New ratios are a sign of something…
As the market rises, a couple of things often occur. First, a conga line of naysayers and cassandras emerge. The earliest doom-and-gloomers point to rational reasons why the market should not be rising and why it should be going down as they earlier but incorrectly predicted. The second bunch point to how much the market has already risen and then lean on a bunch of ratios to show that the market has fallen the last time (insert ratio here) was this high. As the market continues to climb, the next bunch of people point to a ‘bubble’ and warn of an impending crash. Eventually, equities markets correct – you can count on it – but the timing is far less reliable and predictable.
In the past, one of the coincident aspects of a bubble or irrational pricing has been the emergence of new-fangled measures and ratios to justify the prices being paid.
I recall the tech boom of 1999 and 2000. Back then, many companies, whose share prices were soaring stratospherically, had no earnings. Some were generating no revenue either. Nevertheless, their share prices were rising, some might say inexplicably. Taking their cue from prices – always a massive mistake – analysts needed to find ratios that were more reasonable than a price-to-earnings (P/E) ratio of infinity or a price/sales ratio of 1000. And so, they concocted new ratios such as price to views, price to clicks, eyeball growth. Call it ‘bubble logic’. The emergence of weird new ratios for re-labelling a stratospheric price ‘cheap’ often, although not always, accompanies a rally that is getting ahead of itself.
Today, I see perhaps an early example of this development. I’ll let you decide whether it’s relevant to the equity market or Bitcoin…
Every new market mania needs new metrics to attract investors and explain the reason for its existence. Here’s one for the bitcoin boom: “Bitcoin yield.”
MicroStrategy is a company listed on the Nasdaq (NASDAQ:MSTR) that is described as providing business intelligence (enterprise analytics), mobile software, and cloud-based subscription services. Of course, that could actually mean almost anything.
What the company is better known for, however, is a huge bet on Bitcoin, which the company started buying in 2020 under the council of its Co-founder and Executive Chairman Michael Saylor, who is reportedly a Bitcoin evangelist.
The company raises capital by issuing shares and using the proceeds to buy Bitcoin. Think of it as a Bitcoin investment company. The company refers to itself as a Bitcoin treasury company.
As the Bitcoin price rises, the company’s shares rise, and MicroStrategy issues more shares to buy more Bitcoin. On the positive side, as the share price rises, fewer shares need to be issued to raise the same amount of money. On the negative side, the rising price of Bitcoin necessitates more shares to be issued.
If it’s starting to sound a bit like musical chairs – a great game until the music stops – you may be onto something…
Now, we need to define yield, which is a term the company also mentions in its disclosure. You and I both know yield to be the percentage return calculated by comparing the annual income of an asset to its purchase price or its market price. If I buy a rental property for $1 million and rent it out for $25,000 per year, my yield is 2.5 per cent.
MicroStrategy, however, has co-opted ‘yield’ and, in so doing, created a new (bubble logic?) ratio called the Bitcoin yield. According to the company’s filings, the Bitcoin yield is the percentage change, from one date to another, in how many bitcoins per share MicroStrategy owns.
There are a few moving parts including the number of shares issued, the price at which they are issued and the price of Bitcoin, but generally speaking, if the market value of MicroStrategy’s shares rises faster than the price of Bitcoin, fewer shares need to be issued to purchase the same number of Bitcoin, and the Bitcoin yield will be positive because MicroStrategy’s Bitcoin per share rises.
Back in December 2023, when its share price was US$63.00 per share, MicroStrategy owned 0.91 bitcoin per 1,000 shares. Thanks to a circa 650 per cent rally in the share price rise that put MicroStrategy’s shares at US$385 on November 18 this year, and exceeded the 166 per cent rally in the price of Bitcoin over the same period, MicroStrategy’s Bitcoin-per-share holding was 1.29 Bitcoins for every 1,000 of its shares.
Using the company’s own invention of yield, the Bitcoin yield was, therefore, just under 42 per cent.
Of course, thanks to a steeply accelerating share price recently, the Bitcoin yield has been soaring. On November 11, the company released a press statement announcing a, “Bitcoin yield of 26.4 per cent year-to-date.” That number was up from 17.8 per cent at the end of the last quarter.
It all sounds very precise, and it also appears the company is doing a great job because it is clearly exceeding its stated aim of achieving a Bitcoin yield of four to eight per cent.
But the measure is essentially an information-free-zone. The ‘yield’ remember isn’t a yield at all. More worrying is that investors who fund the Bitcoin purchases by participating in the capital raisings are paying much more for their Bitcoin than they would by just purchasing, for example, a Bitcoin exchange-traded fund (ETF).
To prove the point, the company’s last reported holding of Bitcoin was just over 331,000 coins. Their market value (at US$98,879.00 each) was almost US$33 billion. The market cap of MicroStrategy, however, is nearly US$81 billion at the time of writing.
The company’s newest shareholders are therefore effectively paying 2.5 times the market price of Bitcoin for those Bitcoin.
The question is why?
Part of the reason is that the company is also debt-funding its Bitcoin purchases, which leverages shareholders’ ownership of Bitcoin. But if the Bitcoin price falls, the leverage will rise, and shareholders will witness a steeply falling share price as well as a liquidity drought.
Creating imaginary ratios doesn’t soften the blow of overpaying for Bitcoin, and remember, there is no yield! Perhaps the bubble has begun inflating; I just can’t tell if the bubble is in equities or Bitcoin. Perhaps it’s both.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
