Strategy stock is down 55% from ATH but forced liquidations highly unlikely – Kobeissi
Stocks of MicroStrategy (previously Strategy) have fallen by more than 55 percent from their all-time highs, fueling speculation about the possibility that this company will be forced into selling its massive Bitcoin (BTC).
The firm’s 499,096 Bitcoin, worth $43.7 billion, is one of the largest corporate Bitcoin holdings, but it faces challenges in maintaining this strategy due to market volatility.
The Kobeissi Letter states that the risk of forced Liquidation is dependent on two main factors: a significant and prolonged drop in Bitcoin’s price, and MicroStrategy’s capacity to raise additional funds.
The company purchased its Bitcoins at an average of $66,350 each coin. MicroStrategy could be under pressure if Bitcoin fell below this level.
But liquidation isn’t an automatic process. Before creditors can ask for repayment, the company’s debt agreement requires a “fundamental” change. This could be a bankruptcy filing, or stockholder approval of dissolution.
Liquidity concerns
Strategy holds a total of $8.2 billion, mostly in convertible notes maturing between 2027-2028.
The conversion price of most of these notes is below the current stock value, so they are unlikely trigger a liquidity crisis in the near future.
The company’s Bitcoins are still worth more than its liabilities with a leverage of 19%. This reduces the likelihood of immediate insolvency.
Strategy has used a high-risk strategy to acquire Bitcoin. The company raises money through convertible notes. It then buys Bitcoin to boost its value and sells additional shares to purchase even more Bitcoin.
This approach worked well in the past, as it allowed the company’s position to be maintained despite Bitcoin’s price fluctuations.
Forced liquidation
The key question is whether Strategy will be able to continue raising capital despite a falling stock price and uncertainty in the market.
The Kobeissi Letter states that if the investor confidence declines, and the company is unable to refinance or issue new shares, then it might be forced to sell Bitcoin in order to meet its obligations.
Strategy still has a few years to overcome its financial problems, since the majority of its debts will be due in a few years.
Even though an immediate liquidation is unlikely, the stability of the company on a long-term basis depends on Bitcoin’s price trajectory and ability to sustain their financing model. MicroStrategy’s strategy may continue if Bitcoin is stable or recovers.
If the flagship experience a prolonged decline, then pressure to sell may intensify. This could make forced liquidation more likely.
