What to know:
- MicroStrategy shares are down sharply since the announcement of its Nasdaq-100 inclusion and nearly 45% from their peak just a few weeks ago.
- Even with the decline, the stock remains wildly higher this year and since the initiation of bitcoin purchases in 2020.
- George Soros’ Theory of Reflexivity might be a guide to the past and future price action in MicroStrategy.
As a seasoned researcher who has witnessed countless market cycles, I must admit that MicroStrategy’s current predicament is not entirely surprising. The parallels between MicroStrategy and certain bubbles of yesteryear are striking, and George Soros’ Theory of Reflexivity seems to fit this situation like a glove.
In my career, I’ve seen the Tulip Mania, the South Sea Bubble, and even the Dot-Com Boom and Bust. And here we are again, with MicroStrategy being the latest addition to the list of overhyped, overpriced assets. The signs were everywhere: a skyrocketing stock price, a charismatic CEO who seemed to be everywhere at once, and even imitators jumping on the bandwagon.
It’s reminiscent of a joke I once heard: “How do you make a small fortune in the stock market?” The answer was, “Start with a large one.” It appears that many investors forgot that lesson when they piled into MSTR shares.
But let’s not forget that even in the midst of a bubble, there are always opportunities for profit. As Soros once said, “The most important thing in life is to learn how to give out with both barrels.” In other words, know when to hold ’em and know when to fold ’em. The key is to recognize the signs of a bubble and act accordingly.
In this case, it seems that the bubble has finally burst, but only time will tell if MicroStrategy will find its way back to its former heights or if it’s destined for the dustbin of financial history. As for me, I’ll be watching with bated breath and a keen eye for any signs of a reversal—and maybe even a good laugh at the expense of those who got caught up in the hype.
In retrospect, it was inevitable.
On Monday, MicroStrategy (MSTR) shares fell over 8% and were slightly above $300. Since the announcement of their addition to the Nasdaq-100 index, these shares have dropped approximately 30%. Furthermore, they are also about 50% lower than their peak from late November.
Clear indications pointed towards a significant short-term peak for the once obscure enterprise software firm, now powerhouse Bitcoin Developer Company MicroStrategy, were evident all around.
Initially, one significant indicator was the soaring stock value – by late November, it had reached an impressive $543, representing an almost eightfold increase in 2024 and a more than 50-time return for MSTR since they started purchasing Bitcoin (BTC) in August 2020.
Additionally, there was Michael Saylor, both Founder and Executive Chair, who has never hesitated to tout his company’s potential and advocate for Bitcoin. Towards the end of this year, he seemed to appear increasingly frequently in financial news, podcast discussions, and on various social media platforms.
Instead of just his frequent appearances, it was also noticeable shifts in Saylor’s behavior, which some American sports enthusiasts might label as “celebrating too soon” after scoring a touchdown. One such change was his persistent emphasis on the innovative metric developed by MicroStrategy, known as “bitcoin yield.” This reminded many of inflated internet bubble metrics from the late 1990s, like “page views.” With his company having an abundance of funds from stock and convertible debt sales, for reasons unexplained, Saylor started hinting at upcoming large bitcoin purchases on Sundays, prior to the official filing being made public on Mondays.
Subsequently, there arose several companies mimicking the approach. Despite the proven success of Saylor’s bitcoin treasury strategy over the years, there was a significant absence of other publicly traded corporations adopting the same. Yes, some – even large ones like Tesla under Elon Musk and Square led by Jack Dorsey – had experimented with buying bitcoins. However, no notable company was ready to not only make bitcoin their primary treasury asset but also utilize open markets to increase their token holdings by issuing additional capital.
This year has witnessed significant transformations for several entities, including small cap medical device manufacturer Semler Scientific, Japanese hotel operator Metaplanet, and various bitcoin miners, who have adopted the Saylor approach. Each of these entities has garnered praise on social media from Saylor with every successful fundraising round and bitcoin acquisition announcement.
If something cannot go on forever, it will stop
Instead of being satisfied with being potentially the most successful trader in history and earning numerous billions, George Soros aspired to be recognized as a profound thinker. It’s not surprising that his seminal work on trading, “The Theory of Reflexivity,” bears a striking resemblance to a well-known theory by a man named Einstein.
As a seasoned investor with years of experience under my belt, I firmly believe that investor perception plays a crucial role in shaping market dynamics. Over time, I have witnessed instances where misguided perceptions have significantly influenced stock prices and even shaped the destiny of companies.
For instance, consider a situation where investors are optimistic about a company’s earnings potential due to an impending boost. This optimism causes the stock price to surge, giving the management the opportunity to secure capital at a lower cost than usual. The improved financial position, in turn, leads to better earnings performance, further validating the initial optimistic outlook and driving the stock price even higher.
This cycle of self-fulfilling prophecies can be both exhilarating and perilous for investors. On one hand, it offers opportunities for substantial gains if you can predict and capitalize on these trends early. On the other, it can lead to devastating losses when the initial perception turns out to be incorrect or unrealistic.
In my view, it’s essential for investors to remain vigilant and not get swayed by the collective euphoria or panic in the market. Instead, we must rely on our own research, analysis, and judgment to make informed decisions. After all, the market is a complex organism that reflects the collective hopes, fears, and misconceptions of its participants. It’s up to us to navigate these waters wisely.
As a forward-thinking crypto investor, I found myself immersed within MicroStrategy’s cycle of success, commonly referred to as a virtuous circle, by 2024. Similar to Soros, my knack for identifying these cycles came from recognizing the momentum and investing accordingly in substantial amounts. However, what truly set him apart was his ability to predict when these cycles would falter – be it through timely exit strategies or even strategically betting against them before their downfall.
In simpler terms, Herb Stein, a renowned economist, once stated that if something doesn’t have an end, it will eventually stop – and this was true not only for government budget or trade deficits but also for the stocks of MicroStrategy.
Scoreboard: still showing remarkable gains
Following the December 14 announcement that it would join the Nasdaq-100 Index, MicroStrategy’s shares were traded around $430. However, in just two weeks since then, its stock price has dropped significantly to approximately $300, representing a decrease of about 30%.
In retrospect, it seems that signs of trouble were already emerging in the MicroStrategy stock bubble around three weeks prior. The stock reached its highest point at approximately $543 on November 21st. Interestingly, even though bitcoin continued to climb through late November and early December, reaching a peak above $108,000, MicroStrategy began to lose value – a concerning development that technicians refer to as a negative divergence. At the current price of $300, the company has experienced a significant drop of nearly 45% in about five weeks.
MicroStrategy’s stocks have shown exceptional growth, except for a minuscule period. So far this year, they’ve surged over 400%. Furthermore, since August 2020 when Saylor began buying bitcoin, the shares have increased approximately 20 times their original value.
Although some may argue that there is still much room for the stock price to fall (the bears’ perspective), it’s worth noting that since August 2020, MicroStrategy’s (MSTR) share has experienced several steep short-to-medium term drops followed by upward movements (a bullish viewpoint).
Perhaps Soros might emphasize that, according to his Reflexivity Theory, prices have a tendency to exceed what many might anticipate – be it a significant increase or decrease.
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2024-12-30 18:36