday, so did MSTR for a 13% loss.
I have near term support at $367 but look out below if MSTR closes below $339 which will take it back to $297.
Resistance on the upside sits at $418 and $441.
If BTCUSD closes below $97,476 the whole thing could topple over.
MSTR IV is high, but not as high as you think
A lot of times when stocks or commodities hit long term targets, I can feel the air coming out of the balloon. Since Bitcoin is a crypto currency, I can say $100,000 was a long term goal for bulls. That carried MSTR, a long time holder and bull for Bitcoin to new heights. Funny enough MSTR IV peaked two weeks ago. In a hot stock, IV tops are usually a sign of market tops for that asset.
Check out MSTR below. The IV peaked around Nov 25th and since then has backed off. That means those upside call buyers are getting out of dodge and not buying anymore MSTR. 90 Day realized volatility is around 100%. The shorter term realized vols are more in the 130 to 140 range. Actually fairly priced given the move.
The profit taking train is running. Put spreads make sense at these levels with IV fairish.
With the Call Vol Skew, a call calendar is a cheap upside hedge. With some air out of the balloon, some long premium spreads still should work well.
The bitcoin complex has enjoyed an incredible turn of events recently. A pro-crypto President-Elect with a cabal of crypto supporters within earshot bodes well for supporters of digital currencies, Bitcoin in particular. Associated Bitcoin proxy stocks have come along for the ride.
One of those names, MicroStrategy Incorporated (Ticker: MSTR), led by the charismatic Michael Saylor, is a kind of Bitcoin holding entity that has performed to perfection. From having traded in line with the value of its underlying Bitcoin holdings only a few months ago, to now trading at a valuation that implies almost 2.5 times its underlying coin holdings… well one might say that it has perhaps performed to… beyond perfection?
For lucky holders I would say that the 100K level on Bitcoin may act as a kind of magnet until closer to inauguration. We trade a little higher, we trade a little lower. MSTR will likely do the same around current prices.
And as it feels fully valued at the 400 level, I would be happy to take advantage of these high option pricing levels to sell some December 445 calls for around $25. That represents about 6% of the current stock price and a call-away return of over 17% should the stock breach $445 by expiry, only 2 weeks from now. Not only will the options potentially erode but option pricing in the name has the potential to get compressed fairly quickly if implied volatility drops.
And bonus time: right now the upside call skew, meaning the cost for distant calls versus distant puts, has begun to soar again on 100K excitement. In other words, calls are relatively expensive as optimism remains in the name. Our call sale is also taking advantage of this skew effect.
Owning MSTR has been a great investment, but it might be time to collect some rent on it as we look to eggnog and merriment over the next few weeks.
The ultimate Trump Trade is on!
Both Bitcoin (Ticker: BTC) and MicroStrategy Incorporated (Ticker: MSTR) have been riding high since the self-proclaimed “crypto president” was elected last month.
But will it last?
A lot of crypto money helped Trump get elected … particularly from the RFK crowd.
Trump is trying to reward that money with good administrative pics.
While some of Trump’s cabinet nominees have faltered and even withdrawn, his finance pics have been strong and well received … particularly by the crypto community.
His pick to replace outgoing SEC Chairman Gensler was directly responsible for BTC moving past the all-important $100,000 mark.
Gensler had drawn the ire of the crypto community.
Paul Atkins on the other hand, who was an SEC commissioner under George W. Bush, is a big crypto supporter.
Atkins has been part of the Token Alliance, an advocacy group for crypto, since 2017.
He’s also taught a class on blockchain at MIT.
All of that means that we are likely to see BTC and MSTR run up … at least in the short-term.
But crypto winters eventually sneak in, so going in now will require timing the back side of a trade.
What that timing will be is unknown.
Trump is in his honeymoon phase … as President and with his picks.
That is likely to continue until January 20, 2025.
After January 21, 2025, all bets are off.
MSTR and MARA Holdings Inc. (Ticker: MARA) are two of the largest corporate holders of BTC.
MSTR is a publicly traded company specializing in business intelligence software that has substantial investments in BTC.
It financed its BTC acquisitions through the issuance of convertible note debt securities that investors can convert into a predetermined number of shares of the company’s common stock.
The most recent was issued in November 2024 – 0% convertible senior notes due in 2029, with an initial conversion rate of 1.4872 shares per $1,000 principal amount.
That a conversion price of approximately $672.40 per share, a significant premium over the current price.
Holders can convert these notes into cash, shares of MicroStrategy’s class A common stock, or a combination of both, at the company’s discretion.
That ties the financial health of MSTR closely to the price of BTC.
Thus, drops in the price of BTC will negatively impact MSTR.
Depending on the BTC leverage strategy that MSTR has employed, such price movements could be amplified.
There is also future conversion risk for the bond holders.
The price of MSTR needs to appreciate for equity holders to see a return.
The price must greatly appreciate for bond holders too see a positive return.
If the company’s stock price does not appreciate sufficiently, holders of convertible notes may find conversion into equity unattractive.
Or, if investors hold the notes to maturity, expecting repayment in cash, MSTR could be pressured into selling BTC to fulfill debt repayments.
Once risk that looks like it is coming off the table is crypto regulatory risk, which is favoring BTC.
That makes the short-term outlook attractive.
But investors need to keep their heads up and wits high.
Want To Watch Us Live?
Add Our Free Events To Your Calendar By Clicking Your Email Icon Below!
