Bitcoin’s decline to around $75,500 briefly pushed the price just below Strategy’s (MSTR) average purchase cost of around $76,037 per coin.
This may seem alarming at first glance, and it technically puts Michael Saylor’s company underwater on its bitcoin holdings, but it doesn’t fundamentally change the company’s financial situation.
There is no stress on the balance sheet or risk of forced sales. What he does is slow down his future bitcoin purchases.
Strategy currently holds 712,647 bitcoins – all without any encumbrance, meaning none of the holdings are pledged as collateral. There is therefore no risk of forced selling simply because the price falls below its purchase cost.
Some might wonder what happens to the $8.2 billion in convertible debt on its books when the price of bitcoin falls below the threshold.
The debt burden may seem enormous, but it also offers great flexibility.
The strategy can extend maturities (roll over debt), convert debt into shares when they mature. Note that the first sale date for the convertible notes is not until the third quarter of 2027.
There are also other ways to manage bonds. For example, other Bitcoin treasury companies, like Strive (ASST), have recently used tools like perpetual preferred stock to pay down their convertible debt. The strategy provides similar options if necessary.
Where the pressure appears is in fundraising.
Historically, Strategy has primarily funded its bitcoin purchases by selling new shares via on-the-market (ATM) offerings. This means that a company that wants to raise capital by issuing shares asks brokers to sell them at the current market price rather than selling a large portion of new shares at a discount. This has the effect of selling the shares on the open market, thereby minimizing the impact on the market price.
But this strategy only works well when the stock is trading at a premium to its net asset value (mNAV), a metric that compares a company’s market capitalization to the real-time market value of its bitcoin holdings. Last Friday, when bitcoin was between $90,000 and $89,000, the multiple was around 1.15x for the strategy, indicating it was outperforming its bitcoin holdings. But with bitcoin falling from around $85,000 to around $70,000 over the weekend, that premium has now fallen to a discount or below 1, making new equity raises less attractive.
Trading at a loss is therefore not a crisis.
This simply slows down Strategy’s ability to grow its Bitcoin stack without diluting shareholders. As a reminder, in 2022, when MSTR shares were trading below bitcoin’s holding value for most of the year, the company only added about 10,000 bitcoins.
The company likely won’t go bankrupt, but stocks will potentially react negatively if the price of Bitcoin holds at these levels or falls further when markets open on Monday.
Read more: Strategy’s increased dollar cushion covers 2+ years of dividend obligations
Disclaimer: The analyst who wrote this article owns shares in Strategy (MSTR).
