Michael Saylor and MicroStrategy’s system of issuing bonds to buy Bitcoin (BTC) comes with substantial risk, according to BitMEX Research.
In a new report, BitMEX comments on the business intelligence firm’s massive corporate holding of Bitcoin, which it has largely accumulated by issuing debt.
While a forced liquidation is “highly unlikely,” BitMEX notes that Bitcoin is still extremely volatile and that anything can happen.
BitMEX says MicroStrategy has five outstanding bonds with a principal value of $4.25 billion, with two others already fully called and paid for. If the price of BTC happens to crash during the maturity dates of the bonds, devaluing MicroStrategy’s BTC holdings relative to its debt, BitMEX says there is potential for a forced liquidation of the firm’s coins.
“However, if the Bitcoin price declines significantly in value, perhaps to around $15,000 per coin and MSTR cannot raise more debt, then ‘forced liquidation’ of the Bitcoin is something analysts might need to consider…
The maturities and bondholder option dates are spread around, at very specific times, between 2027 and 2031. Therefore, even if Bitcoin does crash to around $15,000, forced selling to finance the cash redemption of the bonds is still unlikely, in our view.
Just because it is not likely that MicroStrategy will be forced to sell Bitcoin, what is much more likely to happen, in our view, is that it becomes in MicroStrategy shareholder interests for the company to sell Bitcoin.
Right now the stock is trading at a huge premium to NAV (net asset value). If this premium becomes a discount, which is pretty much inevitable at some point, and cash bonds repayments are due, then it would be in the best interests of shareholders to sell Bitcoin to raise the money. However, while the stock is trading at a premium, there is the ‘infinite money glitch’ and no reason to sell Bitcoin.
But this glitch will not last forever.”
At time of writing, Bitcoin is trading for $90,434.
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