- MicroStrategy currently owns 386,700 bitcoins, worth $37.6 billion
- The company has raised over $2 billion through convertible notes and secured loans to fund Bitcoin purchases
- What are the risks of its approach to both Bitcoin and MicroStrategy’s stock value?
Ever since MicroStrategy first dipped its toe into the Bitcoin water with a $250 million purchase in August 2020, it has been hoovering up bitcoins like no one else. Yesterday’s announcement that it has acquired another 55,000 takes its total to 386,700 coins, with the company paying for them through various financial mechanisms, including using corporate cash reserves, issuing substantial debt, and conducting large-scale equity offerings. While this strategy has amplified the company’s Bitcoin holdings, it introduces significant risks to both the cryptocurrency’s price stability and MicroStrategy’s own stock valuation.
MicroStrategy’s Macro Strategies
Since its initial purchase in 2020, MicroStrategy has employed several financial strategies that have allowed it to turn its molehill into a mountain:
Convertible Senior Notes: In December 2020, the company raised $650 million by issuing convertible senior notes at a 0.75% interest rate due in 2025. In February 2021, it issued additional notes, raising $1.05 billion at a 0% interest rate due in 2027.
Senior Secured Notes: In June 2021, MicroStrategy issued $500 million in senior secured notes at a 6.125% interest rate due in 2028, using the proceeds to purchase more Bitcoin.
At-the-Market (ATM) Equity Offerings: The company announced an ATM offering in June 2021 to sell up to $1 billion of its Class A common stock. By September 2021, it had sold $399.5 million worth of shares to fund additional Bitcoin acquisitions.
Bitcoin-backed Loans: In March 2022, MicroStrategy secured a $205 million loan from Silvergate Bank, collateralized by its existing Bitcoin holdings.
The company’s heavy reliance on debt to finance Bitcoin purchases increases its financial risk; with over $2 billion raised through debt instruments, MicroStrategy faces significant interest obligations. A decline in Bitcoin’s price could impair the company’s ability to meet these obligations, especially considering the volatility of cryptocurrency markets.
Shareholder dilution is another concern due to the ATM equity offerings, which increase the number of outstanding shares and can depress the stock’s value.
Risks to Bitcoin and MicroStrategy
MicroStrategy’s substantial accumulation of Bitcoin means its actions can significantly influence the cryptocurrency’s market dynamics. If the company decides or is forced to liquidate a large portion of its holdings, it could flood the market and drive down Bitcoin’s price dramatically. Additionally, their aggressive buying may contribute to price inflation, potentially creating a bubble that could burst if market sentiment changes.
The concentration of such a large amount of Bitcoin in a single corporate entity also raises concerns about centralization in a market that is supposed to be decentralized, which could deter other investors and affect overall market confidence. In short, it could have the effect of a price action amplifier in both directions.
Conclusion
Some have likened the relationship between Bitcoin and MicroStrategy to a Ponzi scheme, with one relying on the other to keep going up in order for the machine to continue running. However, MicroStrategy’s accumulation of bitcoins employs a transparent, regulated, and sustainable approach to asset acquisition. By leveraging modern financial tools like ATM equity offerings and convertible notes, the company has built a model that avoids excessive financial risk while capitalizing on Bitcoin’s unique properties as a fixed-supply asset.
While MicroStrategy’s aggressive Bitcoin acquisition has positioned it as a leading corporate investor in cryptocurrency, the strategy carries significant risks. The potential impact on Bitcoin’s market stability and the company’s own financial standing cannot be overlooked; when things are going well, the garden looks rosy, but MicroStrategy’s mettle has yet to be tested when the tide inevitably turns.
