MicroStrategy to QQQ, Bitcoin to the Moon?

The addition to the NASDAQ 100 (QQQ) puts this "Bitcoin Treasury" company in the driver's seat to exploit the crucial flaw of today's passive investment enviornment.

Dear Fellow Expat,

Last night, I went to bed at 10 p.m.

I woke up (jarring) at 1 a.m.

I could blame the anesthesia or coming off post-surgery medication.

But I admit the truth.

Before bed, I read a stock report that blew my mind.

All I could soon think about was Michael Saylor and Bitcoin.

In the coming months, we could see a rally on Bitcoin that defies logic.

Not because I believe it will or want it to, but because adding MicroStrategy (MSTR) to the Nasdaq 100 exploits the essence of passive investing.

A Pivot That Changed Everything

Michael Saylor, the co-founder and chairman of MicroStrategy, engineered one of the most fascinating business pivots in recent history.

In 2020, COVID-19 threatened to send his company into a potential "doom loop."

With a $500 million cash shortage or a complete shutdown, Saylor transformed his business intelligence company into a leveraged Bitcoin investment vehicle.

His initial strategy was simple but a massive gamble.

He used MicroStrategy's existing capital to purchase Bitcoin and then leveraged that position to acquire more.

Between August and December 2020, MicroStrategy purchased more than 70,000 Bitcoins.

But Saylor didn't stop there.

He soon developed a "leveraged feedback loop," using debt and equity to buy Bitcoin.

Here's where things got interesting.

MicroStrategy issued bonds or convertible notes, a loan that can later be exchanged for company shares, at low interest rates to acquire Bitcoin.

The company then raised additional funds by issuing new shares and reinvesting the proceeds into more Bitcoin.

The company's holdings boosted its market value as Bitcoin increased, making issuing more debt or equity at favorable terms easier.

This created a self-reinforcing cycle to accumulate even more Bitcoin.

Today, MSTR owns roughly 439,000 BTC (about $46.5 billion)

Fast forward five years, and the stock is up nearly 2,800%.

And it’s still the early innings, according to Saylor.

Now, the next phase starts.

Enter the QQQ

Last week, the financial markets learned that MicroStrategy will enter a new phase of the financial markets.

It will be included in the Nasdaq 100, the preeminent non-financial stock index, alongside tech titans like Apple (AAPL), Alphabet (GOOGL), and Amazon (AMZN).

The big news is that it will then be included in the Invesco QQQ Trust (commonly referred to as “QQQ”), which manages approximately $200 billion in assets.

The QQQ is one of the market's largest and most heavily traded exchange-traded funds (ETFs).

Saylor’s Tweeted about what could happen. More on that in a moment…

Next Monday, MicroStrategy will join the Nasdaq 100 index and be weighted as a percentage of QQQ assets.

At about a $100 billion market cap (as of Monday), It will likely weigh the QQQ of around 0.6% of the index, around the Lam Research (LRCX) level.

A 0.6% weight allocation would be about $1.2 billion in stock purchases. But that’s just the start of an entirely new feedback loop through passive investment dollars—what I consider to be a permanent flaw in the financial markets.

This creates what we call "forced buying" pressure.

Saylor Tweeted about this last week. You’ll get the reference.

When a stock joins the Nasdaq 100, index-tracking funds, including the QQQ ETF, must buy shares to match the index composition. Many funds employ strategies linked to traditional index ETFs, leveraged/inverse ETFs, equal-weight ETFs, ESG-focused ETFs, and covered calls.

And that’s just the funds. Plenty of active money managers also try to replicate the performance of QQQ because that’s their benchmark (what they’re trying to beat at the end of the year).

Effectively, the addition to the QQQ exploits a large pool of money that MUST buy MSTR stock whether the fund managers want to or not.

If MSTR's price rises significantly, it can buy more Bitcoin.

If Bitcoin (a finite asset) increases in value, the market capitalization of MSTR increases.

This enables the company to issue more stock or debt to buy BTC, which can increase its market capitalization and increase the index's MSTR weight.

This drives up the stock value, allowing Saylor to issue new debt and stock to purchase more Bitcoin.

The increased Bitcoin holdings boost both the stock price and Bitcoin's value, increasing market capitalization and again weight in the Nasdaq.

And the cycle continues.

Until…

Reality Check: The Forces That Could Break the Loop

Before we get carried away, let's consider what could stop this perpetual motion machine.

Major indexes, including the Nasdaq 100, maintain strict diversification rules.

They periodically rebalance and cap individual stock weights to prevent any single company from dominating the index.

Market mechanics also impose their limitations. As MSTR's share price rises, passive funds face increasing costs when acquiring shares. Liquidity constraints and profit-taking create natural selling pressure that can counterbalance the buying frenzy.

And sophisticated market players – hedge funds, arbitrageurs, and professional traders- monitor for overvaluation.

If MSTR's price becomes disconnected from reality, these participants will quickly short the stock or find other ways to profit. Still, if they’re wrong, they might have to cover their bets, which will only raise the stock's valuation.

Finally, many investors are trying to front-run MSTR and BTC prices this week, ahead of their inclusion on the Nasdaq 100.

Thing is… it’s uncertain when any of these things will hit a wall.

There may be roadblocks to MSTR swallowing the Nasdaq, but things could accelerate quickly… and this could move even faster.

Last week, Saylor even suggested that MSTR could eventually surpass Microsoft (MSFT), which has a $3.34 trillion market capitalization and a 7.8% weight on the QQQ.

And that’s just the QQQ.

The market seeks a pathway for MSTR to join the S&P 500 in the next 12 months, unlocking another wave of passive investing that tracks the SPY (with another $644 billion in managed assets).

Hundreds of ETFs track or mimic the S&P 500’s performance, as passive investing and active management crowd out benchmarks.

This could place even further upside pressure on MSTR and BTC while hemorrhaging equity value in other parts of the market (such as an original report from March by author Zackary Morris at Wells Fargo that kept me up last night).

What’s the End Game Here?

Saylor's vision remains revolutionary to proponents and insane and dangerous to market traditionalists.

His long-term Bitcoin price target of $13 million by 2045 isn't just about price appreciation – it represents a fundamental reimagining of the global financial system.

He believes BTC will eventually reach a $180 trillion valuation, displacing countless assets like gold.

Saylor envisions a world in which traditional fiat currencies become obsolete and are replaced by what he calls "clean, silent, programmable" money.

He frequently compares fiat currencies to fragile materials like clay or balsa wood, designed to depreciate over time.

In contrast, he positions Bitcoin as an eternal store of value, fundamentally realigning the global financial system while strengthening the U.S. dollar's position as the worldwide fiat currency.

Still, Saylor's utopian vision faces significant hurdles.

As Saylor himself acknowledges, companies operating in the crypto space face unique scrutiny, often starting as tech firms but being perceived as financial services providers – a distinction carrying significant regulatory implications.

Current regulations also create practical barriers: banks are barred from holding cryptocurrencies under existing guidelines, limiting institutional adoption.

All that said, things are about to get strange.

As traditional finance and cryptocurrency markets continue to collide, Saylor's leveraged bet on Bitcoin's future may be either a masterstroke of financial engineering or a cautionary tale about the limits of financial feedback loops.

It could fuel an eternal bubble.

It could produce a massive liquidity crunch.

It could even produce a Long-Term Capital Management moment for crypto.

We don’t know.

We can only point the camera at the world… and react.

Stay positive,

Garrett Baldwin

Secretary of Risk