Why MicroStrategy shares crashed on Tuesday

What happened

Shares of business intelligence experts and cryptocurrency investors MicroStrategy (NASDAQ: MSTR) fell as much as 23.2% on Tuesday morning. Bitcoin prices fell about 10% this morning, while MicroStrategy CEO Michael Saylor reaffirmed his commitment to the leading cryptocurrency in an interview with CNBC. As of 11:40 a.m. EST, the stock has recovered slightly to a 20% drop.

So what

Cryptocurrencies have seen a significant drop in prices in the last two days amid criticism from important thought leaders such as Microsoft co – founder Bill Gates, Treasury Secretary Janet Yellen and Tesla CEO Elon Musk. Yellen argues that Bitcoin is speculative and inefficient as a medium for settling financial transactions. Gates thinks Bitcoin could be useful for large companies and institutional investors, but it is more dangerous than it promises for small investors. Even Musk, whose company invested $ 1.25 billion in Bitcoin earlier this month, says the currency currently looks overvalued. Therefore, the decline in the price of cryptocurrencies, which began over the weekend, continued on Tuesday.

MicroStrategy has invested $ 1.145 billion in Bitcoin, converting its long-term cash reserves into cryptocurrency stocks and then adding more with the help of new debt securities. Therefore, large changes in Bitcoin prices tend to have a direct impact on MicroStrategy shares as well.

In that text, Saylor hit the airwaves of CNBC Squawk Box on Tuesday morning, defending its Bitcoin investment from a long-term perspective, even as currency prices continued to fall. In the end, Saylor said, Bitcoin will replace gold as the gold standard for long-term securities.

“There’s $ 10 trillion worth of gold there, $ 1 trillion in bitions. Bitcoin will turn gold over and plant an entire gold market cap,” Saylor said. “Then it will sum up the negative-yield government debt and other monetary indices until it rises to $ 100 trillion.”

Image source: Getty Images.

What now

According to Saylor, Bitcoin is not designed for consumption and money transfers but for long-term savings. That approach reflects what Social capital Hedosophia founder Chamath Palihapitiya said in a Bloomberg video last week.

“The real question that I think people should ask themselves is, okay, Bitcoin is becoming a de facto reserve currency that is basically squeezing out gold,” he said. “What replaces the US dollar?”

Like Saylor, Palihapitiya believes Bitcoin has significant value as a tool for long-term preservation of value, while other cryptocurrencies will bring an upgrade that changes the game of other types of financial transactions, such as everyday purchases, loans, insurance policies and digital banking.

That commitment can serve MicroStrategy well in the long run, assuming Saylor and Palihapitiya are on something here. At the same time, he exposed Saylor’s company to cryptocurrency risks and short-term volatility like today’s sharp decline.