Bitcoin’s recent dip to approximately $75,500 has momentarily pushed the price below the average purchase cost of around $76,037 per coin for MicroStrategy (MSTR), the company led by Michael Saylor. While this situation might raise alarms at first, it does not fundamentally alter the company’s financial standing. Despite the decline, there is no immediate stress on the balance sheet or risk of forced selling; rather, the firm will likely slow its future bitcoin acquisitions.
MicroStrategy presently holds 712,647 bitcoins, all of which are unencumbered. This means that none of these holdings have been pledged as collateral, eliminating the risk of forced sell-offs merely due to fluctuating prices. Concerns have been raised regarding the $8.2 billion in convertible debt reflected on the company’s books, particularly as the bitcoin price dips below the acquisition threshold. However, the sizable debt burden also provides considerable flexibility. The firm has the option to extend maturities or convert the debt to shares at the appropriate time, with the first convertible note put date not occurring until the third quarter of 2027.
Alternative strategies also exist for managing these liabilities. Other firms involved in bitcoin, such as Strive, have utilized methods like perpetual preferred shares to address similar debts. MicroStrategy has similar courses of action available should the need arise.
The more pressing issue lies in fundraising capabilities. Historically, MicroStrategy has funded its bitcoin purchases through at-the-market (ATM) offerings, allowing the company to raise capital by selling shares at current market prices. This approach minimizes market impact, but it is most effective when shares are trading at a premium to their net asset value (mNAV)—a measure that weighs the company’s market capitalization against the live value of its bitcoin holdings.
Recently, when bitcoin was valued between $90,000 and $89,000, MicroStrategy’s mNAV stood at a multiple of about 1.15, indicating a premium. However, following the fall in bitcoin’s value to the mid-$70,000 range, that multiple has dropped to below 1, suggesting a shift to a discount. This makes new equity raises less appealing.
While trading below its cost basis is not disastrous for MicroStrategy, it does restrict the company’s ability to expand its bitcoin accumulation without diluting shareholder equity. For perspective, in 2022, when MSTR shares consistently traded below the value of its bitcoin holdings, the firm managed to add only around 10,000 bitcoins.
The current state of affairs may not threaten the company’s survival, but should bitcoin prices remain at these lower levels or decrease further, there may be a negative reaction in the stock market as trading resumes.
