After the election, as everyone except for muggles know, the price of BTC rallied to all time highs (ATH) just short of $100,000. At the time of this writing, it’s hovering around $98,000. An interesting question then is: what happened to Michael Saylor’s MicroStrategy (MSTR) during this period?

The publicly traded stock, synonymous with its unconventional and risk-on co-founder as well as the price of BTC, also rallied to post-election ATH — as one might expect — exceeding $500.

Then last week, it took a precipitous ~22% short selling-inspired hit based off of a report expressing concerns about the company’s valuation. The noise around the stock piqued my interest. I was curious to dig in and see what potential market opportunities might exist, or at least understand the value of owning MSTR vs BTC.

This graph is a bit misleading. The main reason MSTR has outsized gains to BTC is that MSTR is highly levered. Very highly levered. It has acquired 386,700 BTC for nearly $22 billion, which represents an unsurprising ~99.5% of its balance sheet. To achieve this, the company has raised $9 billion in debt, some with zero interest. If their BTC holdings are collateralized by this debt, they could face a challenging repayment in a severe BTC downturn. They also raised $4.6 billion in equity for these BTC purchases. With an average BTC price of ~$56,500, appreciation factors heavily into the market cap.

The correlation between MSTR and BTC is relatively high, using both Pearson and Spearman correlation coefficients, at about 65% using 12 months of daily closing price data. Remove leverage and the correlation is pretty linear. Generally, follow the price of BTC and the price of MSTR will follow. The correlation is strong, but not so strong for several reasons. MSTR runs a very profitable business intelligence (BI) operation that generates annual revenues around $500 million. This makes it one of the largest players in the BI space. It’s a stock with a real business and prone to price moves based on the underlying business. BTC leverage is the key though, creating a 2.5x volatility to BTC.

Arguably, MSTR is not a good proxy for BTC and unless you’re comfortable with the increased leverage and volatility, it’s also not a comfortable investment opportunity. Just buy a BTC ETF. You can leverage BTC perpetual contracts or BTC ETFs to get a similar risk profile to MSTR. But if you want the leverage, it’s probably better to let Michael Saylor take the risk and as an investor, just own the price risk. But it isn’t a replacement.

Given the strong correlation and MSTR’s oversized exposure to BTC, is there a trade here? Let’s look at mean reversion. The dramatic MSTR rally before its big drop last week pushed the z-score to nearly four standard deviations (4σ). Looking at the graph, however, historically there haven’t been many mean reverting opportunities. A large part of this can be attributed to the recent use of leverage to add to its position, so the relationship between the two assets is now much different than before.

MSTR has the ability to sell another ~13 million in equity, which could widen the ratio further. One can conclude that MSTR is significantly overvalued to BTC and an even further narrowing of the spread could occur.