The company led by Saylor is leveraged in its own shares to buy more Bitcoin.
Can this strategy continue forever or at some point you should stop BTC’s purchases?
An unorthodox way to start an article would be with a survey. In this case, it would be one question: what exactly does Strategy (previously called Microstrategy)?
Here comes the interesting thing: surely the answer is in the background in front of another reality. His name has become synonym for massive purchases of Bitcoin (BTC), leaving aside that, in reality, it is a company dedicated to providing software solutions.
And the best response is that of Nikou Asgari, correspondent for digital markets of the Financial Times, who does not hesitate to say: “No one cares about the business software part. All this depends on the price of BTC continuing to rise and upload, because the value of Strategy, and the value of all kinds of investments that they see in it, is linked solely and exclusively to the price of BTC.”
As Cryptonoticias has reported, the firm led by Michael Saylor, a recognized Maximalist from Bitcoin, It bases its strategy on requesting money through 0%convertible bonds, with which it acquires more BTC. Then, seek to boost the price, issues new shares with premium to finance more purchases of Bitcoin, and thus repeat the cycle.
In this way, it has become the public contribution company that accumulates the most BTC in its treasury. Currently, he has 576.230 BTC in his hands.
The strategy promoted by Saylor has aroused praise and criticism. It is that it combines a vision of the potential of the currency created by Satoshi Nakamoto with a degree of financial leverage that could become very risky if the market conditions change.
Craig Coben, former Global Chief of Capital Markets in the Bank of Americaclarifies: “When Strategy buys BTC, BTC is actually buying with a 50%discount. That is why they are buying more as the price of BTC uploads.” On this point, it makes a warning: “The virtuous circle can become a vicious circle if the price of BTC falls and is cousin about the net asset value of Strategy’s shares disappears. Then, any purchase of BTC will be dilutive for shareholders.”
That is, while it works, Strategy strategy seems ideal: buy BTC using the extra value (the premium) that their actions have on the real value of their assets. This premium reflects market confidence in the company and its ability to continue generating value from its exposure to Bitcoin.
Every time the BTC price rises, the premium is maintained or even grows, allowing Strategy to access cheap capital to expand their holdings.
However, and here is what Coben poses, the mechanism has a risk: If the price of BTC falls and the premium disappears, the company may no longer finance its purchases with the same advantage.
It is there when buying more BTC would imply issuing more shares at a value less than real. In this way, the assets of the shareholders are diluted, generating a negative spiral. Or, rather, what seemed like a virtuous circle becomes a vicious circle with increasing risks for Strategy’s financial stability and its investors.
On this point, Asgari points out: “In that case, this infinite money wheel will probably be considerably slowed down, if it is not completely stopped, because investors will think: ‘We gave them money to buy Bitcoin, but the price has fallen and, therefore, the value of our investment has also decreased, why would we continue to finance this machine?’”
In the following graphic of the Financial Times, you can see how the company’s business cycle works: collect money (Raises Money), Buy BTC (Buitcoin Buys) and that investment promotes the price of shares (Share Price Goes Up).
For Max Molter, financial market analyst, Strategy’s action (Mstr) “is one of the weakest and overvalued bets within the sector” of digital assets. In his analysis, he points out that, despite the fact that some investors “celebrate their aggressive BTC accumulation strategy”, their financial foundations do not justify their current assessment.
The specialist argues that Strategy’s position is particular and gives as an example sector companies, such as Coinbase (Coin) or Robinhood (Hood), exchanges that generate income by volume of operations, regardless of whether the price of assets rises or low. Digital Holdings Marathon (Mara), meanwhile, is dedicated to BTC mine and operate with variable margins. In the case of the firm directed Saylor, only get benefits if the price of the asset rises.
Jacob King, cryptocurrency market analyst, has made several criticisms of Strategy’s strategy for this absolute dependence on BTC’s appreciation. In his opinion, there is a considerable structural risk because It is an accumulation model that operates as a closed cycle and compare it with the logic of a Ponzi scheme.
In his thesis, King uses a scheme of a wheel divided into six steps, which feedback to each other. It all starts when the company issues debt or new actions to raise funds, which uses directly to buy more BTC units. This additional demand helps to boost the price of the asset.
With Bitcoin on the rise, the company’s actions are also valued, which attracts the interest of new investors, particularly the retail segment. This renewed enthusiasm allows the company to issue more actions, capture new funds and restart the cycle.
The problem is that all this mechanism is sustained while each of the pieces works perfectly. If the price of the asset stagnates or falls, if the market interest is exhausted or if the capital issuance ceases to be viable, the cycle can break abruptly.
“I prefer that they have them Strategy and not that they are at home”
For Molter, in addition, there is a difficult point to justify: if an investor wants exposure to BTC, it is much cheaper to buy BTC directly, without paying excessive premium and without assuming the risks of Mstr’s corporate debt.
The answer to this doubt is the same investors. Jeff Walter, Strategy investor and researcher, highlights: “For something to break Strategy, I think something in BTC must break. And if something broke Bitcoin, which has not happened in 15 years… is the largest decentralized computer network on the planet, we are talking about that there would be greater problems. It is like a black swan type event. House ammunition and fresh water and some food.
In that line, he assures that he is willing to assume the downward risk because he believes that this risk “is zero.” In addition, he explains: “In November 2024, the company raised 12,000 million dollars of capital. With that capital they could buy BTC. It is crazy. ”
Michael Saylor, on the other hand, considers that the risk of BTC is existential and says: “If aliens land and plant a cyber virus and everything reaches zero irrevocably, with global consensus, then our business fails.”
Here is an interesting issue for Katie Martin, market columnist of the Financial Times, and that is that the owners of the companies are not allowed to promote their actions, But what happens is that Saylor does is spread BTC. “Why would the price of what you are buying increase, everything is reduced to that cousin that investors are willing to pay for Strategy shares, in addition to the price of Bitcoin,” complete.
The concrete thing is that they are willing to pay more for Strategy actions because Saylor’s strategy will generate greater returns in the future, according to investor expectations. Above all, considering that the firm’s own president predicted that the asset will reach a price of 1 million dollars by 2035 and 13 million by 2045, as reported by cryptootics.
These projections start from the premise that BTC is a scarce asset, with a supply limited to 21 million units, and whose broadcast is reduced every 4 years in an event known as the halving. It is a factor that influences the medium and long term price. Unlike Fíat money, it is not devalued by the issuance or monetary policies of a central bank.
For many investors, BTC is considered as “digital gold” by the characteristics it shares with precious metal: it is a decentralized asset, resistant to censorship and valued as a value reserve in uncertainty contexts. And for those investors, as in the case of Walter, Saylor’s strategy is a genius.
However, it is clear that it is not infinite because it depends on the feeling of the market and a premium that can disappear if BTC falls.
If that happens, issue shares to buy more BTC will no longer be sustainable. Therefore, what today seems like a financial genius could become, if the cycle is broken, in the next black swan of the ecosystem. In addition, another issue follows here because if the BTC price falls below 19,000 dollars, Strategy could be forced to sell part of their holdings to avoid breaching financial obligations. This would generate strong selling pressure and possible collapse of the price.
While it seems unlikely, a company drop is nothing impossible. And if it happened, Bitcoin’s blow could be as or more devastating than collapses such as those of Mt.gox, FTX or UST, the Terraft Labs stablocoin.
