MicroStrategy's Bitcoin Arsenal

The bitcoin price could retreat further without the hoped-for rocket fuel of government purchases

President Trump's order to create a Strategic Bitcoin Reserve and explore budget-neutral methods for acquiring additional bitcoin provides insight into his administration's economic and financial priorities.

The executive order, which directs relevant officials to coordinate on a Strategic Bitcoin Reserve comprising current cryptocurrency holdings due to law enforcement activity, is a significant step towards integrating bitcoin into the U.S. financial system.

Moreover, Trump tasked the secretaries of treasury and commerce with developing "budget-neutral strategies" to acquire additional bitcoin, as long as they impose no costs on taxpayers. There's speculation that Trump could exchange some of the nation's gold reserves for bitcoin.

However, any government buying of bitcoin, even if it's just a shift from one financial asset to another, might be politically problematic at a time that Trump and the Republicans are trying to slash federal spending and Medicaid cuts are on the table.

At the same time, Democrats in Congress are planning their own measures to raise taxes on corporations and the wealthy.

Trump's order also mentions stablecoins, which are cryptocurrencies designed to maintain a stable value, typically pegged to the U.S. dollar.

The administration is considering using stablecoins to process some federal payments, aiming to reduce costs and improve efficiency.

Trump's move comes as the price of bitcoin hovers around $78,000, a far cry from its all-time high of over $81,000 reached earlier this year.

The cryptocurrency has been highly volatile in recent months, with factors such as macroeconomic uncertainty, interest rate hikes, and Bitcoin's halving impacting its price.

In March, MicroStrategy (NASDAQ:MSTR) disclosed a $2 billion borrowing at 0% interest for one year and a $1 billion note at a 0% coupon for six months.

Both notes are convertible into stock at a 15% premium to the share price at the time of issuance.

The creditors, who include hedge funds and private equity firms, will continue to offer the company the same exceedingly generous terms if market conditions change, the 10-K warns.

"If market conditions change, we may not be able to obtain equity or debt financing in a timely manner, on favorable terms, or at all," the 10-K cautions.

Strategy is planning to offer $21 billion worth of preferred stock with an 8% interest rate, the company announced Monday.

This follows a similar $584 million offering in February that established the preferred stock which trades under the ticker STRK. Monday's announcement suggests this will be the main financing mechanism going forward, assuming there is demand for it.

Shares of MicroStrategy fell 2.8% early Monday.

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Saylor Strategy Questionable

Both MicroStrategy and its creditors had acted as though Bitcoin was virtually guaranteed a one-way ticket to much higher highs under President Trump.

MicroStrategy spent $21.2 billion buying Bitcoin at an average price of $96,458 per Bitcoin from Oct. 30 to Feb. 23.

At the moment, Strategy Chairman Michael Saylor's investment approach looks questionable.

Before the recent spending binge, MicroStrategy held 279,420 Bitcoin purchased at an average price of $42,692. The recent purchases of 219,676 Bitcoin raised the average price to $66,357.

The current price of Bitcoin is around $79,810, extending a recent downtrend but off Sunday night lows.

MSTR Stock

Strategy stock faces two big risks: that the price of Bitcoin will continue to decline and that the premium investors have given Strategy over the value of its Bitcoin holdings will contract.

Strategy stock tumbled 10.3% to 257.63 in early Monday stock market action. At that price, Strategy has a market value of $75.8 billion, based on 294 million shares, which includes shares after conversion of all its convertible notes.

That valuation approach makes sense, given that Strategy intends to hold all its Bitcoin, rather than pay cash when the notes mature.

That means investors are giving Strategy an 86% premium to the $41.30.7 billion value of its Bitcoin holdings. The premium has already shrunk from 164% on Nov. 10 before the latest buying binge.

Still, that premium allows Strategy to buy $1.86 worth of Bitcoin for each $1 of stock it issues.

But if investors decided that Strategy doesn't merit the premium, cheap financing would go away, and so would the rationale for investing in MSTR as opposed to Bitcoin or a Bitcoin-related ETF.