In a recent report titled “Long Bitcoin / Short MicroStrategy Inc (MSTR): Know When to HODL, Know When to FODL,” Kerrisdale Capital Management outlines a bold investment strategy. The hedge fund advocates going long on Bitcoin directly while simultaneously shorting shares of MicroStrategy (NASDAQ: MSTR), a publicly traded company known for its aggressive Bitcoin accumulation tactics.

Kerrisdale Capital is a hedge fund known for its short-selling investment strategy, where they profit from declines in a company’s stock price. The firm often targets companies they believe are overvalued or have questionable business practices, publishing in-depth research reports to support their short positions. Kerrisdale has a history of attracting controversy due to their aggressive approach and the potential conflict of interest inherent in short-selling activities. Despite this, they have a track record of identifying potential weaknesses in companies across various industries

Kerrisdale argues that MicroStrategy’s stock price implies an inflated Bitcoin valuation of over $177,000 – more than 2.5x the current spot price. They assert that the company’s historical premium over Bitcoin’s actual price is unsustainable. Kerrisdale believes that as more accessible and affordable Bitcoin investment vehicles emerge, such as ETFs and ETPs, MicroStrategy will lose its appeal.

Kerrisdale questions MicroStrategy’s self-proclaimed status as a “Bitcoin development company.” They point out that the core software analytics business represents a tiny fraction of MicroStrategy’s overall value. According to Kerrisdale, the company’s stock price is almost entirely driven by its Bitcoin holdings, which were largely acquired through debt financing and equity-linked offerings.

The report disputes the argument that MicroStrategy’s use of leverage and share dilutions to buy Bitcoin creates superior shareholder value compared to direct Bitcoin ownership. Kerrisdale highlights that while MicroStrategy’s total Bitcoin holdings may have increased, the dilution has kept Bitcoin holdings per share relatively stagnant.

Kerrisdale questions other justifications for MicroStrategy’s high premium. They deem the ability to reinvest cash flows from the software business into Bitcoin insignificant, citing minimal free cash flow generation. The lack of management fees in holding MicroStrategy compared to a spot Bitcoin ETF is also dismissed by Kerrisdale, especially considering the substantial premium and the low fees of spot Bitcoin ETFs like IBIT and FBTC.

Kerrisdale’s thesis hinges on the expectation that the extreme premium commanded by MicroStrategy shares will return to more historically consistent levels. They note that since early 2021, MicroStrategy’s premium has only exceeded 2.0x on 6% of trading days, with an average of 1.3x. This suggests considerable room for the premium to contract, potentially resulting in a significant decline in MicroStrategy’s share price.

Kerrisdale emphasizes that their investment strategy is not based on a bearish view of Bitcoin or MicroStrategy itself. They are simply wagering on the distortion between the two assets correcting. It’s also crucial to remember that Kerrisdale Capital has both a short position in MicroStrategy and a long position in Bitcoin ETFs, standing to profit if their analysis proves accurate.

On Thursday, a day during which the Bitcoin price was more or less stable, thanks to all the short-selling of the stock, MSTR closed at $1,704.56, down 11.18% (though still up 148.79% for the year-to-date period).

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