I love a pair trade. It allows for a relatively low-risk trade, if based on true fundamentals, allowing one to 'go large' on a position size. In my experience they often work out faster than originally anticipated. Granted normally I play lesser-known pair trades where the market has simply been inefficient and it quickly sorts itself out. However, this time I've decided to play a well-known pair trade, front and center in the current froth.
Short MSTR and Long Bitcoin
This could be seen as being plain stupid, trying to bet against the moronic crowds, but I see absolutely no reason for the current premium that MSTR has to being sustainable over the long term. If we look at statistical premiums since MSTR pivoted their business model to acquiring BTC we are almost 3 standard deviations outside of their historic premiums to NAV.
The basis of the trade is that MSTR is simply now a BTC holding machine. Its legacy business is fairly valued at approx $1.5bn (on the generous side) but its EV is now c$33bn (depending on how you treat the converts) i.e. its legacy business now contributes less than 5%. As per the most recent raise they hold 214,426 BTC, so you're paying approx $154k per BTC. At current market prices today of $66k this represents a premium to NAV of about 133%. Given the plethora of cheap liquid BTC ETFs now on the market with effectively zero premiums, I don't see why MSTR can sustain such a premium. It is simply a buy and hold vehicle that has stated it won't sell BTC and will intelligently issue equity or debt to raise funds when it is trading at a high premium to acquire more BTC in an accretive fashion to its shareholders. Perhaps there is some value there, if this was done sensibly. However the more aggressively they do this, in effect they will reduce the premium naturally so it is somewhat self-correcting in my opinion. If we compare the vehicle to another I know well, in another industry, that has exactly the same mandate, one finds that that vehicle typically trades at a discount to NAV, not a premium. I'm referring to Yellowcake PLC (YCA.LSE). I appreciate the upside in Uranium is perhaps less now than in BTC but that wasn't the case a couple of years ago, and discount to NAV in YCA typically bottomed out at about 20% on any given swing. YCA has rarely traded at a premium, only really when it was launched and in the autumn of 2021 and even then only a (relatively) small premium of 10-20% and for very short periods (i.e. days or weeks, not months or years). Logic states that MSTR will trade back down towards NAV (or near NAV whilst BTC is still appreciating).
So I've gone long BTC and short MSTR on the basis this premium will erode over time. The last time MSTR had a sizeable premium (over 100%) was in the last BTC bull of 2021. It got to c300% albeit very temporarily. Interestingly, the premium topped out on 9 Feb 21 whilst BTC topped out (initially) two months later. The premium was back to historic norms (still 30-40%) within a month. It did trade at a discount in early summer of 2022, which further supports the thesis.
Now basing a trade on something rational happening in the crypto space is playing with fire. Things could get much more illogical before they get more normal. I have therefore entered with an appropriately sized position, such that if the premiums blew out to 300% like in 2021 it doesn't come close to blowing my account up. In fact if premiums went to 300% I would have sufficient liquidity to increase the position by a sizeable amount. What's the return - if MSTR were to return to normal premiums to NAV (say 30%) then the trade should return >50%. I've been waiting patiently to get this trade off with the right risk reward, and trying to minimise the chance of a quick peak to 300%. Looking at MSTR on the hourly, 4 hourly and daily charts as of yesterday they're all showing a potential H&S pattern, with a declining RSI on the H, suggesting short term downside for MSTR, and perhaps the normalisation of this premium. Let's see how things play out over the coming weeks.
Disclaimer - this hopefully goes without saying but this kind of trade can blow an account and I am not recommending anybody follow me on this. I am simply sharing what I am doing, as much as myself to look back on later. I am no financial advisor and I have no understanding of your own risk profile and experience. Do your own due diligence.
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