Is Strategy (MSTR) in trouble?

Led by Executive Chairman Michael Saylor, the firm formerly known as MicroStrategy has vacuumed up 506137 bitcoins (BTC)

MicroStrategy (NASDAQ:MSTR) has been a hot topic in the crypto sphere, largely due to its massive bitcoin (BTC) stash and the unique methods it has used to acquire it.

With five years of buying activity, Strategy has managed to collect 506,137 BTC, currently valued at approximately $44 billion at BTC’s price of around $87,000.

To the casual observer, it might appear that the company has a magic, unlimited pool of funds from which to draw on to buy more bitcoin.

However, Strategy acquired a sizable chunk of its bitcoin holdings by issuing billions of dollars in equity and convertible notes (debt securities which can be converted into equity under special conditions), and more recently via the issuance of preferred stock, a type of equity that provides dividends to investors.

The price of bitcoin has decreased by about 20% since reaching highs above $109,000 two months ago.

While such price swings are far from unusual, the particularly aggressive recent purchases by Michael Saylor and his team at Strategy mean that the company’s average bitcoin acquisition price has risen to $66,000.

This puts Strategy just one more moderate swing down in price away from being in the red on its bitcoin buys.

Could all of Strategy’s financial wizardry end up backfiring on the company should bitcoin keep heading lower?

“It’s highly unlikely that it results in a scenario where [Strategy] has to liquidate a bunch of bitcoin because it gets margin called. For the most part, the debt is very likely to be able to be refinanced for the convertible notes. And then [the firm] started issuing this perpetual preferred stock, which never has to be repaid,” Quinn Thompson, founder of crypto hedge fund Lekker Capital, told CoinDesk in an interview.

In other words, not only is there very little chance that Strategy could suffer the kind of blowup that shook over crypto firms and projects in 2022 (like Genesis or Three Arrows Capital), but the firm has even refrained from posting its bitcoin holdings as collateral for loans — with the exception of a loan taken from Silvergate, which was repaid in 2023.

Even so, that does not necessarily mean that it’s blue skies ahead for MSTR investors, because under various scenarios, Saylor could be forced to issue more equity than the market can handle in order to maintain course.

“If he’s not paying dividends with Strategy’s cash flow, he's going to issue more shares and wreck the stock price. But it's no different than what he's doing already. Every time the retail bids it up, he wrecks the stock price by issuing more shares. In the future, he will have to do that, and the flows might not go into bitcoin. They might go to repay these debtors, and it will hurt the share price.”

Three ways to invest in MicroStrategy

Strategy currently employs three different methods for raising capital: it can issue equity, convertible notes, or preferred stock.

Issuing equity means that Strategy creates new MSTR shares, sells them on the market, and uses the proceeds to buy bitcoin. Naturally, that creates selling pressure on MSTR and can potentially push the stock downward.

Convertible notes have allowed Strategy to raise funds quickly without diluting MSTR stock. Typically, investors like these notes because they offer a solid yield, they benefit if the stock surges, and they can usually be redeemed in cash for an amount equal to the original investment in addition to interest payments. The tremendous volatility of Strategy’s convertible notes, however, has allowed the company to mostly issue them at a zero percent interest rate and still meet high demand from sophisticated market participants, who have made bank trading that volatility.

Finally, Strategy has begun deploying preferred stocks. These are instruments that tend to appeal to investors seeking lower volatility and more predictable returns through dividends. There are currently two offerings: STRK, which gives an 8% annual return; and STRF, which pays 10% annualized.

But why is Strategy issuing all of these different types of investment vehicles? The idea is to create demand for Strategy for all kinds of investors that may have different tolerances to risk, Jeffrey Park, head of Alpha Strategies at crypto asset management Bitwise, told CoinDesk in an interview.

“The convertible bond investors and the common equity investors were generally aligned in that they were both volatility seeking structures,” Park said. “Preferred equities are different. They actually are favored by investors who want to minimize volatility at all costs for a steady, reliable and high coupon that they feel is worth the credit risk.”

“Strategy’s capital structure is almost like a seesaw in a playground. The common shareholders and converts are on one side, the preferred equity holders are on the other side. As sentiment shifts, the weights move around, and it tilts the value between these securities. But no matter