Will MicroStrategy be liquidated due to the continuous decline in Bitcoin prices?
If the price of Bitcoin experiences a long-term, deep decline, its high leverage strategy may lead to severe financial pressure.TLDR: Conclusion first: theoretically possible, but practically very low probability
Low leverage ratio, long debt maturity, no significant short-term repayment pressure
The premise of a financial crisis is: Bitcoin value remains at an extremely low level for a long time, which has a low probability;
Founder Michael Saylor holds 46.8% voting rights, which can avoid early redemption clauses in preferred stock debt, firmly controlling the company's operational direction
1. MicroStrategy's Bitcoin Holdings and Strategy
MicroStrategy has transformed from a traditional software company into the largest Bitcoin-holding company in the world, holding approximately 471,107 Bitcoins as of the end of 2024. The total cost of these Bitcoins is about $27.97 billion, with an average purchase cost of about $62,500 per coin, while the market value of these Bitcoins is approximately $41.79 billion at the end of 2024.
MicroStrategy's Bitcoin investment is financed through issuing bonds and increasing stock issuance. Its management (represented by co-founder Michael Saylor) views Bitcoin as the company's primary reserve asset, continuously purchasing more Bitcoin through external financing rather than relying on cash flow from its own business. MicroStrategy primarily raises funds to purchase Bitcoin through four methods.
• Using Own Funds for Purchase
Not the main source of funds, MicroStrategy has used no more than $500 million to purchase Bitcoin.
• Issuing Convertible Senior Notes
To purchase more Bitcoin, MicroStrategy began financing through the issuance of convertible bonds.
Convertible senior notes are a financial instrument that allows investors to convert the bonds into company stock under certain conditions. These bonds typically have low or even zero interest rates, with a conversion price set above the current stock price. Investors are willing to buy such bonds mainly because they provide downside protection (i.e., the ability to recover principal and interest at maturity) and potential gains when the stock price rises. The interest rates on several issues of convertible bonds issued by MicroStrategy mostly range from 0% to 0.75%, indicating that investors are confident in the rise of MSTR's stock price, hoping to convert the bonds into stock for greater returns.
• Issuing Senior Secured Notes
In addition to convertible senior notes, MicroStrategy also issued a $489 million senior secured note due in 2028 with a 6.125% interest rate.
Senior secured notes are a type of secured bond with lower risk than convertible senior notes, but these bonds only provide fixed interest income. The batch of senior secured notes issued by MicroStrategy has already chosen to repay early.
The following chart shows the current debt situation of MicroStrategy:
It can be seen that MicroStrategy's total liabilities are $8.213 billion, total assets (mainly in Bitcoin) are valued at $43 billion, and the leverage ratio is 19%. This means that Bitcoin would need to drop below $16,500 and maintain that price until 2028 or even longer for MicroStrategy to become insolvent.
• At-the-Market Equity Offerings
MicroStrategy's stock issuance to finance Bitcoin purchases does not incur debt, but issuing stock dilutes existing shareholders' equity. Existing shareholders agree to this method of issuance because MicroStrategy has proposed a new metric called BTC Yield, which is the ratio of Bitcoin holdings to diluted total equity. In other words, during a rising market phase, financing through stock issuance to purchase Bitcoin may reduce the ownership percentage of existing shareholders, but the Bitcoin content per share increases, and overall, the amount of Bitcoin held by shareholders may still increase.
For example, MicroStrategy's BTC Yield in 2024 is 74%, meaning the number of Bitcoins per share increased by 74%, while the current BTC Yield for 2025 is 6.9%, with a target of reaching 15% by the end of the year.
2. Short-term vs. Long-term Impact of Bitcoin Price Decline
Short-term Impact:
• A decline in Bitcoin prices will directly affect MicroStrategy's financial performance. Accounting rules require companies to recognize impairment losses when Bitcoin prices fall, but gains cannot be directly reflected when prices rise.
• For example, during the Bitcoin crash in 2022, the company recognized $197 million in impairment losses in the fourth quarter, resulting in a quarterly loss. However, when Bitcoin rebounded in 2023, the company reduced impairment losses due to accounting treatment and even reported profits at one point.
• Currently, the company has no Bitcoin collateralized loans, so short-term fluctuations in Bitcoin prices will not trigger margin call risks. However, the stock price is highly correlated with Bitcoin, and a decline in Bitcoin often leads to a simultaneous drop in MicroStrategy's stock price, which in turn affects the company's financing ability.
Long-term Impact:
• If Bitcoin enters a prolonged bear market, the company may face severe financing pressure. Currently, MicroStrategy's software business is relatively small, with annual revenue of only about $500 million in 2024, and it is still operating at a loss, making it impossible to accumulate significant cash through its business to cover debts or continue purchasing Bitcoin.
• The company's current operating model heavily relies on capital markets; if Bitcoin remains low for an extended period, investors may reduce their financing support for MicroStrategy or demand higher financing costs.
• If Bitcoin prices remain below the company's average purchase price of $62,500 per coin, the book value of MicroStrategy's Bitcoin assets will continue to be lower than the actual cost, which may affect investor confidence and further exacerbate stock price pressure.
