Analyzing the Correlation Between MicroStrategy's MSTR Stock and Bitcoin

Exploring MSTR's stock volatility relative to Bitcoin's price movements over various time frames.

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Feb 22, 2024

Analyzing MicroStrategy’s (MSTR) stock price behavior relative to bitcoin has become a hot topic of interest in Bitcoin. This analysis delves into the beta of MSTR relative to Bitcoin over several distinct time frames, ranging from the launch of spot ETFs to when MSTR started buying bitcoin in 2020. I hope to offer some insights that will be useful to existing or new bitcoin investors.

What is Beta?

Beta is a value that describes how the price of a stock moves compared to the overall market, specifically how their volatilities compare over a given period. A beta of 1 means the stock's price tends to match the market. If the market goes up or down by 1%, the stock is also expected to go up or down by approximately 1%. A beta below 1 means the stock is less volatile than the overall market; greater than 1 means it is more volatile.

In our current analysis, we measure the “commodity beta” of MSTR relative to the underlying asset of bitcoin. This is similar to analyzing the stock price of a gold miner relative to the price of gold. Ideas for further analysis include analyzing the beta for other bitcoin related investments like chip manufacturers or the price of ASICS relative to bitcoin.

MSTR’s Beta to Bitcoin

Since buying bitcoin

I ran several time frames through a beta analysis based on different eras of this relationship. First, since MicroStrategy started buying bitcoin in August 2020, the beta has been remarkably close to 1, specifically 1.00007. As seen below, their price action is very similar. MSTR has gained 162% to bitcoin’s 113%, however, their volatility over that period results in a near perfect beta.

Beta over last year

The next time frame I looked at was of the last year. This period encompasses pre-Blackrock ETF filing (June 2023), as well as the pre-approval speculation period and the time since launch.

The resulting beta for this period is approximately 1.10, indicating that MSTR was positively correlated and slightly more volatile than Bitcoin. One could interpret this as MSTR becoming more volatile in the ETF build-up. The hype likely drove investors into MSTR as a way to front-run the approval and launch.

Beta over last 90 days

I included this 90-day timeframe to demonstrate the effect of the ETF launch more clearly. The ETFs launched exactly 6 weeks ago on the day of writing. Forty two days is close to half of the 90-day period, so comparing the 90-day beta to the beta since launch could yield useful information.

In this 90-day span, MSTR's beta was calculated at approximately 1.14, a result quite close to the 1-year beta. I was not surprised it was higher, but I was surprised how close it was. On the below chart, you can clearly see the ramp up into January’s ETF decision and larger volatility since.

Beta since spot ETFs launched

Since the launch of spot ETFs on January 11, 2024, the beta of MSTR relative to Bitcoin stands at a remarkable 1.51. This means that for every 1% movement in Bitcoin's price, MSTR's stock price tends to move by 1.51% in the same direction, on average.

This period of higher volatility, caused by reverberations of pre-approval speculation, should wane over the next 6-12 months until back in line with the long-term average of 1.1.

Business Valuation

The core software business of MicroStrategy, which specializes in business intelligence, mobile software, and cloud-based services, has historically been a stable and profitable venture. Net revenue for FY 2023 was $504 million, forming a solid foundation that is often overshadowed in stock valuations by the more headline-grabbing Bitcoin holdings. This dual nature of the company’s assets might offer a form of natural hedge against extreme tail-risks to bitcoin, like regulatory changes, development and scaling problems and macroeconomic factors.

Incorporating the value of the underlying software business into the company's overall valuation poses a unique challenge. Several people are doing analysis on this with mixed results. An operational valuation of the company plus bitcoin holdings shows shares at a significant $60 discount, while a fully diluted valuation only shows a discount of $1 per share.

In essence, investors evaluating MicroStrategy need to consider a complex interplay of factors. On one hand, there's a profitable, established software business with a strong revenue stream. On the other, there's a significant exposure to Bitcoin, bringing with it a different risk-return profile characterized by high volatility. Balancing these aspects is key for investors looking to understand the full scope of MicroStrategy's investment potential, beyond the often singular focus on its Bitcoin holdings.

Investment Considerations

Commodity beta provides investors with a tool to gauge how much an investment product might be influenced by the fluctuations of a particular commodity, helping them make more informed decisions about risk and portfolio diversification in relation to commodities.

We can draw several helpful insights from our current analysis:

For Bitcoiners: Investors already with a significant allocation to bitcoin who are looking to access slight leverage on their investment could consider an allocation to MSTR. Michael Saylor, CEO of MicroStrategy, has called MSTR “a leveraged play on Bitcoin with no additional fees.”

Diversified Exposure to Bitcoin: Investors looking to add exposure broadly to the bitcoin space can use MSTR to offset lower beta stocks related to bitcoin. I suspect that will include bitcoin miners, chip manufacturers, exchanges, or even energy companies in the future.

A Bridge Asset to Traditional Markets: Bitcoin is often looked at as an uncorrelated asset relative to traditional financial markets. However, MSTR, as a stock, is more closely tied to specific stock market trends, especially if it is going to be added to the S&P 500 in the near future.

Risk Considerations: The higher beta values suggest that investing in MSTR comes with a higher level of risk compared to a direct investment in Bitcoin.

A Few Words of Warning

I have spent thousands of words over the last 6 months preparing you for the coming recession. We are not sure how bitcoin will behave during the acute phase of that crisis, but March 2020 showed bitcoin can go down with everything else. However, due to the brand new source of demand from the ETFs, MSTR and Tether reserves, as well as others, the spot price of bitcoin might be less volatile than other asset classes this time around.

Since MicroStrategy straddles the Bitcoin and equity asset classes, and has high beta to bitcoin, MSTR could be more directly impacted by a recessionary environment.

Conclusion

While high beta stocks, like MSTR, are inherently riskier due to their volatility, they can be valuable tools in portfolio construction when used thoughtfully and in alignment with an investor's risk tolerance, investment horizon, and market outlook. Recent extremely high beta since the ETF launch should be expected to normalize to longer run norms. Investors considering MSTR as an alternative to direct Bitcoin investment should carefully weigh these risks associated with a high beta stock in the face of a looming recession.

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