As MicroStrategy (MSTR) has experienced a significant drop of over 55%, speculation has increased regarding the possibility of a “forced liquidation.” With the company owning approximately 499,096 Bitcoins worth $43.7 billion, many are questioning whether further declines in the price of Bitcoin could force MicroStrategy to sell its holdings.
MicroStrategy has been accumulating Bitcoin for years, with an average purchase cost of around $66,350 per BTC. This isn’t the first time concerns about liquidation have surfaced; similar discussions arose during the 2022 bear market, when Bitcoin fell from around $70,000 to around $15,000. But the key question remains: Is it different this time?
The foundation of MicroStrategy’s Bitcoin strategy is its ability to raise capital. In a scenario where liabilities significantly exceed assets, this ability could be compromised. But that doesn’t necessarily mean “forced liquidation.”
MicroStrategy’s approach includes:
- Borrowing through 0% convertible notes.
- Using capital to buy Bitcoin and increase exposure.
- Selling shares at a premium to raise additional capital.
- Repeating the cycle to expand assets even further.
MicroStrategy currently has approximately $8.2 billion in total debt, backed by $43.4 billion worth of Bitcoin, reflecting a leverage ratio of approximately 19%. Importantly, most of this debt is in the form of convertible notes with conversion prices below the current share price and do not mature until 2028.
A forced liquidation would likely require a “fundamental change” within the company. Under existing credit agreements, early repayment of convertible notes can be triggered under certain conditions. However, for this to happen, typically one of the following conditions would need to be met:
- Shareholders vote to dissolve the company.
- Corporate bankruptcy.
MicroStrategy co-founder and Chairman Michael Saylor holds 46.8% of the voting power, making a shareholder-initiated liquidation unlikely.
For a serious liquidity problem to occur, Bitcoin would need to experience a sustained price decline of over 50% from current levels. Saylor has repeatedly dismissed the idea of forced liquidation, even claiming that the company would “buy all of Bitcoin” if Bitcoin fell to $1. However, the role of convertible stockholders in such a scenario cannot be ignored.
A sustained decline in both Bitcoin and MSTR stock prices could hinder MicroStrategy’s ability to raise capital, which is crucial to its long-term strategy. Investors are witnessing the first bearish market for MicroStrategy since its Bitcoin-focused strategy began gaining traction in 2024. The question is: will investors continue to “buy the dip”?
Michael Saylor’s stance is clear: “Bitcoin is on sale.” Time will tell whether the market agrees.
*This is not investment advice.
