Why MicroStrategy Stock Crashed in December

What happened

According to data from S&P Global Market Intelligence, shares of MicroStrategy (MSTR 2.48%) fell 28.5% in December 2022, wrapping up the year 74% lower from a 12-month perspective. The data analytics company has become an alternative idea for investors of Bitcoin (BTC -0.17%), as MicroStrategy has converted nearly all of its cash reserves into the leading cryptocurrency.

This tactic exposes MicroStrategy’s stock to lots of Bitcoin-based volatility, but that wasn’t the driving force behind December’s moves. Bitcoin actually closed December’s trading 1% higher, outperforming MicroStrategy and the S&P 500 index.

So what

MicroStrategy’s December woes weren’t directly tied to Bitcoin’s pricing, but the market action still started in the cryptocurrency space. The stock’s price moves were tightly correlated to the plunging value of the FTX Token and Solana, two altcoins at the heart of the FTX crypto exchange’s financial meltdown. In other words, MicroStrategy investors were (and are) deeply concerned about the fallout from the FTX saga hurting other parts of the crypto sector.

MSTR data by YCharts.

One of the largest single-day price cuts in MicroStrategy’s stock came just before the end of the year, when financial filings showed that the company had sold some Bitcoin for the first time. Some investors saw this as a sign that MicroStrategy chairman Michael Saylor had lost confidence in his long-term Bitcoin strategy.

Now what

I’m not here to defend MicroStrategy or Michael Saylor. However, you should know that the bears appear to have misunderstood a few facts last month.

First, MicroStrategy was never a player in the FTX drama. Saylor firmly believes Bitcoin is the only cryptocurrency worth holding, and I have not seen any evidence that the company may have used FTX’s trading services. The only real connection between MicroStrategy’s shareholder value and FTX’s troubles is that the FTX collapse undermined people’s general confidence in cryptocurrencies. There is no direct financial impact to speak of.

Second, the sale of 704 Bitcoins on Dec. 22 was followed by the purchase of 810 Bitcoins two days later. The average Bitcoin price for these transactions was approximately $16,800. The idea was to secure some tax credits from a loss on that transaction. MicroStrategy has bought Bitcoins at much higher prices in the past, such as the $57,477 per coin it paid for 1,434 units in early December 2021. Hence, this was a so-called wash sale with beneficial tax effects, and MicroStrategy’s Bitcoin holdings actually increased by 106 coins in the process.

This tax-cutting idea works because the Securities and Exchange Commission hasn’t officially classified Bitcoin (or any other cryptocurrency) as an investment security yet. The tax rebate is unavailable if you sell stocks, bonds, or funds and repurchase them less than 30 days later.

As of Dec. 27, MicroStrategy and its subsidiaries held roughly 132,500 Bitcoins, bought at an aggregate average price of $30,397 per coin. Those coins are worth $2.24 billion at current Bitcoin prices, which is more than MicroStrategy’s market cap of $1.5 billion. Michael Saylor could look like a genius if and when Bitcoin prices skyrocket again, but many investors are not too impressed by his cryptocurrency strategy right now.