Original title: MicroStrategy’s Bitcoin debt loop: Stroke of genius or risky gamble?
Original author: Yohan Yun
Original source: https://cointelegraph.com/news/microstrategy-bitcoin-debt
Compiled by: Tom, Mars Finance
Critics call it blind, supporters call it a masterstroke. Regardless, MicroStrategy co-founder Michael Saylor continues to double down on Bitcoin.
Some believe that over-reliance on an asset as volatile as Bitcoin is fraught with risk. A sharp drop in the price of Bitcoin could put pressure on a company's balance sheet, exacerbating financial strains and undermining its ability to repay debt or raise additional financing.
Despite the risks, Saylor remains resolute. The American entrepreneur said he had "no reason to sell that winner".
MicroStrategy is the company with the largest amount of Bitcoin in the world, holding 447,470 BTC as of press time. This large-scale holding exposes the company and the entire Bitcoin ecosystem to higher risks and greater impact.
Figure 3: MicroStrategy’s Bitcoin portfolio growth since January 2024.
MicroStrategy’s Bitcoin Purchase Funding
In name, MicroStrategy is a business intelligence software company, but due to its aggressive Bitcoin hoarding behavior, it is actually more like a Bitcoin "treasury" company.
Saylor's Bitcoin shopping spree began in August 2020, when he used $250 million in corporate cash to buy Bitcoin. He then began to raise funds through bond issuance, starting with convertible bonds - debt instruments that can be converted into stocks. These bonds, which are usually accompanied by lower interest rates, helped the company raise $650 million in December 2020, and then issued several times, raising billions of dollars in total.
In June 2021, MicroStrategy issued $500 million in senior secured notes, which offer a higher interest rate and are secured by the company's assets.
Chart comparing convertible bonds and senior secured notes.
Most recently, on December 24, 2024, MicroStrategy proposed to increase its common stock from 330 million to 10.33 billion shares, while increasing its preferred stock from 5 million to 10.05 billion shares. The plan provides the company with the flexibility to raise funds in the future without having to issue all new shares at once.
The approach dovetails with the company’s strategy, dubbed “Project 21/21,” which aims to raise $42 billion over the next three years — half in equity financing and half in fixed-income instruments — to continue buying bitcoin and explore new directions such as establishing a crypto bank or offering bitcoin-based financial products.
A reckless Ponzi scheme?
David Krause, professor emeritus of finance at Marquette University, called Thaler’s strategy “inappropriate.”
He warned that if the price of Bitcoin falls sharply, it could deal a severe blow to MicroStrategy (MSTR), causing shareholders' equity to shrink, debt repayment to be at risk, and even financial difficulties or bankruptcy, thereby triggering a sell-off of the company's stock.
“As an academic who has worked and taught in the field of corporate finance and investments for many years, and who also served as a CFO for more than a decade, I firmly believe that a company’s inventory assets should consist only of highly liquid, low-risk securities, such as money market instruments,” Kraus said in a written statement to Cointelegraph.
MSTR's stock price is mostly above the net asset value (NAV) of its Bitcoin holdings, which were equivalent to 51% of its market value as of January 9, 2025, according to data from BitcoinTreasuries.net.
When MSTR's stock price is above its net asset value in bitcoin, the company raises money through debt or issuing stock to buy more bitcoin. However, this approach can lead to shareholder dilution, Kruger warned.
In theory, this move would create a cycle: the company's Bitcoin holdings would boost its market position and stock price, enabling the company to issue more debt and continue buying Bitcoin.
Some analysts on social media have likened the recycling strategy to a Ponzi scheme.
"This cycle only works as long as Bitcoin continues to rise," said financial analyst Jacob King. "If the price of Bitcoin stagnates or plummets (which it will inevitably happen), the cycle will collapse. This is unsustainable and looks like a huge Ponzi scheme."
MicroStrategy did not respond to Cointelegraph’s request for comment, but in a recent media interview, Saylor likened its approach to the real estate model in Manhattan.
"Like real estate developers in Manhattan, every time the property appreciates, they issue more debt to develop more property," he said. "That's why the buildings in New York City are so tall, and it's been going on for 350 years. I would call it an economy."
Kruger, who has been critical of MicroStrategy's over-reliance on Bitcoin, pointed out in a recent article that this does not meet the U.S. Securities and Exchange Commission's (SEC) official definition of a Ponzi scheme.
The regulator describes a Ponzi scheme as an "investment scam whereby earlier investors are paid purported returns using funds contributed by new investors".
Gracy Chen, CEO of cryptocurrency exchange Bitget, agreed with Kruger.
“Unlike a Ponzi scheme that relies on funds from new investors to pay out early investors, MicroStrategy’s approach relies on market-driven appreciation in the value of Bitcoin.”
“This strategy is more like Charles de Gaulle’s challenge to the Bretton Woods system by converting dollars into gold,” Chen told Cointelegraph. “It’s about taking advantage of loopholes in modern monetary theory and profiting from asset appreciation.”
The undeniable success of Saylor’s Bitcoin blueprint
As of the close of trading on January 8, MSTR stock was trading at $331.70, while when the company first bought Bitcoin on August 11, 2020, the stock closed at $14.44, an increase of about 2,200%. During the same period, the price of Bitcoin has risen by about 735%.
Whether or not one agrees with Saylor’s views, his plan has undoubtedly boosted MicroStrategy’s crypto assets and stock performance, and enabled the company to enter the Nasdaq 100 Index in December.
While shareholders may see some dilution, supporters argue that Bitcoin’s long-term growth potential offsets these risks. In addition, Chen noted that MicroStrategy’s convertible bond structure could provide some cushion in times of crisis.
"A prolonged bear market may indeed expose the company to liquidity pressure as well as higher debt management risks. However, the structure of unsecured convertible bonds can, to a certain extent, prevent the company from being forced to liquidate its positions immediately," Chen explained.
“The company was also able to raise funds by issuing additional shares during a bear market, which reduced the pressure on it to sell Bitcoin.”
Bitcoin Exit Strategy
Simply put, MicroStrategy's mission is very clear: continue to buy Bitcoin.
For the company, Bitcoin is a long-term strategic holding and a hedge against economic uncertainty while helping to increase shareholder value. It can also be used to obtain loans or refinance without having to sell Bitcoin itself.
“It (holding Bitcoin) itself has the potential to generate returns from such a large liquidity pool,” said Alexander Panasenko, head of product management at VixiChain. “When you hold a large amount of assets that can fight inflation and actually store value, you don’t even need to sell it to make money from it. You can make a profit through lending and so on.”
However, critics point out that Saylor does not provide a clear exit strategy. Bitcoin "maximalists" believe that there is no need for an exit strategy at all, because they believe that Bitcoin is the way to eventually leave the traditional financial system.
Stock dilution remains a major concern at the moment, but this approach has indeed benefited MicroStrategy and the entire Bitcoin ecosystem to a large extent, and has also inspired many imitators around the world.
“As long as (MicroStrategy) continues to spark discussion about the role of digital assets in the future economy and more companies start to adopt and come up with new ways to use digital assets ... that’s good for the entire industry,” Panasonko said.
“But if these proposals involving digital assets fail, it will cast a shadow over the entire industry and set back progress.”
