The Rise and Fall of MicroStrategy: A Cautionary Tale
A Top in the Making
MicroStrategy (MSTR) shares have been on a wild ride, but it appears that the company’s meteoric rise may be coming to an end. Down by more than 8% and hovering just above $300 on Monday, MSTR shares are now lower by about 30% since the announcement of their inclusion into the Nasdaq-100 index and nearly 50% from their late November record high.
A Virtuous Circle
The signs of at least a major short-term top in one-time barely known enterprise software company turned juggernaut Bitcoin Development Company were everywhere. First among those signals was the rocketing stock price — at its high of $543 in late November, MSTR was up nearly eight-fold in 2024 and more than a 50-bagger since the company began buying bitcoin (BTC) in August 2020.
The Rise of Bitcoin
One-time barely known enterprise software company turned juggernaut Bitcoin Development Company MicroStrategy’s stock price has been on a tear. The company’s decision to invest in bitcoin, led by founder and Executive Chairman Michael Saylor, has paid off handsomely. But as the old adage goes, "if something cannot go on forever, it will stop." And that seems to be exactly what happened with MSTR shares.
The Emergence of Copycats
Despite years of the obvious success of Saylor’s bitcoin treasury strategy, there had been a decided lack of other publicly traded corporates adopting the same. Yes, a few — even large-caps like the Elon Musk-led Tesla and Jack Dorsey-led Square — had dipped their toes into bitcoin acquisition. No other company of note, though, was willing to not only adopt bitcoin as their main treasury asset but take advantage of willing markets to raise additional capital with which to accumulate tokens.
The Copycats’ Fall
That changed in a sizable way this year however, with small cap medical device maker Semler Scientific, Japan hotel operator Metaplanet, and a number of bitcoin miners among those embracing the Saylor vision — each of them earning social media plaudits from Saylor with every capital raise and bitcoin purchase announcement. But it seems that these copycats have also fallen victim to the same virtuous circle that brought down MSTR shares.
The Theory of Reflexivity
George Soros, the famous investor and philanthropist, would likely say that this is exactly what happens when a virtuous circle breaks. According to his Theory of Reflexivity, investor perception and its effect on prices is a constant two-way street. In this way, perception (which is often wrong, as humans are fallible) can not just influence prices, but literally create its own reality.
The Breakdown
Here’s how it works:
- Investors believe a stock will go higher because earnings are about to get a big boost.
- The stock price goes higher.
- The high stock price allows management to raise capital at a cheaper cost than otherwise.
- This improves earnings.
- The stock price goes even higher.
- The bulls pat themselves on the back for their brilliance and win over converts, … and so on.
Stein’s Law
Soros’ philosophy is also known as a virtuous circle, in which MicroStrategy had surely found itself in 2024. Part of Soros’ trading genius was recognizing these circles when they were happening and jumping on — in size. Another part of his genius was figuring out when the circles were about to break and getting out or even betting against them.
The Scoreboard
As we look back, there appear to have been cracks in the MicroStrategy bubble three weeks earlier. The stock peaked at about $543 on Nov. 21. Despite bitcoin’s continued rise through late November and early December to an ultimate high above $108,000, MSTR lost ground — what technicians might call a troubling negative divergence.
The Plunge
At the current $300, MicroStrategy for the moment is suffering a peak-to-trough drop of 45% in about five weeks. While the bears might thus say the plunge has far to go, the bulls would surely point out that during MSTR’s run since August 2020, the stock has suffered a number of similar scary short-to-medium term declines and has always resolved higher.
Soros’ Take
Just possibly, Soros would remind that his Theory of Reflexivity taught that prices can go further (both upward and downward) than most could possibly expect.
