Bitcoin’s Market Dynamics and Strategy’s Position
This week, Bitcoin’s substantial price fluctuations have captured significant media attention. However, one prominent corporate holder of Bitcoin, MicroStrategy (MSTR), has been experiencing a steady decline for over three months. As of Wednesday, MSTR was trading around the $250 mark, reflecting a staggering 55% decrease from its peak of $543 on November 21. The situation is even more dire for investors in leveraged MSTR products; for instance, the Defiance Daily Target 2x Long MSTR ETF (MSTX) has plummeted by 90%, while the T-REX ETF (MSTU) has dropped 85%.
Despite the downturn in Bitcoin prices, MicroStrategy’s acquisition strategy has thus far remained profitable. Since starting its Bitcoin purchases in August 2020, the company has seen a 32% increase in its holdings. With an average cost basis of $66,300 per Bitcoin and the current Bitcoin price hovering around $87,000, MicroStrategy is enjoying an unrealized profit of approximately $10.65 billion.
The Liquidation Concerns
A closer examination of MicroStrategy’s convertible debt raises questions about potential “liquidation prices” or the necessity for forced Bitcoin sales. Importantly, all of the company’s 499,096 BTC remain unencumbered, meaning that MicroStrategy has not pledged any of its Bitcoin as collateral. Previously, a convertible note secured by Bitcoin with Silvergate Bank was fully repaid, highlighting the company’s ability to manage its debt effectively.
According to insights from Bitcoin Overflow on X, MicroStrategy has a total outstanding debt of $8.2 billion, which is backed by its substantial Bitcoin holdings, currently valued at around $43.4 billion. The key takeaway here is that as long as the market value of MicroStrategy’s Bitcoin holdings exceeds its debt levels, there will be no necessity for the company to liquidate any of its BTC assets. In simpler terms, Bitcoin’s price would need to decline to approximately $16,500—roughly an 80% drop from current levels—before any forced sales would be considered.
Taking a more granular approach, two of the six outstanding convertible bonds—the 2029 and 2030 issues—are currently trading below their conversion price. These bonds represent a significant portion of the total, accounting for $5 billion of the $8.2 billion outstanding debt. However, it is crucial to note that this debt does not mature until 2029, providing MicroStrategy with ample time for potential recovery in Bitcoin prices.
Moreover, if the value of MicroStrategy’s Bitcoin holdings were to fall below its debt levels by the time the convertible bonds reach maturity, and if the MSTR stock price were also below the conversion price—which is likely in such a scenario—the company would probably opt to sell Bitcoin to repay the bonds in cash. This approach would help avoid massive dilution of its stock by preventing the conversion of debt into equity.
MSTR Convertible Senior Notes (Bitcoin Overflow)
