Summary Shorting MicroStrategy is a high-conviction idea due to its risky business model of issuing debt and equity to buy Bitcoin. The most problematic issue is that MicroStrategy actually sells zero-coupon convertible bonds to buy an intangible asset with no intrinsic value. Even if Bitcoin's price remains near $100K, MicroStrategy's stock could fall by 50% due to its market cap valuation premium vs Bitcoin. Short Ideas for 2025 There are many potential short ideas for 2025. For example, there is a maturity wall of refinancing in the Commercial Real Estate, which would also negatively affect exposed regional banks ( KRE ). The Gen AI bubble could also burst ( NVDA ). But the highest conviction short idea is to bet on the downfall in MicroStrategy ( MSTR ). Generally, shorting is the most dangerous strategy, and I would strongly discourage investors from shorting stocks. Shorting stocks based on the macro theme is especially dangerous, given the difficulties in timing events like a recession. Shorting stocks can be effective if the company has a clearly broken business model - thus shorting based on the firm-specific risk. The short MicroStrategy strategy has elements of both, macro and firm-specific. Specifically, as I will explain in the article, the success of this trade will depend on the price of Bitcoin, which is the macro element. However, the main reason for the bearish thesis is mostly due to the MicroStrategy business model, which is the firm-specific variable. The MicroStrategy Business Model Generally, when you discuss the company's business model, you would address the sales, expenses, profits, the competitive nature of the product/service offered, the growth opportunities, etc. MicroStrategy is essentially a self-proclaimed Bitcoin Treasury Bank. Basically, MicroStrategy issues equity and debt to buy Bitcoin. That's it. Thus, we are not talking here about the earnings potential, or anything fundamental. The value of MicroStrategy stock is essentially a derivative of the Bitcoin price - except much riskier than the Bitcoin itself. The bullish thesis for MicroStrategy is that Bitcoin would keep soaring in value, and thus MicroStrategy's Bitcoin holdings will increase in value as well. Essentially, the bet is that the market value of the assets (on the balance sheet) will appreciate in value well above the book value of those assets. The strategy is similar for example to a Real Estate Investment Trust that buys properties strictly in expectations of price appreciation. But here is the difference - real estate is a tangible asset with real fundamental value. Bitcoin is an intangible asset with zero intrinsic value, in my opinion. Most importantly, MicroStrategy is borrowing funds to buy a speculative intangible asset with no intrinsic value, in my opinion. The issue is: What is the collateral for these bonds? In other words, what assets do bond investors expect to get in the case of forced liquidation, as a risk management measure? They expect to get Bitcoin. So, the key issue is what is the tangible value of Bitcoin. Note, lenders rarely finance intangible assets. Thus, it's more likely that bondholders in this case are simply speculating on the Bitcoin value. Yes, the market can assign any market value to this intangible asset, but the sentiment can change and the price can revert to fundaments, which could be as low as a zero, in my opinion. The key bearish thesis is that MicroStrategy has a highly unusual business model, selling equity and debt to buy an intangible asset with no fundamental value, in my opinion. As I will explain in this article, the debt issue is particularly risky. Note, a brand name or a patent are also intangible assets that can eventually produce a cash flow. Bitcoin holdings cannot produce a real business profit (beyond experimental interest). The Numbers MicroStrategy just filed the Form 8-K with the key updates. MicroStrategy has the 21/21 plan, where it's authorized to issue new stock to raise $21B and to borrow another $21B to buy $42B in Bitcoin over the next 3 years. MicroStrategy already issued $10B of new stock in this program, and it can still issue another $11B. The December 4th 8K statement states: During the period between November 25, 2024 and December 1, 2024, the Company acquired approximately 15,400 bitcoins for approximately $1.5 billion in cash, at an average price of approximately $95,976 per bitcoin, inclusive of fees and expenses. The bitcoin purchases were made using proceeds from the issuance and sale of Shares under the Sales Agreement. As of December 1, 2024, the Company, together with its subsidiaries, held an aggregate of approximately 402,100 bitcoins , which were acquired at an aggregate purchase price of approximately $23.4 billion and an average purchase price of approximately $58,263 per bitcoin, inclusive of fees and expenses. Thus, the MicroStrategy Bitcoin holding is now worth around $40B. The MicroStrategy market cap is around $90B. Thus, the MicroStrategy stock is trading at more than double the premium over the current Bitcoin market value. Thus, even if the price of Bitcoin stays around $100K, MicroStrategy stock could fall by 50%, as the valuation premium is priced out. Other valuation ratios are irrelevant. MicroStrategy does not have any profits; thus, there is no PE ratio. The PS ratio is 161, which is based on MicroStrategy business sales, and is irrelevant to this analysis. MicroStrategy Bonds MicroStrategy issues zero-coupon convertible bonds. This