Strategy's Value Drops 50% from Peak. Implications for Its $43B Bitcoin Assets?

Note: The author of this article is a shareholder of Strategy (MSTR).

This week, the significant drop in Bitcoin's price has been the main focus of news outlets. However, major corporate BTC holder Strategy (MSTR) has experienced a downward trend for over three months.

Trading at around $250 on Wednesday, Strategy's shares have dropped by about 55% since reaching their peak of $543 on Nov. 21. Those who have invested in leveraged MSTR products have faced even more substantial losses. The Defiance Daily Target 2x Long MSTR ETF (MSTX) has plummeted 90%, while the T-REX ETF (MSTU) has decreased by 85%.

Despite Bitcoin's decline, Strategy's BTC acquisition is still profitable. Since starting purchases in August 2020, the company has seen a 32% increase on its holdings, with an average cost basis of $66,300 per BTC and an unrealized profit of $10.65 billion at Bitcoin's current price of approximately $87,000.

The issue of forced sales

A more in-depth examination of Strategy's convertible debt reveals potential "liquidation prices" or forced Bitcoin sales. Notably, all the company's 499,096 BTC remain unencumbered, meaning Strategy has not used any Bitcoin as collateral. An earlier convertible note using Bitcoin as collateral with Silvergate Bank was fully repaid.

According to Bitcoin Overflow on X, Strategy currently has $8.2 billion in total outstanding debt, backed by 499,096 BTC, which are currently valued at $43.4 billion.

In short: As long as the value of Strategy's Bitcoin holdings exceeds its debt levels, the company would not need to sell any of its BTC assets. This means Bitcoin's price would have to fall to approximately $16,500, or roughly another 80% from current levels.

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Upon closer inspection, two of the six outstanding convertible bonds—the 2029 and 2030 issues—are trading below their offering price. These are large bonds, amounting to $5 billion out of the $8.2 billion total. However, they do not mature until 2029, allowing time for recovery. And in theory, Strategy could issue more debt, if necessary. If the value of the company's Bitcoin fell below debt levels when the convertible bonds matured, and the MSTR stock price was below the conversion price (which would be very likely in that scenario), Strategy would likely decide to sell Bitcoin to repay the bonds in cash rather than converting them into equity to prevent massive dilution in its stock.

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