Strategy's "Death Spiral": Bitcoin Falls Below Cost Line, Hundred-Billion Leverage Empire Faces Liquidation
- Core View: As Bitcoin's price falls below its holding cost, MicroStrategy (MSTR) is facing a dual crisis of finance and business model, constituted by massive unrealized losses, the collapse of valuation premium, and pressure from substantial convertible bond maturities.
- Key Elements:
- The company reported a Q4 net loss of $12.4 billion, primarily stemming from a $17.4 billion unrealized fair value loss on Bitcoin. The market value of its Bitcoin holdings (approximately $46 billion) has fallen below its average cost basis of $76,052 for the first time.
- Its business model as a high-beta proxy for Bitcoin is being impacted by spot Bitcoin ETFs. The premium of its enterprise value over its Bitcoin holding value has almost vanished, risking the failure of its "borrow to buy Bitcoin" logic.
- The company carries $8.2 billion in convertible debt, facing concentrated put pressure (e.g., $1 billion in September 2027). If Bitcoin prices remain depressed, it may be forced to liquidate assets at low prices or undergo debt restructuring.
- The CEO admitted that if Bitcoin fell by 90%, the company would be unable to repay its debt solely by selling Bitcoin. Prominent short-sellers like Michael Burry warn this could trigger a "death spiral" for corporate holders.
- Although founder Michael Saylor maintains a bullish stance and downplays quantum computing threats, the company expects no profitability in the current or foreseeable future. Market concerns about its debt repayment capability and business model sustainability are intensifying.
Original Author: Ye Zhen
Original Source: Wall Street News
As Bitcoin's price falls below key support levels, turmoil in the digital asset market is intensifying, and MicroStrategy (MSTR), at the center of this storm, is facing unprecedented pressure.
The company founded by Michael Saylor confirmed on Thursday that it posted a net loss of $12.4 billion in the fourth quarter, impacted by a significant write-down in the fair value of its Bitcoin holdings. The loss primarily stemmed from a $17.4 billion unrealized fair value loss due to mark-to-market accounting rules.
As Bitcoin fell below $63,000, MicroStrategy's stock price plummeted 17.1% on Thursday. This not only erased all gains made since the US election but also pushed the stock down nearly 80% from its November 2024 all-time high.
The company's Bitcoin holdings are currently valued at approximately $46 billion, with an average purchase cost of $76,052 per coin. This marks the first time since 2023 that the market value of the company's Bitcoin holdings has fallen below its cumulative cost basis.
Facing the market crash, Michael Saylor admitted during the earnings call that "selling Bitcoin is an option," despite his public calls to "HODL" on social media platform X.
More unsettling for the market is that the cycle of raising funds through "equity premiums" to buy more Bitcoin has stalled. With the company's cost basis now exceeding the market price for the first time, its financial experiment is facing a severe test.
As MSTR's stock price plummets, convertible bond investors are likely to seek early cash redemption rather than conversion. The first $1 billion redemption could be due on September 15, 2027, with another $6.4 billion potentially due in 2028, bringing a total of $8.2 billion in potential cash demands on the horizon.
The Logic of Financing Bitcoin Purchases Faces a Test
MicroStrategy, once a high-beta proxy for Bitcoin, saw its stock price surge over 3500% between 2020 and 2024. However, this engine was built on shaky ground. With the launch of spot Bitcoin ETFs, investors gained cheaper, more direct exposure, weakening MicroStrategy's uniqueness.
More critically, the valuation premium has collapsed. MicroStrategy's enterprise value once approached twice the value of its Bitcoin holdings, but this premium has now almost vanished. If Bitcoin's price remains at current levels, MicroStrategy's market cap would only need to fall about 13% more to completely eliminate the premium. Once the mNAV (enterprise value to crypto asset value ratio) falls below 1, meaning the company's market cap is lower than the value of its Bitcoin holdings, the logic of financing Bitcoin purchases would completely break down.
During the post-earnings call, CEO Phong Le tried to reassure investors, saying, "This is your first downturn, my advice is to stay the course," but this statement sparked anger in the live chat. Benchmark Co. analyst Mark Palmer noted that in the current environment, the market's focus has shifted to how the company will raise funds under challenging conditions.
Technically Insolvent on the Books
Deteriorating financial data has heightened market concerns about MicroStrategy's solvency. Data shows that as of February 1, the company holds over 713,000 Bitcoins with an average cost basis of $76,052. With Bitcoin trading significantly below this cost line, MicroStrategy is technically insolvent on its books.
MicroStrategy carries $8.2 billion in convertible debt. While Saylor emphasized the company has $2.25 billion in cash reserves, sufficient to cover interest and dividend payments for the next two years with no margin call risk, market concerns persist.
MicroStrategy's current convertible bond structure shows different maturity pressure points. The $1.01 billion convertible bond issued in September 2024 has a conversion price of $183.19, with holders able to exercise a put option on September 15, 2027. The $3 billion zero-coupon convertible bond issued in November 2024 has a high conversion price of $672.4, with a put option available on June 1, 2028. Additionally, several other convertible bonds with conversion prices ranging from $149.77 to $433.43 will face put pressure in 2028.
S&P Global previously warned in a report that if Bitcoin prices face severe pressure when the debt matures, it could force the company to liquidate assets at low prices, which would be viewed as a debt restructuring "tantamount to default."
Phong Le admitted on the call that if Bitcoin fell 90%, the company would be unable to repay its debt solely by selling Bitcoin and would have to seek debt restructuring.
Saylor Maintains Bullish Stance
Despite the pressure, Saylor remained optimistic during the earnings call. "We have a crypto president who is determined to make America the Bitcoin superpower, the world's crypto capital, and the digital asset leader," Saylor said. "You cannot underestimate the importance of having support for this industry and digital capital at the highest levels of the political structure."
Saylor also downplayed the threat of quantum computing to Bitcoin, calling it "at least a decade away from being a threat," and reiterated it was "FUD" (fear, uncertainty, and doubt). He maintained his consistent position that selling Bitcoin remains one of the options in response to market conditions.
MicroStrategy reiterated on Thursday that it does not expect to generate net income or profit for the current year or the foreseeable future. Based on these expectations, the company stated that current distributions to perpetual preferred shareholders are expected to be tax-free.
However, prominent short-sellers like Michael Burry have issued more severe warnings. According to Bloomberg, Burry reiterated his scrutiny of MicroStrategy this week, warning that Bitcoin's decline could trigger a "death spiral" among corporate holders. This view aligns with long-time critics like Jim Chanos, who have long pointed out the risks of MicroStrategy's reliance on non-yielding assets and speculative leverage.
Meanwhile, Saylor downplayed the threat of quantum computing to Bitcoin during the meeting, labeling it "FUD" and stating the threat is at least a decade away.
Although management attempts to maintain an optimistic tone and describes profitability as a distant prospect, with Bitcoin trading below cost and financing channels narrowing, investors are facing a harsh reality check.
