MicroStrategy (MSTR) has witnessed a substantial drop of over 55%, prompting concerns about the possibility of ‘forced liquidation.’ The company holds an impressive 499,096 Bitcoins worth $43.7 billion, raising questions if further Bitcoin price declines would force them to sell their holdings. This scenario echoes past discussions from the 2022 bear market when Bitcoin’s value plummeted from around $70,000 to a low of $15,000. But the critical question remains: is this situation different?
MicroStrategy’s Bitcoin strategy hinges on capital raising abilities, which could be hampered if liabilities exceed assets. However, forced liquidation isn’t inevitable.
The company employs a multifaceted approach to manage its Bitcoin holdings:
– Borrowing via convertible notes with zero interest.
– Leveraging capital to purchase more Bitcoin and expand exposure.
– Selling shares at a premium to raise additional capital.
– Repeating this cycle for further asset growth.
Currently, MicroStrategy has approximately $8.2 billion in debt backed by $43.4 billion worth of Bitcoin, resulting in a leverage ratio of 19%. The majority of this debt is comprised of convertible notes with conversion prices below the current share price and maturing until 2028.
To trigger ‘forced liquidation,’ a drastic shift within the company is needed. Under existing credit agreements, early repayment of these convertible notes can occur under certain conditions. However, for this to happen, typical conditions include:
– A shareholder vote dissolving the company.
– Corporate bankruptcy.
However, with Michael Saylor (co-founder and chairman) holding 46.8% of voting power, a shareholder-driven liquidation is unlikely. To trigger a serious liquidity problem, Bitcoin needs to experience a sustained decline of over 50% from current levels. Saylor has repeatedly dismissed the idea of forced liquidation, even claiming that the company would buy all of Bitcoin if it fell to $1. However, the role of convertible stockholders in such a scenario cannot be ignored.
A sustained price decline for both Bitcoin and MSTR stock prices could hinder MicroStrategy’s ability to raise capital, which is crucial for their long-term strategy. Investors are witnessing a bearish market similar to those experienced by MicroStrategy since its Bitcoin-focused approach gained traction in 2024. The question remains: will investors be able to ‘buy the dip’?
Michael Saylor’s stance is clear –