Over the past couple of years, Michael Saylor has emerged to be one of bitcoin's biggest bulls. In essence, he has bet the future of his company - MicroStrategy (Nasdaq: MSTR) on bitcoin. At first, he used the company's cash to invest in bitcoin and has later tapped debt markets to raise money that was used to purchase bitcoin. He has also been pretty ubiquitous doing media and podcast appearances to expound on his thesis and generated his fair share of fans and haters.
Of course, the strategy worked great when bitcoin prices were rising as MicroStrategy essentially became a leveraged bet on bitcoin. In fact, the stock posted a 1,320% gain from its low in March 2020 to its peak in February 2021. However, the stock is down more than 71% from its peak as the growth-stock mania cooled and bitcoin prices have been dropping. Now, bitcoin is approaching the price that MicroStrategy started buying bitcoin.
In total, the company has issued about $2.2 billion in debt to fund bitcoin purchases. This is nearly half of its current market cap of $4.6 billion. On average, the bonds are trading at about 65 cents on the dollar, implying a 9% yield to maturity. In essence, the company has some bankruptcy risk if bitcoin prices keep falling especially as its core business is not profitable enough to make these payments.
For bitcoin bulls, the concern would be that MicroStrategy could be a forced seller of bitcoin in the event of a default. This would reveal a lot about how deep and liquid the market is especially in a liquidation-type event. Currently, the company owns about 124,000 bitcoins which is worth nearly $4 billion.
Bitcoin prices are off about 50% from their all-time highs as well. If nothing fundamental has changed about the bitcoin story then this is likely going to be a great buying opportunity. However, if a more hawkish Federal Reserve is truly a game-changer as some believe, then it's possible bitcoin could continue declining. And, if there are insolvency concerns and worries about Microstrategy being liquidated, then it could be easy to understand how a self-feeding doom cycle could lead to heavier losses for bitcoin.