- Microstrategy’s stock price has been rising rapidly, with the company becoming a “perpetual motion machine” by leveraging the different valuation models for commodities (Bitcoin) and companies.
- The company can continuously issue new shares and use the proceeds to buy more Bitcoin, increasing its Bitcoin holdings relative to shares outstanding, which drives up its market value based on the market’s expectation of Bitcoin’s future price appreciation.
- This mechanism allows Microstrategy to potentially become the most valuable company in the world by capitalizing on the discounted valuation of companies versus the spot pricing of commodities like Bitcoin.
Microstrategy has seen its stock price recently hit new highs, confounding expectations and exhibiting enormous strength. Its close ties to Bitcoin have created a positive feedback loop, allowing Microstrategy to leverage differences between how markets value companies versus commodities. This “perpetual motion machine” effect may ultimately make Microstrategy the most valuable company in the world.
Microstrategy’s Stock Price Defies Gravity
On October 9th, Microstrategy’s stock price approached $200, peaking at $198.35. This remarkable run occurred even as the price of Bitcoin has remained relatively stable.
Microstrategy is strongly tied to Bitcoin, holding more of the cryptocurrency on its balance sheet than any other public company. Its stock price rising while Bitcoin’s price remains flat is counterintuitive.
Perpetual Motion Machine Effect Explained
According to investor Glenn Hodl, Microstrategy has discovered a way to continuously boost its valuation by taking advantage of differences in how markets value commodities versus companies.
Different Valuation Models Create Pricing Paradox
Commodities like Bitcoin are valued based on their current market price. In contrast, companies are valued based on future discounted cash flows.
This means if the market expects Bitcoin’s price to rise in the future, Microstrategy’s Bitcoin holdings should also become more valuable.
Premium Capture Can Drive Up Microstrategy’s Value
By issuing new shares at market value, Microstrategy can capture this future price premium and acquire more Bitcoin. This increases Microstrategy’s Bitcoin holdings relative to its shares outstanding.
Even if Bitcoin’s price stays flat, this expands Microstrategy’s future valuation premium, driving up its stock price. Microstrategy can repeat this process like a perpetual motion machine.
Perpetual Motion Machine Effect Can Make Microstrategy The Most Valuable Company
Microstrategy seems capable of continuously leveraging these valuation model differences to increase its stock price independently of Bitcoin’s price.
If this dynamic continues, Microstrategy may ultimately become the largest company by market capitalization in the world. The perpetual motion machine effect gives Microstrategy enormous potential for further growth.
