2 years ago
After a twelvemonth of borrowing and buying, what’s the outlook for the bitcoin bulls astatine MicroStrategy?
MicroStrategy (MSTR) presently sits connected a immense nonaccomplishment connected their bitcoin purchases. Based connected a existent bitcoin terms of $20,300, their 129,699 aggregate bitcoin holdings are worthy $2.6 billion, down from a full acquisition outgo of astir $4 cardinal (average outgo $30,700). Hence they are sitting connected unrealized losses of ~$1.4 cardinal connected their purchases.
The past mates of years person been a chaotic thrust for MSTR shareholders, and ironically, the stock terms ($186) doesn’t beryllium that acold supra the stock terms successful the summertime of 2020 erstwhile they announced their archetypal bitcoin acquisition (approximately $140).
Michael Saylor has appeared bemused by the continuous speculation online astatine MSTR having their bitcoin holdings liquidated astatine astir $21,000 owed to the caller $200 cardinal indebtedness with Silvergate. Even searching for Michael Saylor’s sanction connected Twitter brought up the auto-complete operation “Michael Saylor liquidated.”
This speculation is beauteous misleading, but adjacent still, wherever does the caller marketplace turmoil successful Bitcoin permission them? To see this, let’s simply outline the presumption of the assorted debts they person taken connected successful the past mates of years, including that Silvergate loan.
First Convertible Note Offering — December 2020
MicroStrategy Completes $650 Million Offering of 0.750% Convertible Senior Notes Due 2025
The archetypal convertible enactment offering was for $650 million, owed successful December 2025. The involvement complaint payable for these by MSTR was conscionable 0.75%, making the servicing of this indebtedness beauteous casual — conscionable nether $5 cardinal involvement outgo per year.
Hence, these convertible enslaved holders are not receiving overmuch interest, but they bash person the enactment to person their concern to MSTR shares astatine $398 per share. Thus this represents a benignant of telephone enactment connected the aboriginal terms of MSTR shares, albeit 1 which is present worthy little astatine existent marketplace prices.
To exemplify the convertible part, let’s accidental MSTR banal is priced astatine $500 per stock astatine the redemption day successful Dec 2025 — if you had $1 cardinal of convertible notes they would past beryllium worthy $1.25 million, since you could bargain the shares for $398 and instantly merchantability them for $500. This, and different upside scenarios, explicate the debased involvement complaint payable.
Second Convertible Note Offering — February 2021
This offering (which raised $1.05bn) is overmuch on the aforesaid operation arsenic the first, albeit astatine adjacent amended presumption from an MSTR constituent of view, and worse presumption for the convertible enslaved holders. This time, the involvement complaint is 0%, truthful determination is nary involvement outgo and the redemption day is successful February 2027.
The convertibility for these notes lone contains worth if the stock terms of MSTR is supra $1,432 per stock — hence overmuch little apt to beryllium converted than the erstwhile offering. It seemed comparatively much apt astatine the time, fixed the banal terms closed astatine $955 connected February 16, 2021.
Skeptics volition question the virtuousness of raising this overmuch indebtedness to bargain bitcoin, but 1 constituent seems wide successful hindsight — MSTR and Michael Saylor got a beauteous bully woody successful borrowing connected these presumption astatine the time.
Senior Secured Notes — June 2021
This represented a much accepted enslaved offering. MSTR borrowed $500 cardinal until 2028, astatine an yearly involvement complaint of 6.125%. This makes the yearly involvement outgo of these bonds astir $30.6 million, substantially much than the erstwhile convertible notes involvement outgo combined.
This announcement besides coincided with the establishment of a subsidiary — “MacroStrategy” — which would clasp the existing 92,079 bitcoin that they owned. While the caller indebtedness was elder secured notes — having a precocious precedence of being paid versus different creditors successful the lawsuit of aboriginal insolvency — crucially they are not secured against the 92,079 bitcoin. This becomes applicable erstwhile we see the aboriginal Silvergate bitcoin-backed loan.
Silvergate Bank Loan — March 2022
This indebtedness was somewhat antithetic — borrowing $205 cardinal for 3 years which is backed by the MacroStrategy-held bitcoin. As linked to successful slides 11 and 12 successful this presentation, this was initially backed by 19,466 bitcoin, but much tin beryllium specifically pledged arsenic collateral should the terms of bitcoin fall.
First Quarter 2022 Financial Results Presentation
The “top up” loan-to-collateral-value ratio is 50%. It is this information that has presumably led galore to mention the MSTR liquidation terms connected the indebtedness arsenic the terms of bitcoin falling beneath $21,000 — astatine this constituent the 19,466 bitcoins would beryllium worthy beneath $410 cardinal (2 x 205), and they would request to pledge much collateral nether the presumption of the loan. But arsenic Michael Saylor pointed retired and the slides supra show, determination are a further 95,643 bitcoins which person not yet been pledged, and could be.
Linked MicroStrategy Investor Relations Tweet.
The mathematics works arsenic follows regarding the $3,562 referenced successful the tweet. At that terms constituent the full 115,109 bitcoin disposable to backmost the indebtedness would beryllium lone worthy $410m, truthful MicroStrategy would person to pledge immoderate different collateral to support the 50% loan-to-value ratio going.
