George Soros referred to it as Reflexivity, though many simply know it as a virtuous circle. At the moment, MicroStrategy’s circle seems to have broken, though its collapse, in hindsight, was perhaps inevitable.

As of Monday, MicroStrategy (MSTR) shares had dropped over 8%, holding just above $300, marking a 30% decline since the announcement of its inclusion in the Nasdaq-100 index, and nearly 50% from its record high in late November. The signs of a significant short-term peak for the once obscure enterprise software firm, now a Bitcoin development powerhouse, were evident.

The first signal was the soaring stock price. At its peak of $543 in late November, MSTR had increased nearly eightfold in 2024 and was up more than 50 times since the company began buying Bitcoin (BTC) in August 2020.

Founder and Executive Chairman Michael Saylor, always vocal about promoting his company’s future and championing Bitcoin, had become even more prominent in financial news, podcasts, and social media by the end of the year. Yet, it wasn’t just his frequent appearances. A subtle shift in his demeanor hinted at what sports fans might call “spiking the football” after a touchdown. For example, his promotion of a company-made metric, “bitcoin yield,” reminiscent of questionable internet bubble metrics like “page views,” raised eyebrows. Additionally, flush with cash from share sales and convertible debt offerings, Saylor had started teasing large Bitcoin acquisitions on Sundays before the official filings came on Monday mornings.

Then there was the rise of imitators. While Saylor’s Bitcoin strategy had seen success for years, it wasn’t until recently that other companies began to follow suit. Companies like Semler Scientific, Metaplanet, and several Bitcoin miners embraced Saylor’s vision, gaining attention from social media and even Saylor himself with every capital raise and Bitcoin purchase announcement.

Soros’ theory, though, teaches us that things can’t go on forever. His Theory of Reflexivity — a concept which bears a striking resemblance to Einstein’s ideas — suggests that investor perception and its effect on prices is a two-way street. When investor beliefs drive stock prices, those prices in turn fuel even more optimism, creating a self-perpetuating cycle. For instance: 1) investors believe a stock will rise because of anticipated earnings, 2) the stock price rises, 3) this allows the company to raise capital at a cheaper cost, 4) the increased capital boosts earnings, 5) the stock rises again, and so on. This cycle is what many refer to as a “virtuous circle,” and MicroStrategy experienced one in 2024. Soros’ brilliance lay in identifying these cycles early and knowing when to jump in or out.

Herb Stein once famously said, “If something cannot go on forever, it will stop,” a law that seems just as applicable to MicroStrategy shares as to government deficits.

When MicroStrategy’s stock was trading around $430 after its Dec. 14 Nasdaq-100 inclusion announcement, it was on a sharp downward trajectory, dropping to just above $300, a 30% loss in two weeks. Looking back, cracks in the MicroStrategy bubble were visible even before the Nasdaq-100 announcement. The stock peaked at $543 on November 21, but despite Bitcoin’s ongoing rise, MSTR started to lag, showing what technical analysts would call a negative divergence. In the five weeks since, MSTR has dropped 45% from its peak.

However, despite these recent declines, MSTR has still shown an extraordinary performance. The stock is up more than 400% year-to-date and about 20 times from when Saylor first started purchasing Bitcoin in August 2020. While bears may argue that the decline could extend further, bulls might point out that during MSTR’s run since August 2020, it’s experienced similar short-term setbacks that were always followed by a rebound.

What would Soros say? Likely, he would remind us that prices can go further than we expect, whether upward or downward, as his Theory of Reflexivity suggests.