Strategy (NASDAQ: MSTR), formerly known as MicroStrategy, has transformed itself from an enterprise software provider to a Bitcoin (CRYPTO: BTC) treasury over the last few years. The company’s software business has taken a back seat to CEO Michael Saylor’s efforts to accumulate more and more Bitcoin every week. He’s even compared his company’s stock to a leveraged Bitcoin ETF back in 2022.
The stock has attracted quite a following, especially as Bitcoin has soared in value over the last five years. Now, another company wants to copy Saylor’s playbook and build a business focused exclusively on accumulating Bitcoin for shareholders. It will go public via SPAC, and investors are already piling into it in anticipation.
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The pure-play crypto copycat
One group of crypto enthusiasts believe the biggest thing holding back Strategy is its actual business. Twenty One, a new Bitcoin treasury backed by Tether, the company behind the stablecoin, crypto exchange Bitfinex, and SoftBank, aims to do away with unrelated businesses so it can concentrate solely on accumulating Bitcoin.
It announced plans to merge with Cantor Equity Partners, a SPAC that’s been trading on the public market since last August, as it looks for an investment partner. Following the announcement, shares promptly tripled in value as investors piled into the stock amid excitement for Twenty One.
The spike in value for the Cantor shares gives the fund a market value around $400 million, as of this writing. To be clear, the stock currently represents a $100 million pile of cash to be exchanged for a 2.7% stake in Twenty One post-merger.
The company expects to establish a treasury of 42,000 Bitcoins, building on the $3 billion worth of the currency supplied by Tether, Bitfinex, and Softbank. The additional Bitcoin will come from purchases using funds raised from the merger and debt.
Based on some back-of-the-envelope math, that means investors are valuing Twenty One’s planned Bitcoin holdings at nearly four times their value. As of this writing, Bitcoin trades for just over $95,000. So 2.7% of 42,000 Bitcoin is worth about $108 million. That doesn’t include the shareholders’ portion of the proposed debt financing.
Is it worth paying the premium price?
Some premium for future shares of Twenty One is due. After all, the goal of Twenty One is to increase Bitcoin per share.
In other words, investors will get a yield on their Bitcoin holdings through Twenty One. It’s currently impractical for most Bitcoin investors to earn any return beyond price appreciation from Bitcoin ownership, so there is some value there.
Strategy stock notably trades around twice the value of its Bitcoin treasury. That’s instrumental to its strategy. It can sell shares of the company on the market at twice the value of its existing holdings. Then it can use that capital to buy Bitcoin, further increasing the value of its stock by about twice the value of the Bitcoin it just bought. Rinse and repeat.
The company’s board recently authorized management to increase share count from 330 million to 10.3 billion, and its preferred shares from 5 million to 1 billion.
This strategy is what makes buying MicroStrategy risky. As long as Bitcoin continues to increase in value, there’s no issue. However, a significant drop in the cryptocurrency’s value could threaten the entire system because of MicroStrategy’s leveraged exposure.
In effect, MicroStrategy investors are betting the company can more than double their exposure to Bitcoin over time without facing a catastrophic event. Potential investors in Twenty One are expecting even better increases in Bitcoin per share, as CEO Jack Mallers put it.
While the potential returns are great if Bitcoin’s price appreciation remains stable, the risks from volatility are very high. And if there’s one thing investors should know about Bitcoin, it’s that it has a tendency to provide highly volatile returns. As such, paying such a high premium above the net asset value of its treasury holdings seems like a poor use of funds.
While I’m bullish on Bitcoin, there are better options to invest in the already risky asset without taking on undue risk created by leverage.
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Adam Levy has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