means that there is no interest payment, and these bonds are usually issued at discount, with the convertible stock price. Thus, as the stock price increases above the convertible stock price, the bond price increases as well to a premium. These are some of the outstanding MicroStrategy bonds, and most are at a premium, with one issue at 295% premium and -30% YTM. It looks like MicroStrategy bond investors buy these bonds as an option to convert to the stock at below the market price level. TradingView In fact, MicroStrategy Just Completed $3 Billion Offering of Convertible Senior Notes Due 2029 at 0% Coupon and 55% Conversion Premium. The conversion rate for the notes is initially 1.4872 shares of MicroStrategy's class A common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $672.40 per share. This represents a premium of approximately 55%. MicroStrategy is trading currently at just below $400. What happens if the stock price stalls and bond investors try to sell these bonds? The fundamental value of this bond is tied to the par value of $1000 at maturity, assuming that the company is still liquid at that point. But investors are not buying these bonds to receive the par at maturity - they hope to convert to the stock. These are zero-coupon bonds, so no interest is paid, and the bond is attractive only if the stock price exceeds 672. Thus, the value of this bond is just like the value of a call option - there is some time value to it, but the value of mostly derived from volatility, or in this case, the hope that Bitcoin will soar by another 100%. Implications The MicroStrategy convertible zero-coupon bond value is basically valued as a call option, since no interest is paid to compute the present value of cash flows, and the only anchor is the par value at maturity stated at $1000. The MicroStrategy stock price is also valued as a call option, given that there is over 100% premium over the current Bitcoin value. So, what happens when the call option expires out of money? The value of the call option goes to zero. If the Bitcoin price stalls, and the MicroStrategy stock price stalls, these just-issued bonds will fall to a deep discount - as no interest is received, and the stock price is below the conversion price. So, if bond investors try to sell these bonds, who will buy them? Given that the primary motivation to buy these bonds is the conversion to Bitcoin, investors are unlikely to buy these bonds in case of financial distress, as it would be difficult to value the assets-in-place liquidating value, since that's Bitcoin - an intangible asset. Thus, MicroStrategy might be forced to buy these bonds back prematurely - which could force them to sell Bitcoin. In fact, in the latest bond offering , investors have the right to require MicroStrategy to repurchase the bond: Holders of notes may require MicroStrategy to repurchase for cash all or any portion of their notes on June 1, 2028 or upon the occurrence of certain events that constitute a fundamental change under the indenture governing the notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid special interest to, but excluding, the date of repurchase. If MicroStrategy is forced to sell Bitcoin to pay back the bondholders, the Bitcoin price could fall, and with it the MicroStrategy stock price. Thus, the key risk is that bondholders try to sell the issued bonds if the stock price stalls, or require MicroStrategy to buy them back. So, just a stall in Bitcoin that could crash the MicroStrategy stock price. What would happen if Bitcoin falls below the $58K breakeven point? At that point, it would be more difficult for MicroStrategy to buy the bonds back or pay the par value at maturity, and it would have to liquidate Bitcoin at a loss. Thus, this bearish thesis is looking particularly at the risk of issuing convertible zero-coupon debt to buy an intangible asset - this is a highly risky business model, which makes it very speculative and thus, and thus, it's a high conviction short trade candidate. The Risk Obviously, the main risk to this bearish thesis is if the Bitcoin triples next year to $300K. This would enable the stock price to rise further, reduce the valuation premium of the stock price to Bitcoin, and possibly allow the bondholders to convert to stock. In other words, given that MicroStrategy's market cap is selling at a premium over the value of Bitcoin holdings, it's already pricing Bitcoin at around $200K; thus, Bitcoin would have to triple to cause further gains in the MicroStrategy stocks. Is this a likely scenario? It's possible, but highly unlikely. The Fed Chair Powell compared Bitcoin to Gold. Next year we could have serious geopolitical escalation with Iran and Russia, so there could be a flight to safe haven assets. Will Bitcoin trade like a safe haven, or collapse with other speculative assets? I suspect Bitcoin will fall with other risk assets. Thus, the combined systematic and firm-specific risk is enormous, which supports the bearish thesis. Note, Trump did promise to buy Bitcoin for the National strategic reserve. Former Treasury Secretary Larry Summers just said that Trump's idea of buying Bitcoin for the National strategic reserve (like oil) is a "crazy" idea : Of all the prices to support, why would the government choose to support by accumulating a sterile inventory a bunch of Bitcoin. There's no reason to do that, other than to pander to generous special interest campaign contributors. 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