Few people have captured the imagination of the cryptocurrency market quite like MicroStrategy CEO Michael Saylor, a guest on Wednesday morning’s First Mover on CoinDesk TV.

His company’s purchases of bitcoin, first announced in August, validated a key narrative driving the current bull market: the “institutions” were joining the fray (companies fitting crypto’s definition of an institution can be far more modest in size, and commercial rather than financial in mission, than Wall Street’s). It took a couple of months more of bitcoin prices languishing around the $10,000 level before really taking off in the final quarter of 2020 but after that, it hasn’t looked back. Well, at least not yet.

Lawrence Lewitinn, CFA is CoinDesk's managing editor for global capital markets and a former fixed-income, currencies and commodities trader who began his career on Wall Street nearly three decades ago. This article first appeared in First Mover, CoinDesk's daily markets newsletter. Subscribe here.

MicroStrategy’s series of bitcoin purchases have been a triumph. As Saylor noted in a recent tweet, the company has thus far spent $2.186 billion to buy a total of 90,859 BTC. That puts its average cost at $24,063. At current prices, MicroStrategy’s bitcoin was worth $4.4 billion as of March 2.

A $2.2 billion gain in value for an asset on the balance sheet of a company that had been worth around $1 billion for the prior three years is usually considered a good thing.

Usually.

Back of the envelope

Yet, it should be noted that while MicroStrategy bought bitcoin at $24,063, which now looks like a bargain, it’s a different story for anyone buying MSTR stock now.

The company’s market cap is now about $7.2 billion. As of March 2, $4.4 billion of its assets were in bitcoin. Around the time it first announced its bitcoin buys, MicroStrategy’s market cap was just $1.3 billion. To buy all that bitcoin it now owns, the company at first used some cash, somewhere to the tune of around $425 million. In recent months, it has issued a total of $1.7 billion in convertible notes that, if turned to equity, could add a couple million shares to the nearly 10 million already outstanding (that’s another discussion).

Doing some paper napkin math – adding the value of the bitcoin and the underlying company while subtracting the debt and the cash spent (to avoid double-counting) – the sum is $3.575 billion. Rounding that up to $3.6 billion and it’s still just half the current market cap. 

The remaining $3.6 billion needed to get to a $7.2 billion valuation can be explained as … magic. Well, at least to some investors buying the stock now. Otherwise, that $3.6 billion premium is a bet on value that has yet to be unlocked. It’s a bet that Michael Saylor and the rest of management is able to do incredible things with the company, like buy a lot of bitcoin before everyone else.

So far, it’s been a profitable bet for those who were lucky to get in at the right time. MicroStrategy shares have significantly outperformed bitcoin’s price since the start of September.

Tfw no ETF

Indeed, the argument made for buying MicroStrategy’s stock right now is that it’s one of the few ways for institutional investors otherwise barred from getting into bitcoin because of regulatory issues (such as no bitcoin exchange-traded fund) to gain exposure to cryptocurrencies. However, it’s a very, VERY expensive way to do so.

That’s because paying a $3.6 billion premium for MicroStrategy’s leveraged bitcoin hoard of $4.4 billion works out to roughly $88,000 per bitcoin, more than triple the $24,063 the company paid to acquire it over the past few months. Remember, buying MicroStrategy shares now isn’t the same as buying shares back in August. 

Thus, if anyone is buying MicroStrategy’s stock solely for the bitcoin play, that person (or “institution”) would be paying nearly double for the bitcoin and getting a flat-lining stock.

Will that premium still be there should a Gary Gensler-led Securities and Exchange Commission decide to approve a bitcoin ETF? Who knows? Weirder things have happened.

The stock may well continue to rally. In this environment, anything can happen. If shares in a declining video game retailer can skyrocket, what’s to stop investors from wanting to pay double for bitcoin?