Who would short MicroStrategy?
27 May 2025
With a number of vocal short sellers talking about potential opportunities relating to MicroStrategy shares and bitcoin, as well as similar trades from convertible arbitragers and index hedgers, Sam Pierson, director of Research at S3 Partners, sheds some light on these trades
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Buy bitcoin / Sell MSTR
In a CNBC interview on 14 May, investment manager Jim Chanos revealed he is long bitcoin (BTC) and short MicroStrategy (MSTR) — a pairs trade that mirrors MicroStrategy CEO Michael Saylor’s strategy in a sense, raising capital by selling MSTR shares while purchasing bitcoin. Saylor issues equity at a premium to net asset value (NAV) to buy BTC, while Chanos shorts that premium and holds the underlying asset.
At the center of both trades is the spread between the market price of MicroStrategy shares and their bitcoin-adjusted book value. As of 21 May, MSTR trades at a roughly 70 per cent premium to its bitcoin holdings, depending on how the firm’s remaining enterprise is valued, with a market capitalisation of US$112 billion, and bitcoin holdings worth US$62 billion.
That premium is what Saylor leverages and Chanos targets. If bitcoin rises but the premium compresses — or dilution outpaces gains — Chanos’ trade works. Like any arbitrage, the spread can widen before it narrows, as seen in the Grayscale Bitcoin Trust trade circa 2021.
Figure 1
One thing working in Chanos’ favor, along with others shorting MSTR, is the low cost of borrowing shares to sell short. New borrows are being priced for hedge funds at a 30 basis point fee in S3 Partners Black App. This helps to keep a lid on the carrying cost of the trade until the spread narrows. With more than 250 million free-floating shares, and 27.4 million shares short, the low cost of borrow is likely to persist. The inexpensive borrow does not make this a painless trade to hold in perpetuity. Bitcoin is not generally accepted as collateral, making this a less capital efficient trade than other arbitrage opportunities, as cash is required both as collateral for the MSTR short and for the long bitcoin purchase. Bitcoin exchange traded funds (ETFs) may improve efficiency to at least some degree. Equity options may offer a more efficient short, but options also introduce valuation risk.
Convertible hedging
Convertible arbitrage strategies that hedge long positions in convertible bonds with short positions in the underlying equity are a persistent source of short demand for MSTR shares. We estimate the short interest attributable to convertible arbitrageurs at 9.9 million shares, or 36 per cent of the current short position. We used S3 Partners MAP product to isolate holders of convertible bond positions that are likely to be hedged. Using the conversion ratio and a delta figure modeled by Bloomberg, we estimate the current short position attributable to convertible arbitrageurs by multiplying the three figures together (Figure 2).
Figure 2
The convert hedge varies as the MSTR share price fluctuates in relation to the conversion price of the bonds, however the moneyness of the embedded options and long duration can blunt the impact of price changes in the underlying equity. For example, the MSTR 0% 2030 convertible bond was priced on 20 February and had a modeled delta of 0.79 (per Bloomberg) on its first day of trading. Since then, the MSTR equity price has increased by more than 30 per cent while the delta has increased to just 0.84.
This framework can also be used to evaluate the short interest related to the firm’s convertible preferred shares which trade under ticker STRK. There are currently 7.3 million shares of STRK outstanding, which can be converted into 730,000 shares of MSTR. That 730,000 represents the upper limit of the MSTR short interest relating to STRK. The vast majority of current STRK holders are not arbitrage strategies, so this trade likely has a negligible impact on short interest. This may change with time, as the firm announced a US$21 billion at-the-market programme for STRK shares in March.
Index hedge
Estimating directional short positions versus index hedging activity can shed some light on sources of short demand. Comparing a Russell 3000 firm’s share of index market cap with its share of index notional shorts provides insight into exceptional levels of short interest, even in large cap stocks. MicroStrategy equity represents 0.18 per cent Russell 3000 market cap, and 0.92 per cent of aggregate short valued in index constituents. That makes MicroStrategy the 91st ranked constituent by market cap, and the 7th ranked by notional short value.
This framework suggests a probable boundary of index hedging in MSTR could be set at 0.18 per cent of the total short value, equivalent to 5.3 million shares, or US$2.2 billion. The remainder of short interest, 22.1 million shares (US$9.2 billion), could then be attributed to sources of short demand away from index hedging.
