MicroStrategy’s Bitcoin Holdings and Liquidation Speculation

MicroStrategy (MSTR) has seen a significant drop of over 55%, increasing speculation about a potential “forced liquidation.” The company owns approximately 499,096 Bitcoins, valued at $43.7 billion, leading many to question if further declines in Bitcoin’s price could compel MicroStrategy to sell its assets.

MicroStrategy has been accumulating Bitcoin for years, with an average purchase cost of around $66,350 per BTC. Concerns about liquidation have surfaced before, notably during the 2022 bear market when Bitcoin’s price fell from around $70,000 to approximately $15,000. The key question is: Is the situation different this time?

The foundation of MicroStrategy’s Bitcoin strategy relies on its ability to raise capital. If liabilities substantially exceed assets, this capacity could be compromised, but it does not automatically imply a “forced liquidation.”

MicroStrategy’s Approach Includes:

• Borrowing through 0% convertible notes.
• Using capital to buy Bitcoin and increase exposure.
• Selling shares at a premium to generate additional capital.
• Repeating the cycle to further expand assets.

Currently, MicroStrategy has approximately $8.2 billion in total debt, backed by $43.4 billion worth of Bitcoin, resulting in a leverage ratio of about 19%. Most of this debt is in the form of convertible notes with conversion prices below the current share price, maturing in 2028.

A forced liquidation would likely necessitate a “fundamental change” within the company. Under existing credit agreements, early repayment of convertible notes can be triggered under specific conditions, such as:
– Shareholders voting to dissolve the company.
– Corporate bankruptcy.

MicroStrategy co-founder and Chairman Michael Saylor holds 46.8% of the voting power, making a shareholder-initiated liquidation improbable.

For a significant liquidity problem to arise, Bitcoin would need to experience a sustained price drop of over 50% from current levels. Saylor has dismissed the idea of forced liquidation, asserting the company would “buy all of Bitcoin” if its price fell to $1. However, the influence of convertible stockholders in such scenarios shouldn’t be ignored.

A prolonged decline in both Bitcoin and MSTR stock prices could restrict MicroStrategy’s ability to raise capital, an essential aspect of its long-term strategy. Investors are witnessing the first bearish market for MicroStrategy since its Bitcoin-centric strategy gained traction in 2024. The pivotal question remains: will investors continue to “buy the dip”?

Saylor’s stance is unequivocal: “Bitcoin is on sale.” Time will reveal whether the market concurs.

This is not investment advice.