MicroStrategy’s aggressive Bitcoin (BTC) acquisition strategy has captivated investors, but is it sustainable? With plans to raise $42 billion within three years, the company is taking bold steps to fund its Bitcoin purchases.
For retail investors, the question is not only whether MicroStrategy’s move is pushing Bitcoin above $100,000, but also whether this approach is stable or sets the stage for a bubble.
How MicroStrategy is financing its Bitcoin acquisition
MicroStrategy’s “21/21 Plan” describes a large capital raise split evenly between stock sales and bonds. Recently, the company raised $4.6 billion by selling 13.6 million shares along with issuing convertible bonds worth $2.6 billion. This raised enough funds to purchase 78,890 Bitcoin ($6.62 billion), underscoring the company’s commitment to its strategy.
Basics of convertible bonds. Source: Corporate Finance Research Institute
The key innovation of the approach lies in the 0% convertible bond. Investors who purchase these bonds do not receive regular interest payments. Instead, you profit when MicroStrategy’s stock price rises and convert the bonds into stocks at a premium price. This allows MicroStrategy to acquire Bitcoin at minimal ongoing cost, relying on the stock price to provide returns to bondholders.
MicroStrategy’s debt is often viewed as a vehicle for investing in Bitcoin rather than traditional corporate financing. Zero or low yields reflect a diverse investor base seeking Bitcoin exposure with convertible equity rather than traditional bond yields.
For bondholders, the lack of interest payments is offset by the potential for significant profits from rising stock prices. However, this strategy ties both bondholder returns and MicroStrategy’s financial stability to the volatile Bitcoin market.
Could MicroStrategy be doomed if the price of Bitcoin plummets?
MicroStrategy’s play may seem bold, but it is not without risk. The company’s weighted average debt service period is over five years. This means the obligation will not be fully realized until after 2028. This long runway provides flexibility to respond to market downturns.
If the price of Bitcoin remains stable or rises, MicroStrategy can continue operations without emergency refinancing. However, a sudden Bitcoin crash could expose serious vulnerabilities. Because a significant portion of its balance sheet is tied to Bitcoin, MicroStrategy could face liquidity issues, including having to sell Bitcoin at unfavorable prices to meet its debt obligations.
Additionally, bondholders who rely on stock conversions for profits may see no benefit if MicroStrategy’s stock price plummets. MicroStrategy trades at nearly 3.3 times the value of Bitcoin on paper due to speculative investor confidence in Bitcoin’s future appreciation and the company’s leveraged exposure.
MicroStrategy Net Asset Value (NAV) Premium. Source: MSTR-Tracker
If the premium falls below 1.5x, shareholders could receive less profit than expected and convertible bond holders could avoid converting to equity if the stock price underperforms compared to the rise in Bitcoin price. This could strain MicroStrategy’s finances as it would have to repay bondholders in cash instead of equity.
relevant: A perfect storm is coming for Bitcoin
Implementing a strategy like MicroStrategy requires a company to have significant financial resources, including strong cash flow and liquidity. A company must be large enough to raise significant capital through debt or equity offerings without jeopardizing its financial health. They also need the ability to absorb Bitcoin’s volatility without jeopardizing their core operations.
MicroStrategy offers leveraged exposure to Bitcoin, but amplifies the cryptocurrency’s inherent volatility. Investing directly in Bitcoin provides easier exposure with a smaller layer of risk.
Alternatively, if the price of Bitcoin rises, MicroStrategy could repurchase the bonds to avoid diluting shareholders. This is a move that can support the stock price and potentially deliver greater returns.
This article is written for general information purposes and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.