MicroStrategy (MSTR) is currently experiencing a huge loss in bitcoin purchases. Based on a current bitcoin price of $20,300, the total assets of 129,699 bitcoins are valued at $2.6 billion, less than the total cost of acquisition of approximately $4 billion (average cost of $30,700). Therefore, they are sitting on ~$1.4 billion in unrealized losses on their purchase.
The last few years have been a crazy ride for MSTR shareholders, and ironically, the share price ($186) isn’t far above the share price when they announced their first bitcoin purchase (around $140) in summer 2020.
Michael Saylor seemed baffled by the constant online speculation at MSTR where Bitcoin assets were liquidated around $21,000 due to the recent $200 million loan with Silvergate. Even searching for Michael Saylor’s name on Twitter revealed the autocomplete phrase “Michael Saylor has been purged.”
This speculation is quite misleading, but still where does the recent market turmoil in Bitcoin leave them? To think about this, let’s simply summarize the terms of the various debts they’ve taken on over the past few years, including the Silvergate loan.
Initial Convertible Bond Offering — December 2020
MicroStrategy Completes $650M Offer of 0.750% Convertible Senior Bonds Due 2025
The initial convertible note offering was $650 million due in December 2025. The interest rate payable by MSTR for these was just 0.75%, which made paying off the debt considerably easier – with interest costs of just under $5 million per year.
Therefore, these convertible bond holders do not receive much interest, but have the option to convert their investments into MSTR shares at $398 per share. Thus, it represents a type of call option on the future price of MSTR shares, though less valuable at current market prices.
To illustrate the convertible portion, let’s say MSTR stock was priced at $500 per share on its December 2025 redemption date – if you had a $1 million convertible note then it would be worth $1.25 million because you can buy the shares for $398 and right away. sell them for $500. These and other upside scenarios explain the low interest rate payable.
Second Convertible Bill Offer — February 2021
MicroStrategy Completes $1.05B Convertible Senior Bond Offering 2027 Futures with 0% Coupon and 50% Conversion Bonus
This offer (raising $1.05 billion) is very similar in nature to the first, albeit on better terms for MSTR and worse for convertible bondholders. This time there is no interest cost as the interest rate is 0% and the payback date is February 2027.
Convertibility for these securities includes value only if the MSTR’s share price is above $1,432 per share – so they are much less likely to be converted than the previous offering. Considering that the share price closed at $955 on February 16, 2021, it seemed relatively more likely at the time.
Skeptics will question the virtue of raising that much debt to buy bitcoin, but in retrospect one element seems clear – MSTR and Michael Saylor were pretty good at borrowing on those terms at the time.
Senior Safe Notes — June 2021
MicroStrategy Completes $500M Offer of 6.15% Senior Collateralized Notes With 2028 Futures Using Bitcoin Proceeds
This represented a more traditional bond offering. MSTR borrowed $500 million at an annual interest rate of 6.15% until 2028. This makes the annual interest cost of these bonds approximately $30.6 million, which is significantly more than the sum of the interest cost of the previous convertible bonds.
This announcement also coincided with the establishment of “MacroStrategy”, a subsidiary that will hold the current 92,079 bitcoins they hold. While the new debt is highly collateralized securities – with high priority over other creditors in the event of future bankruptcy – they are not significantly secured against the 92,079 bitcoins. This becomes relevant when we consider the later Silvergate bitcoin-backed loan.
Silvergate Bank Loan — March 2022
This loan was a little different – borrowing $205 million over three years backed by bitcoin held by MacroStrategy. Linked to slides 11 and 12 in this presentation, this was initially backed by 19,466 bitcoins, but more could be specifically pledged if the bitcoin price drops.
2022 First Quarter Financial Results Presentation
The “additional” loan-collateral-value ratio is 50%. It is probably this fact that has caused many people’s MSTR liquidation price on the loan to drop below $21,000 – at which point 19,466 bitcoins will be worth $410 million (2 x 205) and they will need it. Pledge more collateral under loan terms. But as Michael Saylor points out and the slides above show, there are still 95,643 bitcoins that have yet to be committed and could be.
