Convertible bonds are currently the only liquidation risk for MicroStrategy.
Written by: Willy Woo
Compiled by: Shaofaye123, Foresight News
About MicroStrategy MSTR convertible bond risks
Currently, the only liquidation risk I can see is its issued convertible bonds:
If convertible note buyers do not convert to stock before maturity, MSTR will have to sell BTC to repay the debt holders.
This will happen if MSTR does not exceed a 40% increase within 5-7 years (varies by bond type, see table below). Essentially, either MSTR's correlation with BTC fails, or BTC fails.
There are also other risks to varying degrees:
Competitive risk, other companies copying and replicating, reducing MSTR's premium relative to net asset value;
Risk of SEC intervention on future purchases, reducing MSTR's premium relative to net asset value;
Custody risks from Fidelity and Coinbase;
Risk of U.S. nationalization (seizure of BTC);
Key person risk for Saylor;
Operational risk for MSTR;
Final note, please pay attention to the convertible note table. While it roughly provides some concept, it is not accurate due to my use of Grok AI.
Other Questions About MSTR
Question 1: Why doesn't MSTR have self-custody rights?
Willy Woo: As of now, the exact custody arrangements have not been disclosed. As far as we know, MSTR may have co-signatory rights in a multi-signature arrangement. This is a wise handling method.
Question 2: Will MSTU and MSTX be liquidated and harm MSTR?
(Translator's note: MSTU: Invest in T-Rex 2X Long MSTR Daily Target ETF; MSTX: Invest in Defiance Daily Target 2X Long. MSTR ETF has accumulated over 600 million and 400 million in assets respectively.)
Willy Woo: MSTU/MSTX = higher risk. The 2x is achieved through a paper bet on MSTR, with a liquidation level close to instant liquidation (furthermore, there are no claims on real BTC).
Note: Derivative positions can devalue BTC.
Additionally, due to the impact of volatility, holding long-term will not achieve 2x (losses are more expensive than gains).
Question 3: What if a large number of stockholders sell their stocks simultaneously due to external events (stock market downturn)?
Willy Woo: This only belongs to short-term effects; in the long term, the market always implies increased returns, so it is not a real risk. Debt holders can convert within up to 5-7 years after purchasing the notes. As long as Bitcoin is over 40% higher than the initial price within 1-2 macro cycles, there will be no problems.
Question 4: Are there leveraged ETFs that obtain risk exposure through options instead of swaps?
Willy Woo: The volatility arbitrage trading department of TradFi hedge funds does this day in and day out. $70 million is very little; based on volatility mispricing in the options market, this amount is sufficient to support the trading volume of any given day.
