MicroStrategy (MSTR) is currently making a huge loss on its bitcoin purchases. Based on a current bitcoin price of $20,300, their 129,699 bitcoin holdings are worth $2.6 billion, down from a total purchase cost of around $4 billion (average cost $30,700). Therefore, they are sitting on unrealized losses of around $1.4 billion on their purchases.
The past two years have been a frantic race for MSTR shareholders, and ironically, the share price ($186) does not sit well above the share price in the summer of 2020 when they announced their first purchase of bitcoin (around $140).
Michael Saylor appeared puzzled by the continued online speculation that MSTR had liquidated its bitcoin holdings at around $21,000 due to the recent $200 million loan with Silvergate. Even searching for Michael Saylor’s name on Twitter brought up the autocomplete phrase “Michael Saylor liquidated.”
This speculation is quite misleading, but even still, where does the recent Bitcoin market turmoil leave them? To consider this, let’s just outline the terms of the various debts they’ve incurred over the past two years, including this Silvergate loan.
First issue of convertible notes — December 2020
The first offering of convertible notes was for $650 million, maturing in December 2025. The interest rate payable for these by MSTR was only 0.75%, making servicing this debt quite easy. – a little less than 5 million dollars in interest per year.
Therefore, these convertible bondholders do not receive much interest, but they have the option to convert their investment into MSTR stock at $398 per share. It is therefore a type of call option on the future price of MSTR stock, even though it is now worth less at current market prices.
To illustrate the convertible part, let’s say MSTR stock is priced at $500 per share on the redemption date in December 2025 – if you had $1 million worth of convertible notes, then they would be worth $1.25 million, since you could buy the shares for $398 and immediately sell them for $500. This, and other upside scenarios, explain the low interest rate payable.
Second issuance of convertible notes — February 2021
This offering (which raised $1.05 billion) follows much the same structure as the first, but on even better terms from an MSTR perspective, and on worse terms for convertible bondholders. This time, the interest rate is 0%, so there are no interest charges and the repayment date is February 2027.
The convertibility of these notes only contains value if MSTR’s stock price is above $1,432 per share – so much less likely to convert than the previous offering. This seemed comparatively more likely at the time, given that the stock price closed at $955 on February 16, 2021.
Skeptics will question the virtue of raising so much debt to buy bitcoin, but one thing seems clear in hindsight – MSTR and Michael Saylor got a pretty good deal borrowing on those terms at the time.
Senior Secured Notes — June 2021
It was a more conventional bond issue. MSTR has borrowed $500 million through 2028, at an annual interest rate of 6.125%. This brings the annual interest cost of these bonds to approximately $30.6 million, considerably more than the combined interest cost of the previous convertible bonds.
This announcement also coincided with the creation of a subsidiary – “MacroStrategy” – which would hold the existing 92,079 bitcoins they owned. While the new debt consisted of senior secured notes — having a high priority of being paid over other creditors in the event of future insolvency — they are mostly unsecured against the 92,079 bitcoins. This becomes relevant when we consider the latest Silvergate bitcoin-backed loan.
Silvergate bank loan — March 2022
This loan was slightly different – borrowing $205 million over three years, which is backed by bitcoin held by MacroStrategy. As shown in slides 11 and 12 of this presentation, this was initially backed by 19,466 bitcoins, but more may be specifically pledged as collateral if the price of bitcoin drops.
The “top-up” collateral loan-to-value ratio is 50%. It was this fact that likely led many to cite the MSTR liquidation price on the loan as bitcoin’s price falling below $21,000 – at this point the 19,466 bitcoins would be worth less than $410 million. (2 x 205), and they should pledge more collateral as per the terms of the loan. But as Michael Saylor pointed out and the slides above show, there are an additional 95,643 bitcoins that have yet to be pledged and could be.
