The stock of Strategy (MSTR) – formerly MicroStrategy – soared as long as bitcoin (BTC) soared. Now that Bitcoin is plunging, Strategy is left with few good options… and a cratering stock price.
As bad as it has been for Strategy, there may well be plenty worse on the way for shareholders.
That’s because the value of Strategy is highly levered to the price of the cryptocurrency Bitcoin, and Bitcoin has been plummeting, down around 40% since its all-time high in October. Strategy has plunged further and faster, declining nearly 60%, thanks to how it invests in the crypto coin.
The volatility in Bitcoin is already legendary. Monumental price swings are just a part of trading the original cryptocurrency. In fact, traders seek out this kind of volatility because it offers opportunities to profit. Of course, volatility cuts both ways, and traders can lose quickly, too.
But that’s only part of the story about why the Bitcoin plunge may continue…
First, it’s vital to remember that Bitcoin and most other cryptocurrencies have no fundamental value. They have no assets or cash flow that anchor their value — their prices depend purely on sentiment. So, they’re tremendously sensitive to changes in traders’ risk tolerance.
With many other highly leveraged players in the Bitcoin trade, the crypto could keep free-falling, forcing even more traders to liquidate and kick-starting another leg in a downward spiral.
It’s this kind of meltdown — everyone racing to exit through a single door — that has the potential to wipe out all but the most conservatively financed Bitcoin traders.
And volatility, if it’s severe enough in one market, can often spread to another market.
In fact, we may have already seen some feedback loops with the gold and silver markets. The price volatility of each asset may be affecting the others, worsening the volatility in each. That’s what Big Short investor Michael Burry thinks may be going on in those markets.
So, that’s why Strategy — the world’s largest corporate Bitcoin holder — may have a lot more downside, even after its meltdown from north of $400 per share in July.
Strategy Is a Digital Asset Treasury: Here’s How It Works
Strategy is what’s called a digital asset treasury. A digital asset treasury is a company that stockpiles cryptocurrency on its balance sheet in place of traditional currency such as the U.S. dollar. It’s not so much cash management as an investment or even a business strategy.
Many publicly traded companies — nearly 200, by Burry’s count — have digital asset treasuries. They’re amassing cryptocurrency in place of having strong operational businesses. So, they’re plays on rising cryptocurrency rather than fundamentally strong businesses.
And that’s the situation with Strategy. CEO Michael Saylor made a major shift in 2020 to become a digital asset treasury holding Bitcoin. In August 2020, Strategy bought $250 million of the coin.
Sure, Strategy has some operating divisions, but they can be safely disregarded when looking at the merits — or demerits — of investing in the stock. The play is the company’s stake in Bitcoin.
Since that first purchase, Strategy has bought tens of billions of dollars of Bitcoin. Then it issued common stock, debt, and preferred stock to buy more bitcoin, and then did it again and again.
Strategy holds 713,502 bitcoins as of February 1. The hoard is worth more than $52.2 billion at a price per bitcoin of $73,200. The company holds about 3.4% of Bitcoin’s maximum issuance of 21 million coins. But it may hold an even larger portion of available bitcoins.
That’s because a sizable amount of the cryptocurrency has been lost or is otherwise irretrievable. While estimates vary widely, some analysts put the amount of lost Bitcoin at nearly 20% of total maximum issuance. So, the real maximum amount of available bitcoins may be closer to 17 million.
So, Strategy’s holdings may be closer to 4.2% of the maximum total issuance. And since not all bitcoins have been mined yet, its percentage holding of existing bitcoins is higher still.
Strategy Is a Bitcoin Play Built on Debt Financing
Strategy’s strategy worked well as long as Bitcoin was rising. Its capital raises quickly became even more money as Bitcoin spiraled higher. Although Bitcoin experienced a “crypto winter” — a bear market for digital assets — in 2022, the cryptocurrency surged in 2023 and 2024 and Strategy piled in.
Bitcoin rocketed higher as the 2024 U.S. presidential election looked more and more favorable for the crypto industry’s champion, Donald Trump. This run even continued well into 2025, as crypto-friendly legislation such as the GENIUS Act stoked traders’ animal spirits.
But as Bitcoin’s fortunes peaked, so did Strategy’s… due to how the company financed its buys. At first, Strategy’s approach helped juice its stock price well beyond the value of its holdings.
Let’s look at the company’s situation at the end of 2024, when Bitcoin was still on the upswing.
As of year-end 2024, the net asset value of Strategy — its assets (primarily bitcoins) minus its debts — was $43.72 billion, if you figure the fair market value of the bitcoins. At the time, Strategy’s market capitalization — the total value of all its shares — was $71.2 billion.
So, investors were willing to pay a 63% premium to buy bitcoins through Strategy rather than directly or via Bitcoin exchange-traded funds, where they could be purchased for no premium.
It made financial sense for Strategy to exploit that difference by raising cash using its relatively high stock price to buy relatively low-priced bitcoins. The company rushed to take advantage.
For example, in the fourth quarter of 2024, it raised $15.1 billion by selling stock and purchased $20.5 billion worth of bitcoins, thanks to existing cash on hand. Plus, it kept open the ability to sell more common stock when prices looked favorable, letting it take advantage of a momentary spike in its share price.
