With Bitcoin Falling, Is Strategy Stock in Trouble?

Strategy, (NASDAQ: MSTR) formerly known as MicroStrategy, has turned itself into a highly leveraged digital asset holder, with its fate tied almost entirely to the price of Bitcoin (CRYPTO: BTC).

But with Bitcoin down sharply from its early October highs, and Strategy's stock roughly cut in half from its peak in the same period, investors are asking whether the company could eventually be forced to dump its Bitcoin to repay debt, and whether that could crush the coin itself if it happens. Let's dig into the numbers and figure out the magnitude of the risks here.

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The risk is real, but it isn't about to happen

Before worrying about forced sales, let's first look at what Strategy actually owns and what it owes.

Today the company holds about 650,000 bitcoins, which is more than 3.1% of Bitcoin's total possible supply of 21 million, and by far the largest corporate stockpile in the world. It spent about $48.4 billion building that position, at an average cost of roughly $74,400 per coin -- the cost basis is important here, as it determines how deep its losses on its Bitcoin investment need to be before the company's equity cushion shrinks enough to put pressure on its ability to refinance or repay its existing debt obligations. As of early December, Bitcoin trades near $93,000, down from a peak of about $126,000 in early October, so the company's position still carries a sizable unrealized gain despite the recent slump.

In other words, Strategy is not underwater on its Bitcoin holdings, it just has less of a cushion than it did two months ago, which is not a five-alarm fire, as there have been some periods where it actually was underwater and the sky didn't fall.

On the liability side, management recently told investors it has about $8.2 billion of convertible debt and roughly $6.6 billion of preferred equity, which together represent a bit more than 20% of its Bitcoin net asset value. Strategy also paid off its older Bitcoin-backed loan from Silvergate Bank back in 2023, so today's Bitcoin stack is not pledged against any margin loans.

So yes, Strategy stock is under real pressure because of its high sensitivity to the price of Bitcoin; remember, the stock is basically a highly leveraged bet that Bitcoin will be worth more in the future than it is now. But the numbers also show that the company is nowhere near a textbook bankruptcy scenario as long as Bitcoin stays even remotely close to current levels.

What would a forced sale mean for holders?

If the largest corporate holder starts dumping, does that risk a cascade for Bitcoin?

Strategy's Chief Executive Officer Phong Le recently stated that the company would consider selling Bitcoin only if two conditions are met, with one being that the stock trades below its Bitcoin value per share, and the other being that the company loses access to both equity and debt markets as funding sources. Furthermore, at a Bitcoin price of about $25,000, Strategy would be close to being insolvent on paper relative to its debt, and that means there's still a very long way left to fall before it's time to start sweating.

Therefore, if Strategy ends up becoming a forced seller due to the price of Bitcoin falling alone -- not because it took out more debt than what's repayable or because it incorrectly implemented one of its signature financial engineering tactics -- things will have already been very grim for the coin's holders. And its sales will almost certainly make a bad situation much worse at that point. But there's reason to believe it won't happen.

Bitcoin's market is far deeper and more institutional than when Strategy started buying the crypto. Exchange-traded funds (ETFs) that hold Bitcoin directly now manage hundreds of thousands of coins on behalf of investors, and sovereign and corporate treasuries outside of Strategy are continuing to accumulate it. That means that even a large seller would be competing with a lot more potential buyers than a few years ago, which should help to limit the ferocity of even the sharpest downturns.

So Bitcoin holders, Strategy's current stress is very likely more of a background storyline than an actual existential threat. The company is important, but it is not the only large buyer in town anymore, and its balance sheet is still comfortably backed by its coins at current (or much lower) prices. Bitcoin's investment thesis still stands strongly on the basis of its fixed and ever-decreasing supply, and nothing Strategy does will change that.

Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.