MicroStrategy’s Bitcoin Bet Grows — But Leverage Risks Loom Large

MicroStrategy has once again increased its investment in Bitcoin. Yet again, the company, led by very public Bitcoin proponent Michael Saylor, has bought more Bitcoin.

In total, 3,459 more. And while the total monetary value of this latest acquisition is $285.8 million, it nonetheless brings the total Bitcoin holdings of MicroStrategy to a really ridiculous-sounding number of 531,644 BTC. Yes, that’s right. Almost half a million Bitcoin.

Following Saylor’s strategy of acquiring Bitcoin, MicroStrategy has gained a cult-like following among those who believe in Bitcoin and among institutional crypto bulls. The company’s stock, $MSTR, not infrequently trades as a high-beta proxy for Bitcoin. But while it may appear on first glance that MicroStrategy has a simply unshakeable conviction in the future of the world’s largest cryptocurrency, a closer look reveals that the optics are better than the reality is. The case could be made that the company is soundly in the camp of calling for the future success of Bitcoin and, by extension, for BTC’s price to continue its upward trajectory. But MicroStrategy’s BTC acquisition pathway is fraught with leverage and risk.

The Hidden Cost of Conviction

At first glance, MicroStrategy’s aggressive BTC accumulation seems to be a strong indicator of long-term confidence. The firm has been acquiring Bitcoin consistently since 2020, and they haven’t let price declines stop them. But this accumulation has not been purely organic. Much of it has been financed through debt — including convertible notes, secured loans, and share offerings. This has allowed MicroStrategy to amass a vast Bitcoin reserve, but it also means that they’ve tied their financial health directly to the price of BTC.

This strategy works exceedingly well when Bitcoin’s price is trending upward. But it is much less stable and secure, when markets move sideways or turn bearish. How much pressure might MicroStrategy’s Bitcoin bet be putting on the company’s balance sheet? About 52 percent of the pressure on profits from potential margin calls and other effects of using Bitcoin as a prop collateral, according to lighthouse research. (Bullish price targets — from the 9,000 price forecast in the last section to the current $68,000 price target — reduce that pressure. This is not an indicator of what we think will happen next. Just to underline: Our lighthouse research is based on the very bullish premise that Bitcoin will eventually reach these targets.)

This fear is not only real but also quite potent. Should the price of Bitcoin continue to languish in the low $60,000s or below for an extended period, MicroStrategy may have to take some very drastic actions to stay above water. As we discussed yesterday, the company could at that point be forced to post a lot more in collateral, or in a worst-case scenario, start selling off part of its massive holding of 108,992 BTC to meet obligations and keep the company solvent.

$MSTR Under Pressure as Macro Risks Mount

Indicators of strain are already starting to appear. MicroStrategy’s stock ($MSTR), which rushed up alongside Bitcoin in the most recent bull run, is now down more than 20% from its latest highs. The stock’s recent drop has mirrored closely Bitcoin’s pullback from the $73,000 range, underscoring how closely the two assets are now linked in investor minds.

The mounting pressure stems from the overall macroeconomic environment. Increasing global geopolitical tensions, hazy interest rate policies from the Federal Reserve, and indications of slowing worldwide growth are now risk assets — including crypto — are facing headwinds. For MicroStrategy, these outside pressures risk compounding our internal risk, particularly by creating sustained downward pressure on Bitcoin price.

The firm is still very much on the long-term path they laid out. Michael Saylor still casts Bitcoin as a superior form of money and a hedge against fiat debasement. In an era where traditional assets seem ever more subject to political and monetary manipulation, Bitcoin—thanks to an absolute cap on its supply—seems to Saylor to be the best store of value.

Nevertheless, the most powerful conviction cannot stave off the immediate effects of market unpredictability. The present worry is that MicroStrategy’s once-visionary quest to become a Bitcoin powerhouse may have pushed the company too far out on the risk spectrum during the recent bull run. If Bitcoin does not manage to maintain anything close to where it is now, MicroStrategy could find itself not just on the wrong end of volatility but helping to drive it.

The Chain Reaction Scenario

Broader market analysts have started to bring up the potential of a much wider fallout across the financial markets if MicroStrategy finds itself in the position of having to sell.

Selling would represent a huge shift for a company that has done more than almost any other to push Bitcoin into traditional financial circles.

A potential chain reaction could go like this: if Bitcoin dips below $67,000, it will trigger some internal collateral pressure on MicroStrategy’s debt. If, then, Bitcoin were to fall further, the company might be forced (in the manner of a liquidation clause) to sell some of its BTC. If it does, the market will react and we will see lower BTC prices. The triggering of any additional margin calls across the ecosystem will then probably be seen as additional evidence of the weakness that everyone already knows is there. All of this is more likely to happen in an environment like today’s, which is particularly fragile.

At present, MicroStrategy is maintaining its position. However, with Bitcoin hovering around its average cost basis, and worldwide markets on the verge of a heightened period of uncertainty, there has never been a margin of error this small.

Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.

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