Summary On 10th March 2025, Strategy (formerly known as MicroStrategy) unveiled a $21B at-the-market offering of its 8% yielding perpetual preferred stock $STRK. While Saylor & Co. have pitched their leveraged Bitcoin bet as "intelligent leverage", a prolonged extension of the ongoing bear market in the digital commodity can create a death spiral. Investors should avoid MicroStrategy and instead directly buy Bitcoin if they believe in its value, as MicroStrategy's leveraged position adds unnecessary risk. Read on to learn more. Introduction As the largest institutional holder of Bitcoin (BTC), Strategy’s ( formerly known as MicroStrategy ) ( MSTR ) CEO, Michael Saylor, shared the center table with President Trump at the White House Digital Assets Summit last week, where he urged the US Government to acquire 5-25% of the Bitcoin Network by 2035 to solve its $36T+ national debt problem: saylor.org saylor.org saylor.org With MicroStrategy “holding” 499,096 BTC (at an average cost of $66,357 per bitcoin) as of 2nd March 2025, I am not at all surprised about Saylor talking about his own book at the summit! After all, both MSTR and BTC are experiencing painful drawdowns in early 2025: YCharts And, with MicroStrategy stock [ $240 per share, market capitalization: $60B ] trading at a significant premium [1.5x] to its Bitcoin holdings [ ~$40B (~$80K per Bitcoin) ], the sell-off in MicroStrategy may have legs - with a non-zero probability of a death spiral! Why? MicroStrategy’s Dangerous Bitcoin Playbook Based on Wikipedia, MicroStrategy Incorporated [Strategy] is an American development company that provides business intelligence (BI), mobile software, and cloud-based services. While MicroStrategy’s SaaS business is still a thing, it’s revenues and gross profit have declined since the mid-2010s, and operational cash flows are currently in negative territory: YCharts Now, with its core business in decline, Michael Saylor [CEO and Chairman] pivoted MicroStrategy to a “Bitcoin Treasury” company in late 2020. Since then, MicroStrategy has accumulated ~499K bitcoins for ~$33B: strategy.com bitbo.io To do so, MicroStrategy has relied on a mix of stock issuance and convertible bonds: YCharts With Mr. Market assigning a heavy premium to MSTR stock (as a leveraged bet on Bitcoin), Saylor & Co. have rightly tilted their capital-raising efforts towards equity - exhausting all $21B of its $42B capital raising plan → $21B equity, $21B fixed income instruments. Additionally, MicroStrategy has also raised over $9B through convertible bond debt, with most of it yielding “little to no” coupon, i.e., ultra-cheap debt. strategy.com Now, if you are wondering why market participants would lend money to MicroStrategy at 0% interest to bet on Bitcoin with no recourse [call feature or collateral], here’s a simple explanation - directly from Michael Saylor - YouTube Video MicroStrategy’s convertible bonds effectively provide an indirect way for institutional investors to participate in the Bitcoin trade, with limited reward and limited risk. How? If Bitcoin goes up, MicroStrategy’s intrinsic value (derived from its Bitcoin holdings) goes up along with MSTR stock. Now, as long as MSTR stock exceeds the conversion price of the respective bond tranche at maturity, the bond investors receive MSTR equity at a discount to the market (conversion price) - thereby resulting in a profit. On the flip side, if Bitcoin declines or fails to appreciate enough, MicroStrategy is required to repay the convertible bondholders in cash or MSTR equity (based on current market pricing at maturity). Hence, while Saylor can highlight the non-recourse nature of their convertible debt agreements, at maturity of these bonds, MicroStrategy will either need to liquidate bitcoin or dilute shareholders to raise capital. There are no free lunches, and as you now understand, MicroStrategy’s leveraged Bitcoin bet exposes the self-proclaimed “Bitcoin Development” company to the whims and fancies of a highly volatile digital commodity. Leverage Cuts Both Ways, A Death Spiral Is Possible As long as Bitcoin is an appreciating commodity, MicroStrategy - a leveraged bitcoin holder - will appreciate in value, at a faster pace than bitcoin. In this scenario, Mr. Market would pay a premium on MSTR stock relative to its Bitcoin holdings. However, leverage cuts both ways, and if Bitcoin experiences a vicious decline and prolonged bear market, MicroStrategy stock could suffer a death spiral due to significant potential stock dilution. YCharts Think of this cycle, and then imagine it working in reverse: Jacob King (X) Over the years, Saylor & Co. have described their debt-fueled Bitcoin accumulation as “Intelligent Leverage”; however, with Bitcoin entering a technical bear market, MicroStrategy is now looking to issue preferred stock yielding 8% to continue its accumulation of Bitcoin. With MicroStrategy’s core business and its Bitcoin holdings cumulatively yielding negative cash flows, Saylor & Co. are relying on continued appreciation in Bitcoin and/or Mr. Market’s kindness [continued access to cheap liquidity] to avoid a death spiral. Troubling as it is, MicroStrategy will require new buyers of its equity and/or debt to pay the 8% yield on its preferred stock. Final Thoughts Bitcoin is a digital commodity - its value is what the market is willing to bear, driven purely by demand-supply. For Bitcoin maximalists like Michael Saylor, Bitcoin’s scarcity [21M coins] and decentralized network make it an invaluable hedge against incessant money printing from global central banks. Many refer to it as “Digital Gold”. Like any risk asset, I have no idea where Bitcoin will trade today, tomorrow, or in the next five years. However, nobody else has a clue, either. Michael Saylor thinks or believes Bitcoin will be worth $13M per coin by 2045 [range: $3M to $49M per Bitcoin], and to be fair, he is putting his money where his mouth is by risking MicroStrategy’s future on it. Given his ~10% ownership stake in MSTR, Saylor could lose a multi-billion dollar fortune in the event of a dilution death spiral. Yes, the new administration is clearly taking a friendlier stance towards the crypto/digital asset industry - evidenced by the establishment of a “Strategic Bitcoin Reserve” and “US Digital Asset Stockpile” , but deploying US Taxpayer dollars into speculative cryptos will likely require a lot more convincing - even for President Trump - based on his remarks on the “Never Sell Your Bitcoin” strategy ( YouTube Video - wait for the end). In my view, MicroStrategy stock is a leveraged bet on Bitcoin. With the market souring on both of them in recent weeks, Saylor & Co. have pivoted to issuing 8% yielding preferred stock to continue with its accumulation of Bitcoin. As of now, MicroStrategy owns ~2.4% of the Bitcoin Network [21M supply], and doesn’t necessarily represent a single point of failure for Bitcoin. However, in the event of a prolonged bear market for Bitcoin, MicroStrategy could experience a dilution death spiral due to its debt obligations. As an investor, I like to buy cash-generative assets. This means I do not buy commodities - be it Bitcoin or Gold. However, if one likes Bitcoin, he/she should just buy Bitcoin without leverage, i.e., avoid MicroStrategy. Thanks for reading. If you liked this note, please share it far and wide, as that will help me provide more free material in the future.