Linked MicroStrategy Investor Relations Tweet.
The math works as follows regarding the $3,562 referenced in the tweet. At this price point, the total of 115,109 bitcoins available to support the loan would be worth just $410 million, so MicroStrategy would have to provide another collateral to maintain the 50% loan-to-value ratio.
What will the interest cost of this loan be? Based on a 30-day average SOFR (Safe Overnight Funding Rate) plus 3.7%. At the time of writing (end of June 2022) the SOFR is about 1%, so this is 4.7% in total. Based on 4.7% interest, it will currently cost them about $9.6 million annually to serve interest. However, the 1% SOFR rate is expected to rise further. Other SOFR increases will not be so significant – for example, at 4% (and thus 7.7% overall) the interest cost would be $15.8 million.
Results
So what can we conclude from all this?
1. The total interest costs on all debt collected to buy bitcoin appear manageable and currently total $45 million per year ($5 million + $0 + $30.6 million + $9.6 million). This looks good for the service – last quarter results show a gross profit of $94 million for the last quarter.
MicroStrategy Announces First Quarter 2022 Financial Results
2. Even considering the recent large drops in Bitcoin price, MSTR’s holdings should not be affected by the price in the short term unless they drop drastically to $3,500k. This is because of the large amount of bitcoin they have to support the Silvergate loan to keep the support at a 50% loan-to-value ratio.
3. What is striking, of course, is the current massive paper loss on which MSTR sits in terms of bitcoin purchases, given that the average cost fundamentals are $30,700 per bitcoin. It will undoubtedly be a problem for them if the price of Bitcoin stays below this in the long run and some of the debt begins to approach repayment. The first loan maturity is Silvergate loan in March 2025. Given that this is backed by bitcoin as collateral, it may be possible to roll it over in a similar fashion.
The next maturity is the first convertible note offering in December 2025. If MSTR is still experiencing massive bitcoin losses at this point, they may find it difficult to roll over that $650 million in debt in the market. It will likely lead to a difficult decision as they will want to avoid selling any bitcoins at a loss to repay the debt.
One aspect is on their side, though: In the Bitcoin world, even in the broader macroeconomic environment, December 2025 seems like a very long time.
4. It seems unlikely (or indeed possible) for MSTR to try to collect much more debt under current market conditions – as Michael Saylor points out in the interview clip below, they have previously borrowed on very favorable terms. It also seems unlikely that they will sell additional capital to the market to buy more bitcoins, as they have done before, as the share price is so low right now.
5. They can continue to buy more bitcoins with profits, and indeed as of writing this, MSTR has announced another small purchase of $10 million in bitcoin.
6. What seems probable besides that, despite bitcoin’s lower price, is choosing to keep some future profits in dollars for the option instead of buying more bitcoins with it. The Q1 2022 results linked above (see item 1) show that they are currently building up some cash reserves and holding $93 million in cash compared to $63 million three months ago.
7. A final option would be to buy back some of their own shares with profits from the business, given that share prices have fallen at a higher rate than bitcoin price in the last 6-12 months. This will essentially send a signal that the market is underestimating the MSTR even relative to the bitcoin price, creating a show of faith that challenges their strategy, albeit risky.
Finally worth watching This video link from CNBC For some new thoughts from Michael Saylor including the following quotes:
Interviewer: “Would you consider buying more?”
Michael Saylor: “Yes. If your time horizon is one month, Bitcoin looks like a volatile risk asset. But if your time horizon is ten years, it looks like a risk from the store of value…”
“… We borrowed $2.2 billion at a mixed interest rate of 1.8% before interest rates doubled. It seemed like the sensible thing to do. $1.7 billion is unsecured, the rest is 7 years after borrowing the money. Margin credit is well managed…”
“… Bitcoin is the first and only legitimate scarcity in the universe.”
None of the content in this article should be construed as financial advice or an endorsement to buy or sell shares in MSTR. The author owns shares in MSTR.
Thanks to Will Schoellkopf for reviewing this article.
This is a guest post by BitcoinActuary. The views expressed are their own and may not reflect or reflect the views of BTC Inc. Bitcoin Magazine.