MicroStrategy's Bitcoin Investment Strategy and Its Financial Risks

Conclusion first: theoretically possible, but practically very low probability

Author: XinGPT

Conclusion first: theoretically possible, but practically very low probability

Leverage ratio is low, debt maturity is long, and there is no significant short-term repayment pressure

The premise is that the Bitcoin value remains at an extremely low level for a long time, which has a low probability

Founder Michael Saylor holds 46.8% voting rights, which can avoid early redemption clauses in preferred stock debt, firmly controlling the company's operational direction

1. MicroStrategy's Bitcoin Holdings and Strategy

MicroStrategy, Inc. (Nasdaq: MSTR) has transformed from a traditional software company into the largest Bitcoin-holding company in the world. As of the end of 2024, the company held approximately 471,107 Bitcoins. The total cost of these Bitcoins is about $27.97 billion, with an average purchase cost of about $62,500 per coin. In contrast, the market value of these Bitcoins is approximately $41.79 billion at the same time.

The company's strategy for financing its Bitcoin purchases involves issuing bonds and increasing stock issuance. Its management, represented by co-founder Michael Saylor, views Bitcoin as the company's primary reserve asset, continuously purchasing more Bitcoin through external financing rather than relying on cash flow from its own business.

Main methods of financing

The company primarily raises funds to purchase Bitcoin through four methods:

1) Using Own Funds for Purchase

Not the main source of funds, MicroStrategy has used no more than $500 million to purchase Bitcoin.

2) Issuing Convertible Senior Notes

To purchase more Bitcoin, MicroStrategy began financing through the issuance of convertible bonds.

Convertible senior notes are a financial instrument that allows investors to convert the bonds into company stock. These bonds typically have low or even zero interest rates, with a conversion price set above the current stock price. Investors are willing to buy such bonds mainly because they provide downside protection, i.e., the ability to recover principal and interest at maturity, and potential gains when the stock price rises. The interest rates on several issues of convertible bonds issued by MicroStrategy mostly range from 0% to 0.75%, indicating that investors are confident in the rise of MSTR's stock price, hoping to convert the bonds into stock for greater returns.

3) Issuing Senior Secured Notes

In addition to convertible senior notes, MicroStrategy also issued a $489 million senior secured note due in 2028 with a 6.125% interest rate.

Compared with convertible bonds, senior secured notes are a type of secured bond with lower risk, but these bonds only provide fixed interest income. The batch of senior secured notes issued by MicroStrategy has already chosen to repay early.

The following chart shows the current debt situation of MicroStrategy:

It can be seen that MicroStrategy's total liabilities are $8.213 billion, total assets (mainly in Bitcoin) are valued at $43 billion, and the leverage ratio is 19%. This means that Bitcoin would need to drop below $16,500 and maintain that price until 2028 or even longer for MicroStrategy to become insolvent.

4) At-the-Market Equity Offerings

This method of financing does not incur debt but dilutes existing shareholders' equity. Existing shareholders agree to this financing mode as MicroStrategy has proposed a new metric called BTC Yield, which is the ratio of Bitcoin holdings to diluted total equity. In other words, during a rising market phase, financing through stock issuance to purchase Bitcoin may reduce the ownership percentage of existing shareholders, but the Bitcoin content per share increases, and overall, the amount of Bitcoin held by shareholders may still increase.

For example, MicroStrategy's BTC Yield in 2024 is 74%, meaning the number of Bitcoins per share increased by 74%, while the current BTC Yield for 2025 is 6.9%, with a target of reaching 15% by the end of the year.

2. Short-term vs. Long-term Impact of Bitcoin Price Decline

Short-term impact: A decline in Bitcoin prices will directly affect MicroStrategy's financial performance. Accounting rules require companies to recognize impairment losses when Bitcoin prices fall, but gains cannot be directly reflected when prices rise.

For instance, during the Bitcoin crash in 2022, the company recognized $197 million in impairment losses in the fourth quarter, leading to a quarterly loss. However, when Bitcoin rebounded in 2023, MicroStrategy reduced impairment losses due to accounting treatment and even reported profits at one point.

Currently, the company does not have any Bitcoin collateralized loans, so short-term fluctuations in Bitcoin prices will not trigger margin call risks. Nevertheless, the stock price is highly correlated