The price of bitcoin is up almost 29% year to date. Traders of the digital asset are naturally a bit giddy.
We are unabashed bitcoin bulls, and over the long term, we hold the view that the price of the digital asset will go higher. The best way to participate in the rally is to buy bitcoin and go for a ride. But many people are incapable of dealing with the intricacies of crypto exchanges, some of which are shady, and the creation and management of wallets that enable people to take possession of their assets the same way they take possession of cash. Due to these complexities, our preferred recommendation was to buy Microstrategy, the enterprise software company run by the renowned bitcoin maximalist Michael Sauylor.
Our latest trade in the name is coming to harvest sooner than we thought possible. Last year, we suggested a bullish risk reversal that performed spectacularly well. But after a big move, we wanted to pull in the risk a bit. So, we took profits by closing the risk reversal and creating a collared stock position.
In a collared stock position, one buys the stock and sells far out of the money calls to generate cash and capture upside potential. They use some of that premium to buy a downside put to limit losses. We put this position on the books when Microstrategy was trading at $520 a share. But in just three months, the stock price has blown through the strike of the upside call. Since there is a lot of time value left in the options we sold, we plan to let the trade age.
This is an interesting phenomenon as the price of bitcoin is up 29%, year to date. The question on everyone’s mind is, “Can it continue?” It can be over the long hall, but a pause may be about to take hold.
On a short-term basis, the price of BTC is up against trendline resistance. The price could stall at current levels and move back toward the lower trendline. Given the energy and enthusiasm for this asset, it is hard to imagine, but such a circumstance is often the setup. Things always look rosy at the top.
There are reasons to be bullish from a fundamental basis. The government printing $2.5 trillion a year is an opener. The ETFs are attracting lots of capital. Since the approval of bitcoin ETFs, about 114,000 bitcoins have been purchased by ETF buyers, net of the liquidation of the Grayscale trust. That is about 0.6% of all the bitcoin produced. Now that it is easier for people to buy bitcoin, we should expect more buying. It is important to remember that this market has a large contingent of people who want to hold for the long term. They think bitcoin goes way up because the dollar goes way down in purchasing power. They buy it to protect purchasing power the same way people buy real estate to do the same.
It is now easier for someone with an IRA at a traditional broker like Fidelity or TD to buy Bitcoin. Now that it is a tradable asset through conventional means, institutions are likely to become buyers. We are waiting for CalPERS to announce a purchase. When they do, the pension market will have the green light to get involved. With $billion of moving in, higher prices are likely.
We are also waiting for a big Sovereign Wealth Fund to make an allocation. Once one does, we suspect the others will FOMO in as well. These global investors represent tens of $ trillion, and they are not risk averest as they are highly diversified to disperse that risk. They provide a catalyst for higher prices as well.
Finally, there is the halving that is scheduled for April 19 of this year. This will cut the network incentive fee from 6.26 to 3.125. The reduction in the supply of new bitcoin is likely to put upward pressure on the price of the coin. There is a warning, however. Miners might come under financial pressure as their revenue will get cut by almost half. We might see a disruption on the road to higher prices.
Hold on to your hats. Bitcoin is about to deliver attendees an “E” ticket ride. Unfortunately for options traders, options on ETFs are not available yet. That leaves us with trading options on Microstrategy. That has become a strategy with a hidden risk. The price of MSTR has risen well beyond the value of bitcoin on the balance sheet.
When Microstrategy started buying bitcoin for its balance sheet, the enterprise value of the software business was about $90 a share. At the time, the company had no debt and about $500 million in cash, so the equity value and enterprise value were the same. As you can see from the exhibit above, that is trading at about $325 a share. The software business has grown some since 2021, but not 260%. That said, the company is busy making software tools and apps that make it easier for people to pay with bitcoin and for companies to use it for inventive compensation. It will give companies the capability to custody bitcoin if they want to. So there are reasons for the rise in value. But it seems too much. There may be a Vanguard effect. Vanguard will not let its customers buy the bitcoin ETF products. So, if they want to get exposure, MSTR stock is the only game in town. Since the market cap of MSTR is just $16 billion, it does not take much money to push the price around and could be the reason for the outperformance of MSTR stock versus bitcoin. In the last 24 hours, for example, bitcoin is up 3.5% and MSTR is up 13.7%. If you are a long MSTR, be aware that if Vanguard changes its policy, it is possible to see MSTR sink fast. Given the valuation, we prefer the bitcoin ETFs over MSTR.