We estimate MSTR short interest relating to convertible arbitrage at 9.9 million shares, and index hedging at 5.3 million shares — a total of 15.2 million shares. Subtracting that hedge estimate from the 27.4 million shares of total short interest shares leaves 12.2 million shares of MSTR short positions, equivalent to US$5.1 billion.
In a CNBC interview on 14 May, investment manager Jim Chanos revealed he is long bitcoin (BTC) and short MicroStrategy (MSTR) — a pairs trade that mirrors MicroStrategy CEO Michael Saylor’s strategy in a sense, raising capital by selling MSTR shares while purchasing bitcoin. Saylor issues equity at a premium to net asset value (NAV) to buy BTC, while Chanos shorts that premium and holds the underlying asset.
At the center of both trades is the spread between the market price of MicroStrategy shares and their bitcoin-adjusted book value. As of 21 May, MSTR trades at a roughly 70 per cent premium to its bitcoin holdings, depending on how the firm’s remaining enterprise is valued, with a market capitalisation of US$112 billion, and bitcoin holdings worth US$62 billion.
That premium is what Saylor leverages and Chanos targets. If bitcoin rises but the premium compresses — or dilution outpaces gains — Chanos’ trade works. Like any arbitrage, the spread can widen before it narrows, as seen in the Grayscale Bitcoin Trust trade circa 2021.
Figure 1
One thing working in Chanos’ favor, along with others shorting MSTR, is the low cost of borrowing shares to sell short. New borrows are being priced for hedge funds at a 30 basis point fee in S3 Partners Black App. This helps to keep a lid on the carrying cost of the trade until the spread narrows. With more than 250 million free-floating shares, and 27.4 million shares short, the low cost of borrow is likely to persist. The inexpensive borrow does not make this a painless trade to hold in perpetuity. Bitcoin is not generally accepted as collateral, making this a less capital efficient trade than other arbitrage opportunities, as cash is required both as collateral for the MSTR short and for the long bitcoin purchase. Bitcoin exchange traded funds (ETFs) may improve efficiency to at least some degree. Equity options may offer a more efficient short, but options also introduce valuation risk.
Convertible hedging
Convertible arbitrage strategies that hedge long positions in convertible bonds with short positions in the underlying equity are a persistent source of short demand for MSTR shares. We estimate the short interest attributable to convertible arbitrageurs at 9.9 million shares, or 36 per cent of the current short position. We used S3 Partners MAP product to isolate holders of convertible bond positions that are likely to be hedged. Using the conversion ratio and a delta figure modeled by Bloomberg, we estimate the current short position attributable to convertible arbitrageurs by multiplying the three figures together (Figure 2).
Figure 2
The convert hedge varies as the MSTR share price fluctuates in relation to the conversion price of the bonds, however the moneyness of the embedded options and long duration can blunt the impact of price changes in the underlying equity. For example, the MSTR 0% 2030 convertible bond was priced on 20 February and had a modeled delta of 0.79 (per Bloomberg) on its first day of trading. Since then, the MSTR equity price has increased by more than 30 per cent while the delta has increased to just 0.84.
This framework can also be used to evaluate the short interest related to the firm’s convertible preferred shares which trade under ticker STRK. There are currently 7.3 million shares of STRK outstanding, which can be converted into 730,000 shares of MSTR. That 730,000 represents the upper limit of the MSTR short interest relating to STRK. The vast majority of current STRK holders are not arbitrage strategies, so this trade likely has a negligible impact on short interest. This may change with time, as the firm announced a US$21 billion at-the-market programme for STRK shares in March.
Index hedge
Estimating directional short positions versus index hedging activity can shed some light on sources of short demand. Comparing a Russell 3000 firm’s share of index market cap with its share of index notional shorts provides insight into exceptional levels of short interest, even in large cap stocks. MicroStrategy equity represents 0.18 per cent Russell 3000 market cap, and 0.92 per cent of aggregate short valued in index constituents. That makes MicroStrategy the 91st ranked constituent by market cap, and the 7th ranked by notional short value.
This framework suggests a probable boundary of index hedging in MSTR could be set at 0.18 per cent of the total short value, equivalent to 5.3 million shares, or US$2.2 billion. The remainder of short interest, 22.1 million shares (US$9.2 billion), could then be attributed to sources of short demand away from index hedging.
We estimate MSTR short interest relating to convertible arbitrage at 9.9 million shares, and index hedging at 5.3 million shares — a total of 15.2 million shares. Subtracting that hedge estimate from the 27.4 million shares of total short interest shares leaves 12.2 million shares of MSTR short positions, equivalent to US$5.1 billion.
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