MicroStrategy, Bitcoin, and the High-Stakes Risk Game

 Will MicroStrategy or " Strategy " Be Able To withstand what they're trying to do?

*Strategy now has, 528,185 BTC holdings, Average purchase price of $67,458.*

I will examine the risks associated with the strategy they are pursuing, outlining the potential worst-case scenario. Additionally, I will assess the impact on bondholders and provide a brief overview of how to approach trading Bitcoin, along with the relevant strategies.

Background and Strategy Overview:

MicroStrategy's Bitcoin acquisition strategy, initially launched under the leadership of Michael Saylor, commenced with a $250 million cash investment in August 2020. This approach has since evolved to include both debt and equity financing. By the end of 2024, the company's long-term debt had reached $7.191 billion, reflecting a significant 229.55% year-over-year increase, according to MacroTrends data on long-term debt. In early 2025, MicroStrategy issued an additional $2 billion in convertible bonds, bringing their total debt to approximately $9.191 billion. These bonds, which have an average coupon rate of 0.421% and a weighted maturity of 5.1 years, are part of a broader strategy aimed at utilizing low-cost capital to acquire Bitcoin, with the expectation of long-term price appreciation. This strategy, as outlined in a CoinDesk article on convertible debt, positions the company to capitalize on favorable market conditions for Bitcoin over time.

The company’s equity financing activities involve the issuance of shares, including the issuance of 2.76 million shares in January 2025 to acquire 10,107 BTC for $1.1 billion, according to Investopedia. In late 2024, shareholders approved an increase in the authorized share capital to 10.3 billion, allowing for potential further dilution. However, the extent of such dilution will largely depend on market conditions, which may be less favorable in a bear market.

Risks if Bitcoin Falls Below Average Purchase Price?

As of the current Bitcoin price of $78,993.63 ( At time of writing, may change later ) MicroStrategy holds a profitable position, with its Bitcoin holdings valued at $41.72 billion, compared to a cost basis of $35.62 billion (528,185 BTC at an average purchase price of $67,458). However, should the price of Bitcoin dip below $67,458, the company would be required to report unrealized losses in accordance with fair value accounting, which will be effective in 2025 under FASB ASU 2023-08, as highlighted in Forbes' analysis of FASB regulations. These unrealized losses could negatively impact MicroStrategy's net income, potentially leading to a net loss for the reporting period, which may, in turn, affect its stock performance and investor sentiment.

The financial implications extend beyond reporting.

A lower stock price could make equity raises more dilutive and costly, as warned in Investing.com's risk analysis. Additionally, with estimated debt of $9.2 billion, a sustained drop could impair their ability to refinance at maturity, especially if Bitcoin's value falls below debt levels, increasing financial distress. However, their software business, generating revenue (e.g., $125 million in Q2 2021, though recent figures are not specified), might cover interest payments, estimated at $38.7 million annually at 0.421% on $9.2 billion, mitigating short-term liquidity risks.

Worst-Case Scenario: Prolonged Bitcoin Crash

The worst case assumes a prolonged Bitcoin price drop, say to $10,000, reducing their holdings' value to $5.28 billion (528,185 * $10,000), compared to a cost basis of $35.62 billion, resulting in an unrealized loss of $30.34 billion. At this level, their Bitcoin holdings would be worth less than their debt, risking insolvency.

In this scenario, MicroStrategy might face:

To fulfill debt obligations, they might be compelled to liquidate Bitcoin holdings at a loss, which could initiate a detrimental cycle. A substantial sale of assets may exacerbate the downward pressure on Bitcoin's value,  thus, intensifying their financial challenges.

If the debt cannot be repaid or refinanced by its maturity (2029-2032, according to Cointelegraph), a default could occur, potentially resulting in bankruptcy. In such a scenario, assets would be liquidated to satisfy creditors. Secured creditors, such as those holding $500 million in senior secured notes due 2028 backed by Bitcoin  would be paid first, followed by unsecured creditors from any remaining assets, including the software business.

Stock Price Impact: Their stock (MSTR) could plummet, making capital raises nearly impossible without massive dilution

MicroStrategy demonstrated significant resilience during the 2022 bear market, when Bitcoin dropped below $20,000, by raising capital instead of selling,  Despite now facing greater risks due to larger holdings and increased debt, the company's strategy remains focused on Bitcoin's eventual recovery, making it a high-risk, high-reward bet.

Impact on Bondholders?

For bondholders, particularly holders of convertible notes (estimated $8.7 billion unsecured, with $500 million secured), the implications include:

• Increased Credit Risk: If MicroStrategy's financial health deteriorates, perceived risk rises, potentially decreasing bond prices and increasing yields. This is especially relevant if Bitcoin stays low.

• Convertible notes enable conversion into equity at set prices (e.g., $1,432 per share for 2030 notes, according to Cointelegraph). If the stock price dips below the conversion price, bondholders may retain the debt, anticipating repayment. During market downturns, conversion becomes less appealing, heightening the risk of default.

• In the event of bankruptcy, secured creditors, such as holders of $500 million notes, are prioritized and paid from Bitcoin collateral. Unsecured creditors share any remaining assets. Recovery outcomes depend on asset values and liabilities, with unsecured bondholders potentially receiving only partial recovery, according to Saxo Bank's analysis.

While immediate risk is low due to long-term maturities, bondholders may face increased risk as the maturity date nears, particularly if Bitcoin fails to recover, potentially resulting in losses in the event of a default. Michael Saylor, the CEO of Strategy, (previously known as MicroStrategy), prefers Bitcoin prices to either increase or maintain their volatility. However, a significant decline in Bitcoin, particularly if it remains below their average purchase price and lacks substantial volatility, would present a challenging scenario for the company.

Comparative Analysis Table

To illustrate impacts, consider the following scenarios.

Conclusion:
Should Bitcoin decline below $67,458, MicroStrategy may experience significant reporting losses, downward pressure on its stock price, and potential challenges in meeting debt obligations. In the worst-case scenario, a sustained price drop could even lead to bankruptcy. Bondholders would face heightened credit risk, with the possibility of losses in the event of a default. However, the company's long-term debt maturities and ongoing software revenue help mitigate immediate risks. The sustainability of this strategy remains a topic of debate, underscoring the importance for stakeholders to closely monitor market conditions moving forward.

Notes On Trading This:

I will not go into extensive detail on the trading strategy, but here are a few potential approaches:

1. You could consider shorting MSTR while taking a long position in Bitcoin (BTC) and selling call options on IBIT shares. Additionally, you might purchase a call option on MSTR that is close to the strike price with a three-month expiration and simultaneously sell higher strike call options.

2. Another approach could involve buying both put and call options close to the current price of IBIT ETF, which tracks Bitcoin. Alternatively, you could buy put and call options at the same strike price and also sell puts at a lower strike price.

You Could also Gamma Scalping on MSTR Options: Buy high-gamma options, dynamically hedge delta, profiting from volatility. Best case: high volatility, frequent scalping profits; worst case: low volatility, premium decay; normal case: moderate volatility, mixed results.