Summary MicroStrategy has rallied strongly due to Bitcoin`s rise, benefiting from higher Bitcoin prices and continued buys financed by debt. MSTR outperforms Bitcoin by leveraging debt to buy more Bitcoin, increasing shareholder value, but faces risks if Bitcoin enters a bear market. Bankruptcy is unlikely even if Bitcoin drops below $15,000; MSTR has several financing options to cover debts even if Bitcoin`s price falls. Potential risks include regulatory changes, competition, internal issues, and Bitcoin`s price not appreciating as expected, which could impact MSTR`s strategy and stock value. Thesis Summary MicroStrategy ( MSTR ) has staged a strong rally in the last month as Bitcoin (BTC-USD) has broken back above $60,000. The company is well poised to benefit from higher Bitcoin prices and will continue to outperform the asset thanks to continued buys financed by debt. As long as Bitcoin keeps appreciating, MSTR will do fine, but eventually, Bitcoin will enter a bear market again, at which point MicroStrategy could be in big trouble. What`s the bankruptcy threshold for MSTR? How will investor sentiment affect the share price? And is it possible MSTR will end up selling its Bitcoin? The latter seems quite unlikely, and even if the price of Bitcoin plummets, MicroStrategy has plenty of options to finance, and still has a successful software business too. The MSTR Rally MicroStrategy is making new ATHs with the stock closing in on $225 as I write this on October 14th. In my last report on MSTR, I discussed the company was a levered Bitcoin play, but warned investors about its inherent volatility. So, today we address exactly those concerns. MSTR Price (SA) The company has enjoyed a significant rally in the last month, outperforming Bitcoin by a significant margin, and even rallying as Bitcoin sold off in the last week. In other words, MSTR is increasing its Bitcoin premium, or its price defined in Bitcoin, as we can see in the chart below. MSTR/Bitcoin (TV) This is happening while Bitcoin has also appreciated over the last month, but MSTR is outperforming the cryptocurrency. Why MSTR Outperforms Bitcoin The reason MSTR outperforms Bitcoin is pretty straightforward. Though it may be oversimplified, I would call it a levered Bitcoin play. The company indebts itself using loans, and more recently convertible notes in order to buy Bitcoin. MicroStrategy currently has around $3.8 billion in long-term debt, while their stash of around 250,000 Bitcoin is worth around $15 billion. MSTR doesn’t just hold Bitcoin, it keeps buying it, which is why it actually has a Bitcoin yield. When you buy a share of MSTR, you also have a percentage of Bitcoin, and that percentage has increased throughout the year, specifically at a rate of 17.8%. And MSTR can keep buying Bitcoin very efficiently. Its latest convertible notes carry an interest of 0.62% though they will likely get converted into stock. However, even accounting for dilution, the company added Bitcoin value to shareholders. The question is, of course, what happens when Bitcoin enters another bear market? Can MSTR Go Bankrupt? A lot of people are under the impression that MicroStrategy will go bankrupt as soon as the Bitcoin market takes a dip, but that’s actually quite far from the truth. For starters, there’s no such thing as an impending margin call for MicroStrategy. The debt they have issued, right now, is not collateralized by Bitcoin. There was at one point a loan obtained from Silvergate Bank, which was backed by Bitcoin, but that has since been repaid. The most pressing “concern” now would be the $1.05 billion in convertible notes due in 2027, and then the $500 million due in 2028. MSTR Debt maturities (Investor slides) Of course, if the stock is above $143 (we have to adjust for the 10-1 split) the notes will be converted, so no problems there. So, first off, MSTR would have to be trading below $143, how could we get to that point? MSTR and Bitcoin price (TV) This doesn’t seem that unreasonable. MSTR was trading at below $140 in many instances when Bitcoin dipped below $60,000. So, if Bitcoin is below $60,000 by the time convertible notes are due this scenario could play out. What Then? The company would have to pay back its loans. At this point, the company could: Refinance with new convertible debt Refinance with a Bitcoin-secured loan Dilute shareholders Sell Bitcoin Based on Michael Saylor’s stated conviction in Bitcoin, it’s likely that he would not want to sell. He would likely have to raise more cash, and perhaps the most efficient way to do this would be with a Bitcoin-secured loan, which especially makes sense if you think Bitcoin is going to keep rising long-term. For a loan of $3.9 billion, which would cover all their long-term debt, at $60,000 BTC price, MSTR could raise the money with a 50% backed Bitcoin loan that would require 36,000 Bitcoin. Even if no one is willing to loan money to MSTR, which seems very unlikely, the price of Bitcoin would have to drop to below $15,600 for MSTR to enter negative book value territory. It would probably have to stay at those levels for a while too. Enter Game Theory Of course, the issue here is that market participants have foresight and investors would be preempting such a move from MSTR. If Bitcoin begins to fall anywhere near these levels, but perhaps much higher, like $40,000, then MSTR could be in trouble. At this point, the share price would no doubt begin to fall, and the Bitcoin premium could become a Bitcoin discount, as it becomes clear that the company will be forced to raise more cash. The worst-case scenario would, of course, be MSTR actually selling the Bitcoin, which would no doubt be the last thing Saylor would ever do. With over 1,2% of the supply in their hands, this would be a massive shock to the market, and even worsen the situation. Other Potential Problems There are also other potential problems the company could face. Regulation could be a potential risk, both in terms of somehow limiting Saylor’s ability to buy Bitcoin or his ability to finance his Bitcoin buys. Competition could also be an issue, as more companies begin to buy Bitcoin and apply this strategy, therefore diluting the MSTR premium, much like was the case with Grayscale ( GBTC ) MicroStrategy could even be subject to internal problems, and the board could turn against Saylor. And, of course, if Bitcoin’s price fails to appreciate at the pace it has in previous years as many expect, then the strategy would stop making sense, and MSTR would lose its appeal. My 2 Cents In order for MSTR to really face liquidity issues, a few things would have to happen. Either Bitcoin drops below $15,000 and stays there, making MSTR insolvent. Or, Bitcoin could drop enough to cause MSTR to need more financing. If MSTR were not able to secure the financing using its BTC as collateral, which is also a big if, then they would have to dilute, and this in turn would drive out investors en masse, and MSTR would begin to trade much closer to book value, or even below it. Does this seem likely? I am personally quite bullish on Bitcoin, as I wrote about here and I don’t think Bitcoin will drop back to $15,000. Furthermore, I think MSTR has enough financing options out there to secure the necessary funds to pay back its debts, even if Bitcoin is significantly lower than today, which could happen but is also unlikely. And yes, in that event, MSTR could eventually be forced to sell its Bitcoin, unravel its whole strategy and the stock could begin to trade below its book value. This is a real risk and bear in mind the company now trades at almost 15x book value. MSTR’s stock could absolutely plummet if Bitcoin fell, say 30% from here, based on the speculation and game theory reasoning laid out above. The volatility works both ways and once we add investor sentiment to that, we may see big moves both up and down. Nonetheless, I maintain a hold rating as I continue to be bullish on Bitcoin
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