Is MicroStrategy a bubble? What is the risk for Bitcoin’s price?

MicroStrategy’s aggressive Bitcoin (BTC) acquisition strategy has captivated investors, but is it sustainable? With plans to raise $42 billion in three years, the company is taking bold steps to finance its Bitcoin buying spree.

For retail investors, the question isn’t just whether MicroStrategy’s moves are driving Bitcoin above $100,000—it’s whether this approach is stable or setting the stage for a bubble.

How MicroStrategy is funding Its Bitcoin acquisitions

MicroStrategy’s “21/21 Plan” outlines a massive capital raise, split evenly between equity sales and fixed-income securities. Recently, it raised $4.6 billion by selling 13.6 million shares, alongside a $2.6 billion convertible bond issuance. Together, these raised enough to buy 78,890 Bitcoin ($6.62 billion), underscoring the company’s commitment to its strategy.

A key innovation in its approach lies in 0% interest convertible bonds. Investors buying these bonds receive no regular interest payments; instead, they profit if MicroStrategy’s stock rises and they convert the bonds into shares at a premium price. This allows MicroStrategy to acquire Bitcoin with minimal ongoing costs, relying on its stock price to provide returns to bondholders.

MicroStrategy’s debt is often seen as a vehicle for Bitcoin investment rather than traditional corporate financing. The zero or low yield reflects a different investor base looking for Bitcoin exposure with potential for equity conversion, not traditional bond yields.

For bondholders, the lack of interest payments is offset by the potential for substantial profits from stock appreciation. However, this strategy ties both bondholder returns and MicroStrategy’s financial stability to the volatile Bitcoin market.

Could Bitcoin price crash doom MicroStrategy?

MicroStrategy’s play may seem bold, but it isn’t without risks. The company’s weighted average debt repayment period is over five years, meaning its obligations won’t fully materialize until after 2028. This long runway gives it flexibility to weather market downturns. 

If Bitcoin’s price remains stable or rises, MicroStrategy can continue operations without urgent refinancing. However, a sharp Bitcoin crash could expose significant vulnerabilities. With much of its balance sheet tied to Bitcoin, MicroStrategy could face liquidity issues, needing to sell Bitcoin at unfavorable prices to meet debt obligations. 

Additionally, bondholders relying on stock conversion for profits could be left with no gains if MicroStrategy’s share price plummets. MicroStrategy trades at nearly 3.3x the Bitcoin value on its books due to speculative investor confidence in Bitcoin’s future appreciation and the company’s leveraged exposure. 

If the premium drops to 1.5x or lower, shareholders could see smaller-than-expected gains, and convertible bondholders might avoid converting to equity if the stock underperforms relative to Bitcoin’s price increase. This could strain MicroStrategy’s finances, as it would need to repay bondholders in cash instead of equity.

Related: A perfect storm is brewing for Bitcoin

To implement a strategy like MicroStrategy’s, a company needs substantial financial resources, including strong cash flow and liquidity. The company must be large enough to raise significant capital through debt or equity offerings without jeopardizing its financial health. It also needs the ability to absorb Bitcoin’s volatility without threatening its core operations.

While MicroStrategy offers leveraged exposure to Bitcoin, it amplifies the cryptocurrency’s inherent volatility. Directly investing in Bitcoin might provide simpler exposure with fewer layers of risk.

Alternatively, if Bitcoin prices climb, MicroStrategy could repurchase its bonds to avoid diluting shareholders—a move that would support its stock price and potentially provide greater returns.