MicroStrategy's aggressive Bitcoin acquisitions, using debt funding, raise concerns among JP Morgan analysts about potential market risks and deleveraging.
MicroStrategy, a company renowned for its bold moves in the crypto space, has amassed a corporate treasury of 205,000 Bitcoins, valued at nearly $14 billion in today's market. This stash nearly rivals the $15 billion worth of Bitcoin recently acquired by BlackRock to support its iShares Bitcoin Trust.
However, concerns loom over MicroStrategy's method of acquiring BTC, according to analysts at JP Morgan.
"The purchase of Bitcoin using debt by MicroStrategy adds a layer of leverage and speculative fervor to the ongoing crypto surge, heightening the risk of significant unwinding during a potential market downturn in the future," remarked JPM analysts led by Nikolaos Panigirtzoglou.
Michael Saylor, the Chairman of MicroStrategy, has earned accolades from fervent Bitcoin enthusiasts for his assertive approach.
"Bitcoin stands as the premier investment asset. Our objective is to accumulate more Bitcoin as it is the ultimate goal. In this game, the one who amasses the most Bitcoin emerges victorious. There's simply no other endgame," Saylor recently conveyed to Yahoo Finance.
Saylor and MicroStrategy, listed on the Nasdaq under the ticker MSTR, are no strangers to leveraging Bitcoin as collateral to secure loans and procure additional Bitcoin. In the latest development this week, MicroStrategy announced plans to issue convertible senior notes due in 2031, amounting to $500 million, to fund further Bitcoin purchases.
Nevertheless, the market has not yet witnessed record-high levels of leverage.
Leverage, denoting the capacity to borrow capital to magnify investment returns, remains a double-edged sword. While it can augment profits, it can also intensify losses.
In the United States, trading with leverage, especially at high ratios, encounters stringent regulatory constraints due to this inherent risk. For instance, major crypto exchanges like Coinbase and Kraken are permitted to offer leverage, capped at 10x and 5x respectively, demonstrating a conservative stance compared to other jurisdictions.
The notional open interest of Bitcoin futures contracts recently reached a historic pinnacle of $34 billion, reflecting a surge in bullish sentiment toward Bitcoin's price trajectory.
Despite the prevailing optimism, leverage utilization in the market remains modest at 0.20, according to CryptoQuant. This suggests that there's currently no imminent threat of widespread liquidations capable of triggering a market downturn. The highest recorded Bitcoin leverage reached 0.40 back in October 2022.
Furthermore, the actual open interest, measured in BTC units, significantly lags behind the peak observed in October 2022, standing at just 496 BTC, as reported by CoinGlass. This indicates that although leverage exists, it has not escalated to levels indicative of a speculative bubble or an impending market correction.