The math works as follows regarding the $3,562 referenced in the tweet. At that price, the total of 115,109 bitcoins available to secure the loan would only be worth $410 million, so MicroStrategy would have to pledge further collateral to maintain the 50% loan-to-value ratio.
How about the interest cost on this loan? It is based on the average SOFR (Secured Overnight Funding Rate) over 30 days plus 3.7%. At the time of writing (end of June 2022), the SOFR is around 1%, which makes a total of 4.7%. Based on 4.7% interest, it would cost them about $9.6 million a year to service the interest now. However, the 1% SOFR rate is expected to increase. Further increases in SOFR would not prove too large, however – at 4%, for example, (and thus 7.7% in total), the interest cost would be $15.8 million.
So what can we conclude from all this?
1. The total interest costs of all the debt incurred to buy bitcoin seem manageable, totaling around $45 million ($5 million + $0 + $30.6 million + $9.6 million) per year at present. It seems affordable for the service – the latest quarterly results show gross profit for the last quarter at $94 million.
2. Even given the huge recent drops in bitcoin price, MSTR’s holdings shouldn’t be affected by the price in the near term unless it drops massively, to $3,500,000. This is due to the amount of bitcoin they have to back the Silvergate loan, to keep the backing at a 50% loan to value ratio.
3. What is of course striking is the huge current loss on paper that MSTR is sitting on in terms of bitcoin purchases, given that their average cost is $30,700 per bitcoin. This would undoubtedly be a problem for them if the price of bitcoin remained below this longer-term level and some of the debt began to be nearly paid off. The first loan due is the Silvergate loan in March 2025. Since bitcoin is secured as collateral, it may actually be possible to roll it over the same way.
The next deadline is the first offering of convertible notes in December 2025. If MSTR is still sitting on huge bitcoin losses at this point, they may struggle to refinance that $650 million debt in the market. This would lead to a tricky decision as they would likely want to avoid selling bitcoins at a loss in order to pay off the debt.
However, one aspect is very much on their side: in the Bitcoin world, or even in the larger macro environment, December 2025 seems a long way off.
4. It seems unlikely that MSTR will seek (or even be able to) raise much more debt under current market conditions – as Michael Saylor points out in the interview below, they have borrowed on fairly favorable terms before. It also seems unlikely that they will sell any additional shares in the market to buy more bitcoin, which they have also done before, since the stock price is currently so low.
5. They might continue to buy more bitcoin with profits and indeed in writing this MSTR did announce another small bitcoin purchase of $10 million.
6. What seems likely alongside this is choosing to keep some future dollar earnings for optionality over the next two years rather than buying more bitcoin with it, despite bitcoin’s lower price. The Q1 2022 results linked above (see point 1) suggest they are currently building up cash reserves, holding $93 million in cash versus $63 million three months earlier.
7. A final option would be to buy back some of their own shares with company profits, as their stock price has declined by a greater proportion over the past 6-12 months than the price of bitcoin. This would essentially send a signal that the market is undervaluing MSTR relative to even the price of bitcoin, and would be a provocative, albeit risky, show of confidence in their strategy.
Well worth watching this video link from CNBC for some recent thoughts by Michael Saylor, which include the following quotes:
Interviewer: “Would you consider buying more?”
Michael Saylor: “Yeah. If your time horizon is one month, then Bitcoin looks like a volatile risk asset. But if your time horizon is ten years, it looks like an off-reserve asset value risk…”
“…we borrowed $2.2 billion at a blended interest rate of 1.8% before interest rates doubled. It seemed like a reasonable thing to do. $1.7 billion is unsecured, the rest is for 7 years after borrowing the money. Margin lending is well managed…”
“…Bitcoin is the first and only legitimate rarity in the universe.”
Nothing in this article should be construed as financial advice or considered an endorsement to buy or sell stock in MSTR. The author owns shares in MSTR.
Thanks to Will Schoellkopf for proofreading this article.
This is a guest post from BitcoinActuary. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.