Key Points
Strategy, known previously as MicroStrategy, has transformed into a heavily leveraged holder of digital assets, having its future closely linked to the value of Bitcoin.
As Bitcoin has significantly declined from its early October highs, and Strategy’s stock has halved since then, investors are raising concerns about the possibility of the company needing to sell its Bitcoin to settle debts, which could adversely impact the cryptocurrency itself. Let’s explore the numbers to assess the risks involved.
The Risk is Real, but It’s Not Imminent
Before discussing potential forced sales, it’s essential to understand Strategy’s assets and liabilities. The company currently holds about 650,000 bitcoins, representing over 3.1% of the total supply of 21 million, making it the largest corporate stockpile globally. It has invested approximately $48.4 billion to acquire these bitcoins at an average cost of around $74,400 per coin. The cost basis is critical because it highlights how much of a decline in Bitcoin’s price would affect the company’s equity buffer, impacting its ability to refinance or manage its debt. As of early December, Bitcoin trades close to $93,000, down from about $126,000 two months prior, but the company still retains a substantial unrealized gain despite the downturn.
This means Strategy isn’t in a negative situation with its Bitcoin holdings; it simply has a reduced cushion compared to two months ago. This isn’t a cause for alarm, as there have been periods in the past when the company was in a worse position without significant fallout.
On the liability side, management has indicated that it owes about $8.2 billion in convertible debt and approximately $6.6 billion in preferred equity, totaling slightly over 20% of its Bitcoin net asset value. Strategy has also paid off its older Bitcoin-backed loan from Silvergate Bank earlier this year, meaning its current Bitcoin holdings aren’t secured against any margin loans.
What Would a Forced Sale Mean for Holders?
If the leading corporate Bitcoin holder begins selling off its assets, could that trigger a chain reaction affecting Bitcoin’s price? According to Strategy’s CEO, Phong Le, the company would only consider selling Bitcoin if two conditions arise: first, if the stock trades below its Bitcoin value per share, and second, if it loses access to equity and debt markets. If Bitcoin’s price reaches around $25,000, Strategy would face potential insolvency, indicating considerable room for price drops before it would need to panic.
Therefore, if Strategy is compelled to sell solely due to falling Bitcoin prices—not from excessive debt or poor management practices—Bitcoin holders would already be facing challenging conditions. Sales at that point could exacerbate an already bad situation. However, there are reasons to believe such forced selling is unlikely.
The Bitcoin market is now much more robust and institutional than when Strategy first began acquiring it. Exchange-traded funds (ETFs) now manage substantial amounts of Bitcoin for various investors, with other corporations and sovereign treasuries also accumulating the asset. Thus, any significant selling action would encounter a wider pool of buyers than in previous years, mitigating the impact of potential downturns.
Should You Invest $1,000 in Bitcoin Right Now?
Before investing in Bitcoin, it may be beneficial to consider other options. The Motley Fool Stock Advisor team has identified what they believe are the 10 best stocks to buy now, and Bitcoin is not included among them.
