Strategy’s Bitcoin bet faces new risks as MSTR stock risks mount

Strategy, formerly MicroStrategy, continues to purchase Bitcoin, accumulating over 506,137 BTC so far, valued at roughly $44 billion. However, Bitcoin’s price is trading down from its peak price above $109,000, raising concerns about whether the firm should pursue more buys.

While price fluctuations are common, Strategy’s average acquisition price has jumped to $66,000, and the firm still relies on equities and convertible notes to make purchases. Some analysts even hinted that the firm could just be one moderate token price fall away from trouble.

Thompson argues that Strategy may not have to sell Bitcoin to add more collateral 

Strategy raised billions through equity sales and convertible debt to buy most of its BTC holdings. However, in its most recent purchases, the company opted to raise funds through preferred stock, a type of equity offering investors dividends.

However, the company’s growing debt and aggressive token purchases have some analysts wondering about its fate. 

Contrary to some, Quincy Thompson, founder of crypto hedge fund Lekker Capital, argued that it’s very unlikely for Stategy to find itself in a situation where it has to sell its BTC holdings to give lenders more collateral in case of a drastic price drop.

He explained that the firm would likely refinance debt for convertible notes instead of paying them off immediately, and in the case of preferred stock, they don’t have to repay any part of it.

Since the firm has not listed its Bitcoin holdings for its loans, it’s less likely to end up like failed crypto firms and projects such as Genesis and Three Arrows Capital. Nevertheless, Strategy still needs to be careful that it does not issue more equity than the market can handle. 

Thompson argued similarly, saying that if the firm cannot pay dividends with its cash flow, it could be forced to issue more shares, which would ultimately affect the stock price.

He added, “But it’s no different than what he’s doing already. Every time the retail bids it up, he wrecks the stock price by issuing more shares. In the future, he will have to do that, and the flows might not go into Bitcoin. They might go to repay these debtors, and it will hurt the share price.” 

Thompson says Strategy may need to issue more shares to settle the due interests

The Bitcoin-focused company also needs to pay 8% dividends on STRK, 10% dividends on STRF, and a 0.4% interest rate on its convertible bonds. Meanwhile, the firm’s software business is bringing in few returns, so the company could struggle to pay off the dividends.

According to Thompson, Strategy should continue issuing MSTR stock to pay all the pending interest. He even claimed the stock could trade at a discount to avoid having to issue more shares. However, he did warn that if the discount would grow to 20% or 30%, shareholders would most likely ask for the discount closure. He even suggested that to increase shareholder value, the number one option would be to sell Bitcoin and buy stock.

He also touched on the company’s issues with its ETFs, saying they have been “obliterated”. Surprisingly, these ETFs are still in high demand despite the stock’s losses.  Moreover, the popularity of ETFs has only helped aggravate constant buying pressure for MSTR.

Though widely amazed by ETFs’ potential and importance, Thompson believes they are unreliable when making 10-year predictions of the asset’s price.

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