News that MicroStrategy founder and CEO Michael Saylor is stepping down to assume an executive chair role has sent shares in the software company lower on Wednesday. But the stock may be poised to spike for a completely unrelated reason.
Saylor is one of the most outspoken proponents of Bitcoin,
which has played an increasingly important role in how investors view MicroStrategy (ticker: MSTR) stock, because the company holds a significant amount of the cryptocurrency on its books. Shares in the business intelligence and analytics company move largely in step with swings in the crypto market—and that has played havoc on the stock of late.
Bitcoin has lost around two-thirds of its value since November 2021 — when the largest digital asset was trading at an all-time high near $69,000 — amid a wider cryptocurrency crash that has come in tandem with a milder stock market selloff. MicroStrategy stock has dropped an eye-watering 66% in nine months.
Saylor’s departure as CEO was announced alongside the company’s dismal financial results, which included a $1.1 billion loss in the second quarter driven by a Bitcoin-sized hole worth some $918 million. The company held 129,699 Bitcoins on its balance sheet as of the end of June at an average purchase price of $30,664, which makes MicroStrategy firmly underwater given the token’s current price around $23,000.
While Saylor will no longer run the company as CEO, MicroStrategy shows little sign of easing off on its Bitcoin bullishness. “As Executive Chairman I will be able to focus more on our Bitcoin acquisition strategy and related Bitcoin advocacy initiatives,” Saylor said in a statement,
Shares in MicroStrategy dropped 1.5% in US premarket trading on Wednesday—but the stock remains up by almost 50% over the past month, roughly in line with a rally in Bitcoin prices and a rebound in tech stocks. And there is reason to believe that the stock is poised for more gains, or potentially violent volatility—and it has very little to do with Bitcoin, or Saylor, or demand for business analytics.
More than half of MicroStrategy shares are on loan for short positions, Neil Wilson, an analyst at broker Markets.com, wrote in a note Wednesday, citing data from S3 Partners. Short positions are bets that a stock will fall and involve investors borrowing shares and selling them with the intention of buying the stock back at a lower price.
But this strategy can backfire dramatically if the stock moves up, not down. Traders with short positions may have to “cover their shorts,” which involves buying back the stock at an unfavorably high price, taking a loss on their bets and adding buying pressure into an already upward-trending market.
En masse, this phenomenon can create what is known as a “short squeeze,” which is when a significant volume of short-covering drives the share price relentlessly higher. Short squeezes played an influential role in the “meme stock” frenzy of early 2021, when stocks like GameStop (GME) and AMC ( AMC ) made wild intraday moves and notched triple-digit gains in days or weeks.
With MicroStrategy stock up by so much in such a short period of time, a short squeeze could be on the horizon, according to Wilson.
“Shorts are selling into the recent pop for the stock which mirrors a small rebound for crypto markets and the broader tech space since bottoming around the middle of June,” Wilson said. “With that kind of heavy short exposure it’s a prime target for the ‘degenerates’ to take aim—a short squeeze on MicroStrategy could be brutal.”
Wilson added that it will be important to see what kind of options activity might be in play in the derivatives market, where bets can be magnified with leverage.
“I have nothing to say except be careful out there if trying to trade this kind of stock.”
Write to Jack Denton at [email protected]
Credit: www.marketwatch.com /