How astir the involvement outgo connected this loan? It’s based connected the 30-day mean SOFR (Secured Overnight Funding Rate) positive 3.7%. At the clip of penning (end of June, 2022) SOFR is astir 1%, truthful this makes 4.7% total. Based connected 4.7% interest, it would outgo them astir $9.6 cardinal annually to work the involvement currently. However, the 1% SOFR complaint is expected to spell higher. Further SOFR rises would not beryllium excessively worldly though — astatine 4%, for example, (and hence 7.7% total) the involvement outgo would beryllium $15.8 million.
Conclusions
So what tin we reason from each this?
1. The involvement costs successful full from each the indebtedness raised to bargain bitcoin look manageable, totalling astir $45 cardinal ($5m + $0 + $30.6m + $9.6m) per twelvemonth astatine present. This looks affordable to work — the caller quarterly results amusement gross nett for the caller 4th astatine $94 million.
MicroStrategy Announces First Quarter 2022 Financial Results
2. Even fixed immense caller declines successful the terms of bitcoin, MSTR’s holdings should not beryllium impacted by the terms successful the abbreviated term, unless it falls massively, to $3,500k. This is owed to the sheer magnitude of bitcoin they person disposable to backmost the Silvergate loan, to support the backing astatine a 50% loan-to-value ratio.
3. What is of people striking is the existent immense on-paper nonaccomplishment that MSTR is sitting connected successful presumption of its bitcoin purchases, fixed that their mean outgo ground is $30,700 per bitcoin. It would nary uncertainty beryllium a occupation for them if the bitcoin terms remains beneath this successful the longer word and immoderate of the indebtedness starts to adjacent redemption. The archetypal indebtedness owed is the Silvergate indebtedness successful March 2025. Given this is with bitcoin backed arsenic collateral, it whitethorn really beryllium imaginable to rotation this implicit successful a akin fashion.
The adjacent owed is the archetypal convertible enactment offering successful December 2025. If MSTR is inactive sitting connected immense bitcoin losses astatine this point, they whitethorn find it hard to rotation implicit that $650 cardinal indebtedness successful the market. It would pb to a tricky determination arsenic they would presumably privation to debar selling immoderate bitcoin astatine a nonaccomplishment successful bid to wage backmost the debt.
One facet is precise overmuch connected their side, though: In the satellite of Bitcoin, oregon so adjacent the wider macroeconomic environment, December 2025 feels similar a precise agelong clip away.
4. It seems improbable that MSTR would question (or so beryllium able) to rise overmuch much indebtedness successful existent marketplace conditions — arsenic Michael Saylor points retired successful the interrogation clip below, they borrowed antecedently connected beauteous advantageous terms. It besides seems improbable close present that they would merchantability further equity into the marketplace to bargain much bitcoin, which they person besides done previously, arsenic the stock terms is presently truthful low.
5. They could transportation connected buying much bitcoin with profits and indeed, portion penning this, MSTR did announce a further tiny bitcoin acquisition of $10 million.
6. What seems apt alongside this is opting to support immoderate aboriginal profits successful dollars for optionality implicit the adjacent mates of years alternatively than bargain much bitcoin with it, contempt bitcoin’s little price. The Q1 2022 results linked supra (see constituent 1) would suggest that they are presently gathering immoderate currency reserves, holding $93 cardinal successful currency versus $63 cardinal 3 months earlier.
7. One last enactment would beryllium to bargain backmost immoderate of their ain shares with profits from the business, fixed that their stock terms has declined by a higher proportionality implicit the past 6-12 months than the bitcoin price. This fundamentally would nonstop a awesome that the marketplace undervalues MSTR comparative to adjacent the bitcoin price, and would represent a defiant, albeit risky, amusement of religion successful their strategy.
Finally, it’s worthy watching this video nexus from CNBC for immoderate caller thoughts from Michael Saylor, which includes the pursuing quotes:
Interviewer: “Would you see buying more?”
Michael Saylor: “Yeah. If your clip skyline is 1 month, past Bitcoin looks similar a volatile hazard asset. But if your clip skyline is 10 years, it looks similar a hazard disconnected store of worth plus ...”
“... we borrowed 2.2 cardinal dollars astatine a blended involvement complaint of 1.8% earlier involvement rates doubled. It seemed similar a tenable happening to do. $1.7 cardinal is unsecured, the remainder is simply a 7 twelvemonth word aft we borrowed the money. The borderline indebtedness is good managed ...”
“... Bitcoin is the archetypal and lone morganatic scarcity successful the universe.”
None of the contented successful this nonfiction should beryllium construed arsenic fiscal proposal oregon taken arsenic an endorsement to bargain oregon merchantability shares successful MSTR. The writer owns shares successful MSTR.
Thanks to Will Schoellkopf for reviewing this article.
This is simply a impermanent station by BitcoinActuary. Opinions expressed are wholly their ain and bash not needfully bespeak those of BTC Inc. oregon Bitcoin Magazine.
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