Bitcoin’s drop to around $75,500 briefly pushed the price just below Strategy’s (MSTR) average purchase cost of about $76,037 per coin.
This may sound alarming at first glance, and technically puts Michael Saylor’s company underwater on its bitcoin holdings, but it does not fundamentally change the company’s financial position.
There is no stress on the balance sheet and no risk of forced selling. What it does is slow down your future bitcoin purchases.
Strategy currently holds 712,647 bitcoins, all unencumbered, meaning none of the holdings are pledged as collateral, so there is no risk of forced selling just because the price drops below your purchase cost.
Some might wonder what happens to the $8.2 billion in convertible debt on its books when the price of bitcoin falls below the threshold.
The debt load may seem enormous, but it also offers a lot of flexibility.
The strategy can extend maturities (roll over your debt), convert debt into equity when they mature. Note that the sale date of the first convertible note is not until the third quarter of 2027.
There are also other ways to manage obligations. For example, other bitcoin treasury companies, such as Strive (ASST), have recently used tools like perpetual preferred stock to retire their convertible debt. The strategy has similar options if necessary.
Where the pressure appears is in fundraising.
Historically, Strategy has primarily funded its bitcoin purchases by selling new shares through at-the-market (ATM) offerings. What that means is that a company that wants to raise capital by issuing shares instructs its brokers to sell them at the current market price rather than selling a large number of new shares at a discount. What this does is that the shares are sold on the open market, minimizing the impact on the market price.
But that strategy only works well when shares trade at a premium to their net asset value (mNAV), a metric that compares a company’s market capitalization to the real-time market value of its bitcoin holdings. Last Friday, when bitcoin was hovering between $90,000 and $89,000, the multiple was about 1.15x for the strategy, indicating it was at a premium to its bitcoin holdings. But with bitcoin falling from about $85,000 to about $70,000 this weekend, that premium has now become a discount or less than 1, making further capital raises less attractive.
Therefore, trading below costs is not a crisis.
It simply slows down Strategy’s ability to grow its bitcoin stack without diluting shareholders. For context, back in 2022, when MSTR stock was trading below bitcoin holding value for most of the year, the company added only about 10,000 bitcoins.
The company likely won’t go under from this, but the stock will potentially react negatively if the bitcoin price stays at these levels or falls further when markets open on Monday.
Read more: Strategy’s largest dollar cushion covers more than 2 years of dividend obligations
Disclaimer: The analyst who wrote this article owns shares in Strategy (MSTR).
