Disclaimer: The analyst who wrote this piece owns shares of Strategy (MSTR).
Bitcoin’s sharp price declines have dominated news headlines this week, but major corporate BTC holder Strategy (MSTR) has been in a downtrend for more than three months.
Trading around the $250 level on Wednesday, Strategy is lower by about 55% since peaking at $543 on Nov. 21. Investors in leveraged MSTR products have suffered even greater losses. The Defiance Daily Target 2x Long MSTR ETF (MSTX) has plunged 90%, while the T-REX ETF (MSTU) has declined 85%.
Despite the decline in bitcoin, Strategy’s BTC acquisition remains profitable. Since initiating purchases in August 2020, the company is up 32% on its holdings, with an average cost basis of $66,300 per BTC and an unrealized profit of $10.65 billion at bitcoin’s current price of about $87,000.
The forced sales question
A closer look at Strategy’s convertible debt highlights potential “liquidation prices” or forced bitcoin sales. Notably, all of the company’s 499,096 BTC remain unencumbered, meaning Strategy has not pledged any bitcoin as collateral. An earlier convertible note using bitcoin as collateral with Silvergate Bank was fully repaid.
According to Bitcoin Overflow on X, Strategy has $8.2 billion in total outstanding debt, backed by 499,096 BTC, currently valued at $43.4 billion.
The short answer: As long as the value of Strategy’s bitcoin exceeds its debt levels, the company would not need to sell any of its BTC holdings. In other words, bitcoin would have to decline all the way to about $16,500, or roughly another 80% from current levels.
Taking a more detailed look, two of the six outstanding convertible bonds—the 2029 and 2030 issues—are below their conversion price. They’re large bonds, though, accounting for $5 billion out of the $8.2 billion total. Even then, the debt does not mature until 2029, allowing time for recovery.
And in theory, Strategy could roll over more paper, if that were to happen. If the value of the company’s bitcoin were to drop below debt levels at the time the convertible bonds matured, and the MSTR stock price was below the conversion price (which would be very likely in that scenario), Strategy — in order to prevent massive dilution in its stock — would likely decide to sell bitcoin to repay the bonds in cash rather than converting them into equity.
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