Bitcoin Treasury firm Strategy (MSTR) said it can weather a potential drop in the price of the largest cryptocurrency to $8,000 while still honoring its debt.
“The strategy can withstand a drop in the BTC price to $8,000 while still having enough assets to fully cover our debt,” the Michael Saylor-led company said on X.
The company, which holds more bitcoin than any other publicly traded company, has accumulated 714,644 BTC, worth approximately $49.3 billion at current prices, since its adoption as a treasury asset in 2020.
Over the years, it has accumulated bitcoins via debt, a tactic echoed by peers such as Tokyo-listed Metaplanet (3350). He owes around $6 billion – the equivalent of 86,956 BTC – against bitcoin holdings more than eight times larger.
While these debt-funded bitcoin purchases were widely applauded during the cryptocurrency bull run, they became a liability following the token’s crash, down nearly $60,000 from its October high of more than $126,000.
If Strategy is forced to liquidate its Bitcoin holdings to repay debt, it could flood the market and drive prices down further.
In Sunday’s post, Strategy assured investors that its bitcoin holdings would still be worth $6 billion even at the price of $8,000 BTC, enough to cover its debt.
The company stressed that it was not obliged to pay all of its debt at once, since the maturities span 2027 and 2032.
To further ease concerns, Strategy announced plans to roll existing convertible debt into equity to avoid issuing additional senior debt. Convertible debt is a loan that lenders can exchange for MSTR stock if the stock price increases enough.
Not everyone is impressed
Skeptics remain.
Critics like pseudonymous macro asset manager Capitalists Exploits point out that while $8,000 worth of bitcoin could technically cover the $6 billion net debt, Strategy would have paid around $54 billion for its reserve, or an average of $76,000 per BTC. A fall to $8,000 would equate to a huge paper loss of $48 billion, making the balance sheet look ugly in the eyes of lenders and investors.
Available cash would cover only about two and a half years of debt and dividend payments at current rates, the observer argued, and the software industry only brings in $500 million a year. That’s far too little to manage the $8.2 billion in convertible bonds and $8 billion in preferred stock, which demand large, ongoing dividends like endless interest bills.
All of this means that refinancing might not be readily available if bitcoin falls to $8,000.
“Traditional lenders are unlikely to refinance a company whose core asset has depreciated significantly, with conversion options rendered economically worthless, deteriorating credit metrics, and a stated policy of holding BTC long-term (limiting collateral liquidity),” the observer said in an article on tight market conditions.
Dump on retail investors
Anton Golub, chief commercial officer of cryptocurrency exchange Freedx, called the move “privatization” a “planned spill for retail investors.”
He explained that Strategy’s convertible bond buyers were primarily Wall Street hedge funds, who are not Bitcoin fans but “volatility arbitrageurs.”
Arbitrage involves hedge funds profiting from differences between the expected or implied volatility of options embedded in a convertible bond and the actual volatility of the underlying stock.
Funds typically buy cheap convertible bonds and bet against the stock, or “sell short.” This setup helps them circumvent sharp price swings, while benefiting from bond interest, up-and-down volatility, and a “pull-to-par” that allows deeply discounted bonds to reach their full value at maturity.
According to Golub, Strategy’s convertible bonds were valued based on slight rises and falls. But the stock has fluctuated wildly, allowing hedge funds to make money through arbitrage: buying the bonds at low prices while betting against the stock.
This setup worked wonderfully when stocks were trading above $400, causing bondholders to convert their debt into stock. Hedge funds closed their short positions, bonds disappeared via conversion, and Strategy avoided cash payments.
At $130 per share, the conversion makes no sense. Hedge funds will therefore likely demand full cash repayment when the bonds mature, which could put Strategy’s finances under strain.
Golub expects the company to respond by diluting its shares.
“The strategy will be to dilute shareholders by issuing new shares, retail through ATM sales, raise cash to pay hedge funds,” he said in an explanatory article on LinkedIn.
“The strategy only looks great during Bitcoin bull markets. In bear markets, the dilution is real and destroys MSTR shareholders,” he added.
