Microstrategy has made headlines for its significant Bitcoin holdings, which currently stand at around $4 billion. While this has boosted the company’s balance sheet and stock prices during Bitcoin’s bullish market, it also poses a potential risk to BTC prices during down cycles.
The analysts believe that MSTR’s ability to repay its $2.2 billion debt is closely tied to Bitcoin prices. While its debt repayments are only due in or after 2025 and 15,000 BTC pledged out of 140,000 held, high BTC prices mean a stronger balance sheet, higher stock prices, and easier debt repayment through conversion of 2025/27 notes or new debt/equity issuance without selling its BTC holdings.
However, in a bear market, the company’s potential BTC sale is an overhang. MSTR’s large Bitcoin position could be an overhang during bear markets (H2CY22). In a potential bear market, MSTR’s balance sheet could appear weak, and it may not be able to raise capital to repay debt, forcing it to sell its BTC tokens. The potential liquidation of MSTR’s BTC during bear markets creates an overhang for BTC in a down cycle.
Sentiment Risk to BTC Prices
While the analysts do not believe that MSTR’s position is large enough to distort prices in itself, they do think it presents a sentiment risk to BTC prices during down cycles. Like all leveraged longs, MSTR adds some reflexivity to BTC markets. However, it holds only around 0.7% of total BTC in circulation, and its holdings form around 20% of daily average traded volume in BTC spot markets. The small proportion of total market cap/daily volumes means MSTR does not necessarily pose a concentration risk, even if we consider that trading volumes drop during crypto bear markets.
Conclusion
In conclusion, MSTR’s BTC tokens needing to be sold for the repayment of debt is closely tied to how BTC prices perform. While its large Bitcoin position does not pose a concentration risk, it could create an overhang during bear markets. As MSTR’s ability to repay debt is simply tied to BTC prices, the potential liquidation of its BTC during bear markets creates a sentiment risk to BTC prices in a down cycle. Investors need to keep a close eye on the company’s BTC holdings and the impact they could have on BTC prices.