• Given that the company's management is highly committed to the long-term value of Bitcoin, even if the financial situation deteriorates, the company is unlikely to actively sell Bitcoin, but will instead seek new debt or equity financing to maintain operations. However, if financing is obstructed, it may be forced to adjust its strategy.
3. Key Financial Data Analysis
Bitcoin Holdings and Valuation:
• As of the end of 2024, the book value of Bitcoin held by MicroStrategy is approximately $23.9 billion (after impairment), but calculated at market prices, it is about $41.79 billion.
• Due to the accounting standards adopted by the company, if Bitcoin prices fall below $30,000, the company will have to recognize further impairment, which may intensify stock price pressure.
Debt Levels:
• MicroStrategy's total debt is currently about $8.2 billion, mainly consisting of convertible bonds with low coupon rates, some even at 0%.
• Among them:
Due in December 2025: $650 million, coupon rate 0.75%
Due in February 2027: $1.05 billion, coupon rate 0%
Due in December 2029: $3 billion, coupon rate 0%
• Since some convertible bonds have conversion prices below the current stock price, these bonds are more likely to be converted into stock rather than demand cash repayment, thus posing a lower short-term debt risk.
• However, if Bitcoin prices continue to remain low in the future, and MicroStrategy's stock price falls below the conversion price, bondholders may demand cash repayment, which would increase the company's cash flow pressure.
Cash Flow and Liquidity:
• In 2024, the company's operating cash flow net outflow is $53 million, with only $46.8 million in cash reserves, meaning MicroStrategy has almost no cash buffer.
• By the end of 2024, the company raised $15.1 billion through stock issuance, but if the stock price falls, the company's future financing ability may be affected.
• In 2025, the company also issued a batch of preferred stock with a 10% dividend rate (previously expected to be 8%), indicating that financing costs have begun to rise.
Profitability:
• The company's software business revenue growth has stagnated, with software revenue down 3% year-on-year in 2024, contributing only about $500 million in revenue for the year.
• The company relies on the book gains from Bitcoin investments, but due to the impact of impairment rules, the profit reported in financial statements fluctuates significantly, making it impossible to form a stable profit model.
• In the future, if Bitcoin prices do not continue to rise, the company may remain in a state of long-term losses, further increasing financing pressure.
4. Stock Price Trends and Correlation with Bitcoin
• In recent years, the correlation between MicroStrategy's stock price and Bitcoin prices has reached 0.7 to 0.8, effectively becoming a Bitcoin leveraged ETF.
• At the end of 2024, when Bitcoin hit an all-time high (close to $100,000), MicroStrategy's stock price also soared above $500. However, after Bitcoin corrected, the company's stock price plummeted by 50% in a short period.
• Due to the leverage effect of the company's Bitcoin holdings, MicroStrategy's stock price fluctuations often exceed those of Bitcoin itself. For example, when Bitcoin fell by 40% in early 2025, MicroStrategy's stock price dropped by more than 55%.
• Currently, the market typically values MicroStrategy higher than the net value of its Bitcoin holdings, with some investors willing to pay a premium to invest in Bitcoin indirectly through MSTR. However, if Bitcoin prices fall, this premium may disappear, and there may even be instances of trading below net asset value.
5. Possibility of Bankruptcy or Financial Crisis
In the short term, MicroStrategy still has strong debt repayment capability, but if Bitcoin enters a long-term bear market, it may trigger financial difficulties.
• Asset vs. Liability Ratio: Currently, the company holds $41.79 billion in Bitcoin, far exceeding $8.2 billion in debt, resulting in low short-term repayment pressure.
However, if Bitcoin prices fall to $12,000 to $15,000, the company's Bitcoin assets will fall below total liabilities, potentially leading to technical bankruptcy.
• Debt Maturity Risk: The $650 million debt due in 2025 may be resolved through equity conversion, but there will be over $4 billion in debt maturing between 2027 and 2029.
If Bitcoin remains low at that time, MicroStrategy may struggle to refinance through stock issuance or new debt, potentially needing to sell Bitcoin to repay debts.
• Management's Position: Michael Saylor controls 46.8% of the voting rights, allowing him to prevent the company from selling Bitcoin or changing strategies.
However, if Bitcoin prices fall below a certain critical point, the company may be forced to take emergency measures, including selling part of its Bitcoin, restructuring debt, or even considering bankruptcy protection.
As shown in the chart below, the terms of the convertible bonds stipulate that if the company undergoes significant changes, investors can demand repayment of the debt 12-18 months in advance, but the definition of "significant changes" mainly refers to the company's shareholders deciding to liquidate, and the majority of voting rights are held by Michael Saylor.
Conclusion
MicroStrategy currently maintains financial stability, but if Bitcoin prices experience a long-term, deep decline, its high-leverage strategy may lead to severe financial pressure. The company's fate entirely depends on the future trend of Bitcoin------if Bitcoin remains low for an extended period, MicroStrategy may fall into a debt crisis or even bankruptcy; but if Bitcoin continues to rise, the company will maintain strong growth.
Reference:
Deep Research of ChatGPT
