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MicroStrategy and the Four Stages of the Stock Cycle

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MicroStrategy Inc. (MSTR) was one of the top success stories of the post-pandemic stock boom…

But we’ve actually never talked about it here in Stock Surge Daily.

Given how this story has developed, I have some thoughts on it I want to share with you.

If you’re not familiar with the company, MicroStrategy Inc. is a small-cap software company co-founded by a guy named Michael Saylor, the main character of this story.

The stock came to market in 1998. And like many software stocks, it went through a major boom and bust cycle between 1999 and 2002.

The stock recovered over the next few years but then largely went sideways for over a decade.

That was, until Saylor did something almost no one saw coming…

Big Bitcoin Bet

In August 2020, MicroStrategy disclosed that it had purchased 21,454 Bitcoin when it was trading for around $12,000 per coin.

That came out to about $250 million dollars worth of Bitcoin. 

At the time, Saylor proclaimed that Bitcoin is “a dependable store of value and an attractive investment asset with more long-term appreciation than holding cash.”

And keep in mind that this all started before the latest crypto bull market and all the fear over inflation, when the price was still well below its old high…

Weekly Chart of BTCUSD – Source: TradingView

Microstrategy made numerous purchases of Bitcoin during the move higher as well as through the latest drawdown.

As of April 2022, the company has spent a total of $3.97 billion to purchase 129,218 Bitcoin.

Four billion dollars! And the average cost per coin is roughly $31,000, which means that those holdings are now underwater.

When the price fell into the $25,000 range two weeks ago, there were serious discussions taking place about MicroStrategy potentially facing a margin call on its holdings.

And that brings us to the major mistake Saylor and the company made… They tied the future of their company to the value of Bitcoin.

Don’t Bet the Farm

Maybe that’s what they wanted and they just figured Bitcoin would keep going up.

It’s too bad they don’t know about the Four Stages of the Stock Cycle, which regular readers will be familiar with…

Just take a look at the four stages as Richard Wyckoff first laid them out…

Richard Wyckoff’s Four Stages of the Stock Cycle

Now, look at how MSTR stock performed during the latest crypto cycle…

Weekly Chart of MicroStrategy Inc. (MSTR) – Source: TradingView

The charts are not exactly the same, but the four stages certainly are. 

First, there was a lengthy consolidation stage that took place well before 2020 for many years before the company ever got involved with Bitcoin.

Second, MSTR saw massive tailwinds and entered the accumulation stage just as the stock and crypto markets were breaking out to new highs.

The combination of liquidity entering the stock market and MSTR’s new correlation with the rising price of Bitcoin sent the stock up nearly 1,400% from the pandemic low to the peak of the bubble.

Then, the stock entered its distribution stage as Bitcoin cooled off and investors took profits.

And of course, the story concludes, as expected, with the capitulation stage and MSTR falling 89.8% from its high!

Daily Chart of MicroStrategy Inc. (MSTR) – Source: TradingView

So, what’s the lesson?

Well, first, to always remember the Four States of the Stock Cycle.

But this situation also reminds me of what I said about Cathie Wood, CEO of ARK Invest, who gave up all her recent stock gains

I’m sure Michael Saylor is a smart guy. He went to MIT and built MicroStrategy from the ground up.

But the value of stocks and cryptocurrencies is driven by supply and demand.

If demand slows, price will fall. And every investor knows that.

That’s why we use proper risk management and don’t bet the farm on a single idea.

Will digital currencies one day replace physical ones? Absolutely.

But will Bitcoin be the one to do it? 

Call me a skeptic…

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Embrace the surge,

Ross Givens
Editor, Stock Surge Daily

Ross Givens
Ross Givens

I bought my first stock when I was 12 years old. It was Microsoft. I’ve been a registered financial advisor. I’ve worked as a stock broker. I ran a managed fund. I was a Vice President at JP Morgan with Series 7, Series 66 and Series 3 securities licenses. I’ve been featured on Fox Business, CNBC, Bloomberg, and a bunch of other networks. The only thing I enjoy more than making money, is helping YOU make money.

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