On social media message boards, you might see this strategy referred to as “MicroStrategy’s infinite money glitch.” Convertible note sales allow the company to buy more Bitcoin, which in turn increases the price of the world’s largest cryptocurrency and allows the company to issue more convertible notes. It’s a repeating cycle that’s undeniably played a role in pushing Bitcoin close to the psychologically important $100,000-per-token level.

While there’s no question that MicroStrategy has proved the skeptics wrong, thus far, history has a way of rhyming on Wall Street. Similar leverage-driven scenarios like this have always eventually (key word!) ended in pain for the companies and shareholders behind them.

Perhaps the most front-and-center example of a seemingly can’t-fail leverage scenario that blew up in Wall Street’s face occurred less than 20 years ago.

All the way back in the 1970s, banks began packaging mortgages into more complex products known as mortgage-backed securities (MBSes), which our nation’s leading financial institutions could purchase and sell.

Roughly 20 years ago, banks began taking this highly profitable securitization of loans and applied it to subprime mortgages (i.e., mortgages offered to borrowers with poor credit). Although subprime MBSes offered tantalizing yields, they required subprime borrowers to pay their bills, and for housing prices to continue to climb.

Compared to the prior century of home-price-to-inflation data, the rate home prices were accelerating during the mid-2000s simply wasn’t sustainable. The other critical problem is that subprime borrowers were commonly pushed into adjustable-rate loans that offered low initial payments, but eventually reset and made their payments unaffordable, at least for some subprime borrowers.

Once these subprime MBSes began defaulting, it created a cascade effect for many of America’s largest financial institutions.

To be clear, what’s happening at MicroStrategy isn’t going to topple America’s financial system like subprime MBSes threatened to do during the financial crisis. But it’s the next in a series of examples of leverage being used in (what will be in hindsight) a disastrous way.

For MicroStrategy’s “infinite glitch” to work, the company needs buying interest in Bitcoin to remain frothy, as well as for the price of Bitcoin to head higher. However, history conclusively shows that this isn’t sustainable.

Since Bitcoin trading began 15 years ago, the world’s largest digital currency has undergone seven peak-to-trough pullbacks of at least 50%, including three that exceeded 82%. Crypto bear markets aren’t a walk in the park, and they’ve historically proved unavoidable. If the price of Bitcoin declines by 50% or more, the pressure to pay back its lenders could mount.

To make matters worse, hoarding Bitcoin as a reserve is only going to make the world’s most popular cryptocurrency less liquid. In other words, if MicroStrategy ever has to sell some of its Bitcoin to satisfy its debt obligations, it could lead to a situation that tanks the price of the world’s most prominent digital currency.

But the most glaring flaw of all is the premium being given to MicroStrategy’s Bitcoin assets. Based on a $92,754 price per Bitcoin, as of this writing, MicroStrategy’s Bitcoin portfolio of 386,700 tokens is worth $35.87 billion. But as of the closing bell on Nov. 26, MicroStrategy had an $81.5 billion market cap.

Assigning a very generous $1 billion market value to its declining enterprise analytics software segment — MicroStrategy’s AI software segment is losing money and has seen sales decline by 14% over the last decade — leads to investors paying a 124% premium for the company’s Bitcoin assets.

Mind you, this premium doesn’t take into account its rapidly growing debt obligations, nor does it factor in the possibility of a fully diluted share count of 266.5 million shares (as opposed to the 230.5 million basic shares outstanding its $81.5 billion market cap is based on). On a fully diluted basis, this premium to its Bitcoin assets is even more egregious.

If an investor were optimistic about the future of Bitcoin, they could purchase tokens on a reputable exchange for $92,754, as of this writing. Meanwhile, investors buying MicroStrategy stock are paying north of $208,000 per token based on the current premium of 124%, or almost $244,000 per token on a fully diluted basis with 266.51 million shares outstanding.

Although it’s impossible to precisely pinpoint when a bubble will burst, the tea leaves couldn’t be clearer that this premium, and MicroStrategy’s use of leverage, isn’t sustainable.

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Sean Williams 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.

History Doesn’t Repeat, but It Often Rhymes on Wall Street — and That’s Terrible News for MicroStrategy was originally published by The Motley Fool