The Fundamental Problem With MicroStrategy's Bitcoin-Buying Plan

One of the hottest tech stocks in recent years has been MicroStrategy (NASDAQ: MSTR), which has rebranded itself as just Strategy. And a huge reason for its rally has been due to its bullish position on Bitcoin (CRYPTO: BTC) and its continual stockpiling of the digital currency. With the cryptocurrency soaring in value in recent years and breaching the $100,000 mark, Strategy has benefited from that excitement.

But there's a fundamental problem with this approach. While it seems like a great way to benefit from the cryptocurrency's rising value, simply loading up on Bitcoins may not necessarily result in a higher share price for Strategy. In fact, it could end up hurting the stock down the road.

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Bullish and betting heavily on Bitcoin

Strategy is the largest corporate holder of Bitcoin, with its tally sitting at 582,000 Bitcoins as of June 9. Last year, it announced plans to raise as much as $42 billion, over a three-year period, in an effort to add to its crypto position, through a combination of both debt and equity. It shows a strong commitment to the digital currency, which has made the stock a popular option for crypto investors to load up on themselves.

In five years, Strategy's stock has risen by over 3,000% while Bitcoin is up around 970%. And Executive Chairman Michael Saylor believes that through Bitcoin's rising valuation (he believes it'll surpass a price of $1 million in the future), Strategy may one day reach a valuation of $10 trillion. Today, its market cap is around $110 billion.

But it may not be easy for Strategy to continue with its Bitcoin-buying spree if the digital currency soars in value.

A higher price for Bitcoin will mean a greater need for cash

Strategy routinely purchases Bitcoins, but its average cost is now around $70,000. The company hasn't simply been buying Bitcoins at lower prices, it has also been loading up on them when the price has been above $100,000. The long-term problem is that the higher that Bitcoin goes in value, the more expensive it becomes for the company to add to its position.

For investors, the problem centers around the need for ongoing capital raises. Right now, that may not be a big concern given how well Strategy's stock has been doing -- it's up around 150% in just the past 12 months. But stock offerings dilute existing shareholders and given Strategy's long-term plans to continually add Bitcoins, it has the potential to create an endless cycle of stock offerings followed by Bitcoin purchases. If the stock starts to slow down and can't keep up with a rising valuation for Bitcoin, it can result in greater share offerings necessary to fund future Bitcoin purchases. And the larger those offerings are, the more significant the downward pressure will be on the stock.

The company sells business intelligence and analytics software but its core operations don't generate cash; Strategy has burned through more than $84 million just from its day-to-day operations over the past 12 months. Once you factor in its investing activities, which include Bitcoin purchases, the company's cash outflow ramps up to well over $28 billion.

Investors may be better off just holding Bitcoin

Rather than investing in a company because it hold Bitcoins, investors may want to consider directly investing in Bitcoin. Through spot exchange-traded funds, it's easier than ever to get a position in the cryptocurrency without worrying about digital wallets and having to remember complex passwords. Strategy's stock comes with added risk because more companies these days are also buying Bitcoin, and especially as its valuation creeps higher, investors may start to pivot from Strategy and into more modestly priced stocks that may possess greater upside.

While investing in the tech stock has yielded great returns for investors thus far, that doesn't mean that pattern will continue, especially with its valuation now topping more than $100 billion. Without stronger fundamentals, Strategy is purely a speculative play involving crypto, which makes this an ultra-risky stock to be hanging on to, one that's likely not going to be suitable for the vast majority of investors.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.