The American technology company MicroStrategy (MSTR, now renamed Strategy) has long attracted the attention of many investors by investing heavily in Bitcoin. Currently, the company holds a total of 843,706 Bitcoins. MicroStrategy’s strategy for investing in Bitcoin is also relatively simple. It obtains funds to purchase Bitcoin by issuing stocks or financing instruments. When the price of Bitcoin rises, MSTR’s stock price rises. After the stock price rises, more financing can be obtained to purchase Bitcoin.
The premise of this investment method is that Bitcoin will not collapse. If the price of Bitcoin drops significantly, it will cause difficulties for micro-strategies. For example, it cannot obtain more funds to purchase Bitcoin through financing instruments, and existing short-term or long-term borrowings cannot be repaid when they expire. Therefore, micro-strategies sometimes sell Bitcoin to raise funds. For example, recently, micro-strategies sold a small amount of Bitcoin to raise funds to pay preferred stock dividends (not to repay loans).
The current floating loss of positions is as high as 10.8 billion U.S. dollars:
According to the position data officially disclosed by MicroStrategy, the company currently holds a total of 843,706 Bitcoins, with an average purchase cost of US$75,700 per Bitcoin, and the current total cost of positions is US$63.8 billion. The recent plunge of Bitcoin to $60,000 means that every Bitcoin held by MicroStrategy has incurred a floating loss of up to $15,000, which brings the company’s current total floating losses to $10.8 billion.
However, floating losses are only unrealized losses. As long as MicroStrategy does not continue to sell Bitcoin on a large scale and wait patiently for Bitcoin to rise back, then these floating losses are not a problem. After all, there have been many periods of floating losses in the history of MicroStrategy’s Bitcoin investment. These floating losses did not cause substantial loss of profits to MicroStrategy. However, during the period of floating losses, MicroStrategy’s stocks will fall very sharply, and the situation will be worse for investors who buy MicroStrategy’s stocks.
What are the risks of liquidation in micro strategies:
Although the floating loss is very large, there is actually no risk of liquidation in the micro-strategy Bitcoin position itself. The reason is that in the early days, micro-strategy relied on pledging Bitcoin to obtain loans and then purchase Bitcoin. However, the current micro-strategy financing structure mainly consists of convertible bonds, preferred stocks and common stock ATM issuance. This method does not have an obvious liquidation price like futures contracts, so micro-strategy basically does not have direct risk of liquidation.
Of course, MicroStrategy also has a real liquidation line. Public information shows that MicroStrategy management and multiple analysis institutions believe that even if Bitcoin plummets to $8,000, MicroStrategy can theoretically cover all debts. If it continues to fall and MicroStrategy is unable to raise funds, it may trigger a chain reaction. In extreme cases, it may even lead to direct bankruptcy and liquidation of MicroStrategy.
But $8,000 is not a risk zone. The market believes that when Bitcoin falls to $30,000, MicroStrategy’s positions will begin to come under pressure. When Bitcoin enters 20,000~23,000 USD, MicroStrategy enters the real danger zone. From this time on, MicroStrategy’s stock price will most likely plummet, ATM’s ability to raise additional financing will decline, convertible refinancing will become more difficult, and preferred stock financing costs will rise. Therefore, even if MicroStrategy’s overall assets are still greater than liabilities, liquidity problems will occur.