If bitcoin were to have a big drop, MicroStrategy’s business would be at risk.
There are analysts who explain that Saylor’s strategy is unsustainable in the long term.
Few investment strategies in bitcoin (BTC) have been as talked about in recent times as that of the American company MicroStrategy.
Under the leadership of Michael Saylor, this IT services company became the publicly traded company with the largest amount of BTC in its treasury.
At the time of this publication, MicroStrategy has 450,000 BTCequivalent to 43,225,200,000 million dollars.
This is 10 times more than the next company, which is Marathon Digital Holdings. Bitcoin and Kaspa mining company has “only” 44,893 BTC.
MicroStrategy He started his adventure with bitcoin in 2020, as reported by CriptoNoticias in due course.
On the morning of Tuesday, August 11, 2020, a press release titled “MicroStrategy adopts bitcoin as the main reserve asset in its treasury” began circulating on the Internet.
Who would have thought that this company, then quite unknown, would lead a trend that many others are now joining!
However, MicroStrategy strategy —which, for now, is giving it profits and benefiting its share price— It is not without controversy.
The thing is that MicroStrategy does not follow that investment rule that says “you should only invest money that you are willing to lose.” No, gentlemen! MicroStrategy goes for everything and has resorted to issuing debt to finance these BTC purchases.
Michael Saylor’s firm has been issuing convertible bonds and increasing the number of shares outstanding.
Therefore, MicroStrategy depends heavily on the price of bitcoin to maintain your financial stability.
If the BTC price were to drop dramatically, MicroStrategy’s ability to meet its debt obligations could be compromised.
According to recent analysis, the clearance price of his BTC holdings is estimated at around $16,500. This is a scenario that, although unlikely (at least at current prices close to $100,000), is not impossible.
What would happen if bitcoin entered a “crypto winter” early and, as has happened in the past, the fall exceeded analysts’ expectations?
The author of this post is not the only one who sees certain risks in MicroStrategy’s strategy. Entrepreneur and economist Vinny Lingham has raised concerns about how this tactic could not only affect the company but also the broader bitcoin market.
LinghamEdit suggests that MicroStrategy could become a “bigger threat than FTX.”
FTX had become the second largest bitcoin and cryptocurrency exchange, but suddenly collapsed in 2022, after criminal actions by its directors were discovered.
The FTX bankruptcy deeply affected the entire cryptocurrency industry, especially at the reputation level. The exchange run by Sam Bankman-Fried boasted of being the role model and maintained good relations with senior US officials.
Likewise, MicroStrategy’s strategy seems to enjoy the approval of all bitcoiners. The “astronomical” predictions that Michael Saylor makes about the price of BTC boost spirits and many see Saylor as a born leader of the “bitcoin cult.”
Taking all this into account, If the strategy failed, the effects could be devastating, at least initially (since bitcoin has always managed to recover quickly from all the “tragedies” it has experienced in its history).
Jacob King, a financial analyst who maintains bearish expectations for bitcoin, dares to say that MicroStrategy’s strategy has similarities (which does not imply equivalence) with a Ponzi scheme.
King maintains that MicroStrategy’s finances enter a kind of loop (or loop) which will only continue to work if the price of bitcoin continues to rise.
This loop It consists, according to King, of 6 steps that are repeated over and over again.
First, MicroStrategy issues debt or increases its shares, to buy more bitcoin.
As a next step, the company buys bitcoin with that money (which, due to the law of supply and demand, contributes to the price rising, since circulation is withdrawn from the market).
A consequence of the rise in the price of bitcoin is that the capitalization of MicroStrategy (MSTR) shares also increases.
That attracts new investors (mainly retailers, in King’s observation).
MicroStrategy then issues more actions and repeats the loop over and over.
In King’s opinion, this can be done until one of the steps fails and the loop is broken.
The following image illustrates King’s explanation:
Businessman Arthur Hayes, co-founder of Bitmex, also shows a certain critical stance towards what MicroStrategy is doing and anticipates possible negative consequences.
Hayes questions the viability of the approach as it depends on a continued rise in the value of bitcoin. If the price drops, the company could have trouble meeting its financial obligations.
Analysts at the financial newsletter The Kobeissi Letter have explained that “the recent rise in MicroStrategy shares has nothing to do with its underlying business,” but is instead due to the exposure the company has to bitcoin. Therefore, they point out that the use of convertible bonds is risky, due to the inherent volatility of BTC.
And Mike Fay, a financial specialist, expressed himself in a similar way to the aforementioned Jacob King. Fay does not say that MicroStrategy’s strategy is similar to that of a Ponzi scheme, but he assures that The company “is making the mistake of infinite money.”
In Fay’s view, the biggest risk is that MicroStrategy’s capital depends more on speculation around bitcoin than on revenue from its core software business. The money that comes in from that part of the business is used to pay the interest on the debt.
MicroStrategy, a bullish catalyst and also a systemic risk
To understand the extent of the possible impact of a crash on MicroStrategy’s strategy, it is essential to consider the current context of the bitcoin market.
While the comparison to FTX may seem far-fetched at first glance, MicroStrategy’s centrality to the bitcoin market through its massive purchases could have significant effects if its financial model became unsustainableas some respected analysts are commenting.
This centrality is not only limited to its influence on the price of bitcoin, but also how other investors and institutions perceive the viability and stability of the cryptocurrency market.
As was the case with FTX, although for different reasons, the perception of instability can have rapid and dramatic effects.
If the price of bitcoin were to experience a significant and prolonged decline, MicroStrategy could face the need to liquidate part of its bitcoin position to meet its financial obligations.
This would not only affect the company and MSTR stock, but also would cause a chain reaction in the marketexacerbating the price drop due to the BTC sell-off.
In turn, a crisis at MicroStrategy could impact the sector of publicly traded companies that have invested in bitcoin. The failure of such a public and observed strategy could deter (at least in the short and medium term) other companies from considering bitcoin as a reserve asset, thus affecting institutional adoption.
In terms of regulation, a spectacular failure related to such a prominent strategy could attract stricter regulatory attention and action. It’s true that Trump seems to defend the free market and individual responsibility, but… you never know.
The Regulators could impose harsher measures on companies who wish to invest in cryptocurrencies, or even restrict the ways in which these investments can be made and reported.
From the perspective of retail investors, the fall in prestige of such an iconic figure as Michael Saylor and his company could cause panic and a massive sell-off, not only in bitcoin, but also in other cryptocurrencies, due to fear of contagion and uncertainty. widespread would take control.
And, as a side effect, the “bet it all” model on bitcoin could be revised in favor of more diversified and conservative approaches that mitigate the risks associated with the volatility of a single asset.
In contrast, if MicroStrategy manages to navigate through the market storms and its bitcoin investments prove sustainable in the long term, this could bolster confidence in bitcoin as a legitimate and viable reserve asset for other companies. Such an outcome would reinforce the narrative of bitcoin as “digital gold” and propel its adoption to new levels, both institutionally and among the general public.
What can be assured with certainty is that the history of MicroStrategyregardless of its outcome, surely will be a significant case study in the evolution of global finance.
Disclaimer: The views and opinions expressed in this article belong to its author and do not necessarily reflect those of CriptoNoticias. The author’s opinion is for informational purposes and under no circumstances constitutes an investment recommendation or financial advice.