MicroStrategy Cracks as Bitcoin Tests $90K—Is a Deeper Drop Coming?

👇1-16) During my time in derivatives trading at Goldman Sachs and Morgan Stanley, we observed structural demand for yield products in Asia, where interest rates tend to be relatively low. These products rely heavily on retail investors selling options at cheap volatility or buying options at inflated volatility, often paying a premium compared to where institutional traders price them. Similarly, many investors view MicroStrategy (MSTR) as a leveraged Bitcoin call option, but fail to recognize that they are overpaying significantly—at present, the stock is trading 60% above its fair value (see February 24 report).

Value Traded in MSTR Shares (LHS, $ billions) vs. MicroStrategy (RHS)

👇2-16) Given that MicroStrategy traded $40 billion in volume on November 21, 2024, when its shares peaked, it's likely that savvy investors offloaded (some of) their positions to retail buyers, who are now sitting on significant losses—despite Bitcoin's price remaining flat over the same period. During that period, MicroStrategy acquired $10 billion worth of Bitcoin.

👇3-16) Bitcoin has broken the critical $95,000 level, a move that could have significant implications in the coming weeks. With several key factors at play, this is not the time for complacency—market dynamics are shifting, and traders should remain vigilant.

👇4-16) Bitcoin surged +89% between the September and December 2024 FOMC meetings, driven by expectations of Federal Reserve rate cuts. However, while the Fed eased policy in both meetings, the September cut was dovish, whereas the December cut was hawkish, signaling that the Fed intends to remain on hold for an extended period.

👇5-16) Given this backdrop, Bitcoin is likely to remain in a consolidation or correction phase until the Fed shifts back to a dovish stance and signals further rate cuts. This transition could take several months, as Fed officials believe Trump's tariff policies will be inflationary, making them more cautious about easing monetary policy too soon.

👇6-16) We warned about this risk last year, and while there were brief moments of optimism when Bitcoin held up despite stronger-than-expected U.S. inflation, and around Trump’s inauguration the macro environment remains a major headwind that cannot be ignored. This concern is amplified by Bitcoin breaking key technical levels, while at the same time, a group of Bitcoin ETF holders has emerged as a significant seller, further pressuring prices.

👇7-16) On February 12, we highlighted a pattern where Bitcoin consistently rallied during European trading hours, only to face heavy selling during U.S. trading hours—suggesting that someone may have been artificially creating positive momentum before aggressively selling into it.

👇8-16) So far, February is shaping up to be the largest month for Bitcoin ETF outflows since their launch in January 2024 (see February 24 report). When analyzing the top holders of BlackRock and Fidelity Bitcoin ETFs, we can attribute $10 billion of holdings to hedge funds and (potentially) prime brokers, who may be holding these ETFs on behalf of hedge fund clients.

👇9-16) This figure alone represents 25% of total ETF inflows, and based on our calculations, 56% of Bitcoin ETF buying may have been driven by hedge funds engaging in arbitrage strategies—exploiting the funding and basis rates. Now that these rates have dropped to single digits, those trades are being unwound, resulting in $1.3 billion in Bitcoin ETF outflows this month alone.

👇10-16) Since the December FOMC meeting, Bitcoin futures open interest on the CME has declined by $7 billion, while Bitcoin ETFs have seen net inflows of $2.3 billion. At the same time, MicroStrategy has accumulated an additional $6 billion worth of Bitcoin through multiple purchases over this period.

👇11-16) The next round of 13F filings from hedge funds and asset managers is due in mid-May 2025. Unless there is a significant shift in market structure, it is likely that hedge funds took advantage of liquidity from MicroStrategy’s aggressive buying to exit their positions, effectively selling into that demand.

👇12-16) As we previously noted, MicroStrategy's ability to sustain high volatility in its share price has been key to driving demand for its options, shares, and convertible bonds. However, as volatility compresses, as it is now, the stock's premium above its net asset value (NAV) should theoretically converge to 1—aligning its market cap with the value of the Bitcoin it holds. As MicroStrategy’s realized volatility continues to compress, particularly relative to Bitcoin, selling volatility at inflated prices has become increasingly challenging. This could limit the company’s ability to purchase more Bitcoin in the short term. Additionally, the declining NAV premium may serve as a leading indicator that the near-term risk remains to the downside.

BTC and MSTR realized volatility (LHS) vs. MicroStrategy share price (RHS)

👇13-16) At its peak, MicroStrategy's NAV premium reached 3.4x, but it has since shrunk to 1.6x, implying a fair value of $156 per share. While Bitcoin remains at the same price level as it was on November 21, 2024, when MicroStrategy hit its all-time high of $453, the stock has now declined by 40%, driven entirely by NAV compression. Michael Saylor often claims that MicroStrategy monetizes Bitcoin's volatility—and while that is true, someone is ultimately overpaying for the upside call option. An inflated NAV can easily be monetized and selling call options (embedded in convertible bonds) to institutions is another way as long as demand for MicroStrategy shares remains robust.

Bitcoin breaking the ascending broadening wedge

👇14-16) It's also worth noting that MicroStrategy's current share price of $276 is back to levels last seen around Trump’s election in early November 2024, further reinforcing the idea that the market is re-evaluating its NAV-based premium in the absence of continued volatility. MicroStrategy's average cost per Bitcoin stands at $66,300. If Bitcoin fails to hold its 21-week (147-day) moving average ($89,000), there is a real possibility that prices could retrace toward this level, testing MicroStrategy’s break-even point.

👇15-16) With no concrete developments regarding a Bitcoin Strategic Reserve and a hawkish Federal Reserve, the market has lost key upside catalysts that previously fueled Bitcoin’s momentum. Adding to concerns, Bitcoin has broken below its Ascending Broadening Wedge formation. If prices do not quickly reclaim the wedge, this pattern could evolve into a broader topping formation, increasing the risk of a prolonged price decline.

👇16-16) MicroStrategy shareholders have already experienced a 40% underperformance relative to Bitcoin, and if Bitcoin breaks the $90,000 level, we could see a deeper short-term correction. The breakdown of the Ascending Broadening Wedge is a key technical development, while MicroStrategy shares are now breaching their 11-week support, adding further downside risk.