Bitcoin’s Dip: Impact on Strategies

Bitcoin recently slid to about $75,500, dipping just below the average purchase price of Strategies (MSTR), which stands at around $76,037 per coin.

This might raise some eyebrows, as it signals that Michael Saylor’s company plans to keep its Bitcoin holdings more subdued. However, this shift isn’t likely to significantly change the firm’s financial standing.

There’s no immediate threat to the balance sheet or any necessity for forced sales; rather, it mainly indicates a postponement of future Bitcoin acquisitions.

Currently, Strategies holds 712,647 Bitcoins, all free of any encumbrances, meaning they aren’t compelled to sell just because prices dipped below their purchase price.

A question that crops up is about the $8.2 billion in convertible bonds on the books if Bitcoin’s price stays low. While that might sound daunting, there’s quite a bit of leeway.

Strategies can push out maturities (or roll over debt) and convert bonds into equity when they come due. It’s interesting to note that the first convertible note won’t even be issued until the third quarter of 2027.

There are also alternative strategies to manage obligations. For instance, other companies in the Bitcoin sector, like Strive (ASST), have utilized tools such as perpetual preferred stock to handle convertible debt. Strategies has similar options, depending on what they need.

The real pressure shows up in fundraising, though.

Up to now, Strategies has funded most of its Bitcoin buys by selling new shares at market prices. In simpler terms, when a company looks to raise capital by issuing shares, it instructs its broker to sell at the current market rate instead of offloading large amounts of stock at lower prices. This approach minimizes the impact on market prices.

However, this only works well if the stock sells at a premium compared to its net asset value (mNAV), a metric comparing a company’s market capitalization to the current market value of its Bitcoin. Last Friday, when Bitcoin was hovering around $90,000 to $89,000, the strategy’s multiple was about 1.15x, showing a premium. But with Bitcoin dropping this weekend from about $85,000 to the mid-$70,000 range, that premium has turned into a discount, making new equity fundraising less appealing.

So, trading below its purchase cost isn’t exactly a crisis.

This situation will likely slow down Strategies’ ability to grow its Bitcoin reserves without diluting shareholder value. Looking back to 2022, MSTR stock remained below the value of its Bitcoin holdings for most of the year, leading to only about 10,000 Bitcoin being added.

While the company doesn’t seem at risk of major financial issues, the stock could react unfavorably if Bitcoin prices don’t rise come Monday.