MicroStrategy has amassed a fund of 205,000 Bitcoin companies worth nearly $14 billion at current market prices. That’s almost enough to keep pace with the $15 billion worth of Bitcoin that BlackRock has bought in shares of its iShares Bitcoin Trust.
However, JP Morgan analysts say there is reason to worry about the way the company is purchasing BTC.
“We believe MicroStrategy’s debt-backed Bitcoin purchases add leverage and bubbles to the current cryptocurrency rally and increase the risk of more severe deleveraging in a potential recession down the road,” JPM analysts led by Nikolaos Panigirtzoglou wrote on Thursday. .
MicroStrategy Chairman Michael Saylor has earned praise from sharp-eyed Bitcoiners for his aggressive strategy.
“It is the best investment asset, so the end game is to acquire more Bitcoin,” he said recently. yahoo finance. “Whoever gets the most bitcoins wins. There is no other end game.”
Saylor and MicroStrategy, which trade on Nasdaq under the ticker MSTR, are accustomed to using Bitcoin as collateral to borrow cash and buy more Bitcoin. In its latest round earlier this week, MicroStrategy said it would offer up to $500 million worth of senior convertible notes through 2031 to buy more BTC.
However, record levels of leverage do not yet exist in the market.
Leverage refers to the ability to borrow funds to amplify investment returns. For example, a trader could open a $500 Bitcoin futures contract with just $100 worth of BTC in their exchange account using 5x leverage.
However, leverage goes both ways. It can maximize your profits and exacerbate your losses.
In the United States in particular, highly leveraged transactions face many regulatory restrictions for this reason. For example, cryptocurrency trading platforms such as Coinbase and Kraken are allowed to offer leverage, but only up to 10x and 5x respectively, which is conservative compared to other countries.
The notional open interest in Bitcoin futures contracts recently hit an all-time high of $34 billion, signaling a surge in optimism about rising Bitcoin prices.
Despite the optimism, the leverage used in the market is still around 0.20, according to CryptoQuant. This means that the risk of widespread liquidation, which could potentially cause a market crash, is not yet high. Bitcoin leverage last peaked at 0.40 in October 2022.
And actual open interest, measured in BTC, is well below the October 2022 high of 667,550 BTC. According to CoinGlass, the current BTC-denominated open interest is only 496 BTC. This means that leverage is present but has not reached alarming levels that could indicate a bubble or imminent correction.