Strategy also raised finances through more complex debt financing called convertible bonds. A convertible bond offers notable advantages to the company issuing it: Converts charge lower interest than a traditional bond and allow the company to pay off the bond with shares of stock.
Converts can be useful for companies without strong cash flow… in other words, companies like Strategy. Strategy was actually losing money on its operating businesses in 2024.
Now, Strategy has six series of convertible bonds outstanding, with interest rates ranging from 0% to 2.25%. The earliest maturity occurs in 2028, while the latest runs to 2032.
Those debt offerings allowed the company to buy more bitcoins while the crypto was rising, without having to pay interest at more typical rates.
Then Strategy issued four series of preferred stock, too. Preferred stock acts much like a bond, but typically pays a higher rate than a bond. The advantage for an issuer, however, is that it can suspend payment on a preferred stock without going into default. With a bond, if a company misses a payout, it’s in default and may need to eventually declare bankruptcy.
But preferreds can let a company squirrel out of paying the dividend… potentially indefinitely.
Again, Strategy plowed the proceeds into more bitcoins. All these capital raises to buy bitcoins acted much like an investor using a margin loan to buy stock. It turbocharged profits on the way up… and is accelerating losses on the way down.
That’s why Strategy stock moved up faster than Bitcoin and is now moving down much faster.
If Bitcoin continues to fall, Strategy will face some hard choices, and the downside could be significant for shareholders.
Strategy May Have to Make Some Tough Decisions
The silver lining for Strategy investors is that the company structured its financing to reduce the potential for it to default. But that may be cold comfort for shareholders.
Strategy needs a receptive market for it to be successful. Here’s why…
First, Strategy needs access to the capital markets to continue its Bitcoin buying binge. It doesn’t generate cash – rather, it runs an operating loss. The company has turned in operating losses in the past two years. So, the only way it can get money to invest is to issue new securities.
Moreover, the enterprise value of Strategy — its market cap plus its net debt — needs to be worth more than the net value of its bitcoins for it to make sense to issue securities and buy more. In fact, Strategy tracks this ratio on the landing page of the company’s website. It’s that important.
So, Strategy needs a willing market to buy any new securities, and the issuance needs to make financial sense.
The preferreds don’t pose significant risk for default, even though the various classes pay a costly rate between 8% and 10% per year. A preferred issuer can simply stop paying or defer the payout, potentially indefinitely. If an issuer does that, it may have a hard time selling more preferred stock. That would be a bad outcome, especially for investors in the preferreds.
Turning to the convertible debt…
The converts charge a low interest rate, making them low-cost. When they mature, Strategy could issue new debt to repay them, or the converts can be settled in the company’s stock.
However, if Strategy’s stock remains below the bonds’ conversion price — as it does now on every tranche of converts — then the bondholder will prefer to receive cash in lieu of stock.
So, Strategy may need to come up with cash to repay the bonds. And since it generates no operating profit, it would likely need to refinance. It might be able to issue more securities or convertible bonds at even lower conversion prices, but that would potentially dilute common investors.
However, the earliest convertible maturity is in 2028, giving Bitcoin and the stock a lot of time to recover… or fall even further. Strategy has a series of converts coming due in later years, too.
So, it’s vital that Strategy keeps the market’s confidence up. The last thing it wants to do is sell bitcoins to meet its obligations.
What Happens If Strategy Sells Bitcoin?
Selling bitcoins to meet any potential obligation is a last resort for Strategy. It really wants to go “diamond hands” — refusing to sell under any condition. Strategy has already lost money on some of its bitcoin purchases, but it continues to buy more, even in recent weeks.
If Strategy needs to sell while Bitcoin is at a relatively low price, it may depress the crypto’s price even further. Crypto markets are not highly liquid, and traders might even begin to front-run a known whale that’s looking to liquidate some of its position. Cue a downward spiral.
Of course, Saylor really wants to avoid this outcome. So, Strategy has set up the ability to issue preferred stock and common stock at any moment it likes (and the market is willing to buy). This maneuver allows Strategy to raise cash and keep buying bitcoins even as the price is falling.
And it has the potential to issue a ton more stock…
Strategy can issue more than $29 billion of its various series of preferred stock, as of February 1. It can also sell up to $8 billion of its common stock.
In fact, in late January, Strategy issued $106 million in common stock, then turned around and bought $75.3 million in bitcoins. The purchase translated into 855 bitcoins at an average price of $87,974. So, Strategy is already quickly underwater just days later.
However, Strategy has the potential to quickly get wrapped up in a vicious cycle of issuing stock in order to pay its preferred dividends and interest expenses. It could turn into a nasty scenario.
To that end, notice that Strategy held back some $31 million from that recent offering of common stock. It’s also sitting on a $2 billion war chest that gives it breathing room for now.
If Bitcoin keeps falling, we may see Strategy continue to issue stock and buy bitcoins all the way down… until one day it blows up.
One way or another, it’s going to be a fascinating ride.
Regards,
James Royal
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