Original Author: Ye Zhen
Original Source: Wall Street News
As Bitcoin prices fall below key support levels, turmoil in the digital asset market is intensifying, and Strategy (MSTR), at the center of this storm, is facing unprecedented pressure.
The company, founded by Michael Saylor, confirmed on Thursday that due to a significant write-down in the fair value of its Bitcoin holdings, it recorded a net loss of $12.4 billion in the fourth quarter. The loss was primarily driven by a $17.4 billion unrealized fair value loss resulting from mark-to-market accounting requirements.
As Bitcoin fell below $63,000, Strategy's stock price plummeted 17.1% on Thursday. This not only erased all gains since the U.S. election but also caused the stock to fall nearly 80% from its all-time high in November 2024.
The company's Bitcoin holdings are currently worth approximately $46 billion, with an average purchase cost of $76,052 per coin. This marks the first time since 2023 that the market value of the company's Bitcoin holdings has fallen below its cumulative cost basis.
Facing the market crash, Michael Saylor admitted on the earnings call that "selling Bitcoin is an option," despite his public cries of "HODL" (Hold On for Dear Life) on social media platform X.
What makes the market even more uneasy is that the cycle of using "equity premiums" to continuously raise funds for buying Bitcoin has stalled. For the first time, the company's holding cost is higher than the market price, putting its financial experiment to a severe test.
As MSTR's stock price plummets, convertible bond investors are likely to seek early cash redemption rather than conversion. The first $1 billion redemption could be due on September 15, 2027, with another $6.4 billion potentially due in 2028. A total of $8.2 billion in potential cash demands is approaching.
The Logic of Financing Bitcoin Purchases Faces a Test
Strategy once served as a high-beta proxy for Bitcoin, with its stock price surging over 3500% between 2020 and 2024. However, this engine was built on an unstable foundation. With the launch of spot Bitcoin ETFs, investors gained access to a cheaper, more direct risk exposure, weakening Strategy's uniqueness.
More critically, the valuation premium has collapsed. Strategy's enterprise value was once nearly double the value of its Bitcoin holdings, but this premium has now been almost entirely erased. If Bitcoin prices remain at current levels, Strategy's market capitalization would only need to fall by about 13% more to completely eliminate the premium. Once the mNAV (enterprise value to crypto asset value ratio) falls below 1, it means the company's market value is lower than the value of the coins it holds, and the logic of financing Bitcoin purchases will completely fail.
In the post-earnings call, CEO Phong Le tried to reassure investors, saying, "This is your first downturn, my advice is to hold on," but this comment sparked anger in the live chat. Benchmark Co. analyst Mark Palmer pointed out that in the current environment, the market's focus has shifted to how the company will raise funds under challenging conditions.
Book Value is Already in a State of Insolvency
The deterioration of financial data has intensified market concerns about Strategy's solvency. Data shows that as of February 1st, the company held over 713,000 Bitcoins, with an average cost basis of $76,052. With Bitcoin trading well below this cost line, Strategy's book value is already in a state of insolvency.
Strategy carries $8.2 billion in convertible debt. Although Saylor emphasized that the company has $2.25 billion in cash reserves, sufficient to cover interest and dividend payments for the next two years, and faces no margin call risk, market worries persist.
Currently, Strategy's convertible bond structure shows different maturity pressure points. The $1.01 billion convertible bond from September 2024 has a conversion price of $183.19, and holders can exercise a put option on September 15, 2027. The $3 billion zero-coupon convertible bond issued in November 2024 has a high conversion price of $672.4 and can be put back on June 1, 2028. Additionally, several other convertible bonds with conversion prices between $149.77 and $433.43 will face put pressure in 2028.
S&P Global had warned in a previous report that if Bitcoin prices face severe pressure at debt maturity dates, it could force the company to liquidate assets at low prices, which would be viewed as a debt restructuring "tantamount to default."
Phong Le admitted on the conference call that if Bitcoin fell by 90%, the company would not be able to repay its debts solely by selling Bitcoin and would have to seek debt restructuring.
Saylor Maintains Bullish Stance
Despite the pressure, Saylor remained optimistic on the earnings call. "We have a crypto president who is determined to make America the Bitcoin superpower, the world's crypto capital, and a leader in digital assets," Saylor said. "You can't underestimate the importance of having support for this industry and digital capital at the highest levels of the political structure."
Saylor also downplayed the threat of quantum computing to Bitcoin, calling it "at least 10 years away from being a threat," and reiterated that this is "FUD" (Fear, Uncertainty, and Doubt). He maintained his usual stance that selling Bitcoin remains one of the options to deal with market conditions.
Strategy reiterated on Thursday that it does not expect to generate profits or income in the current fiscal year or the foreseeable future. Based on these expectations, the company stated that current distributions to perpetual preferred shareholders are expected to be tax-free.
However, prominent short-sellers like Michael Burry have issued more severe warnings. According to Bloomberg, Burry reiterated his scrutiny of Strategy this week, warning that Bitcoin's decline could trigger a "death spiral" among corporate holders. This view aligns with long-time critics like Jim Chanos, who have long pointed out the risks of Strategy's reliance on non-yielding assets and speculative leverage.
Meanwhile, Saylor downplayed the threat of quantum computing to Bitcoin at the meeting, calling it "FUD" and stating that this threat is at least 10 years away.
Although management tried to maintain an optimistic tone and described profitability as a distant prospect, with Bitcoin falling below cost and financing channels narrowing, investors are facing a harsh reality check.
