Strategy's Bitcoin Holdings: Liquidation Concerns Addressed

Recently, fears of a potential forced liquidation from Strategy, known as a "Bitcoin Treasury" company, emerged as its stock fell over 11% in one morning. This triggered concerns across the market due to Strategy being the largest corporate holder of Bitcoin.

However, analysts believe these fears may be exaggerated. According to the analysts at The Kobeissi Letter, structural safeguards in place make a scenario of forced liquidation "highly unlikely."

One reason for this assertion is how Strategy has structured its convertible notes. A convertible note is a type of short-term debt that can be converted into equity, which allows the company to delay setting a final valuation. Strategy has raised significant capital through these convertible notes, which include zero-coupon bonds. For example, its $2 billion offering maturing in 2030 allows for conversion into equity at a base rate of $433.43 per share.

This method of raising funds helps the company gain capital without immediately diluting shareholder value. Strategy currently holds around 499,096 Bitcoin, valued at about $44.4 billion, making up about 2.3% of the total Bitcoin supply. Its Bitcoin assets are backed by $8.2 billion in convertible debt, including low-interest bonds and zero-coupon notes, with maturities spanning until 2028 and 2030.

According to Trevor Koverko, co-founder of security token firm Polymath, this means that a large portion of the company's debt is closely tied to Bitcoin's market performance. The recent downturn in the crypto market has resulted in significant losses, erasing $3.7 billion from the value of Strategy's Bitcoin holdings.

While immediate threats of liquidation appear low, Koverko warns that ongoing weakness in the market could impact the company's ability to meet its financial obligations. He emphasizes monitoring collateral requirements and refinancing options as critical factors moving forward.

Theoretically, a bankruptcy or shareholder-approved dissolution could instigate liquidation, but Strategy's track record and ability to raise equity—evidenced by a successful $1.8 billion fundraise during Bitcoin's downturn in 2022—make this outcome unlikely. Moreover, Michael Saylor, co-founder and chairman of Strategy, holds a 46.8% voting stake, which makes it almost impossible to proceed with any shareholder vote without his approval.

In the third quarter of 2024, Strategy reported $116.1 million in software revenue but faced a net loss of $340.2 million primarily due to non-cash impairment charges linked to its volatile Bitcoin assets. This creates a reflexive relationship where the issuance of equity funds Bitcoin purchases, enhancing its overall asset value, which in turn supports further capital raises.

Still, absent a significant unpredicted event, involuntary Bitcoin sales are not expected to occur before the debt maturities in 2028. Even in a worst-case scenario where Bitcoin's value drops by 50% to $33,000, reports suggest that Strategy's assets would still surpass its debts by over 100%, bolstering the analysts' position on the improbability of forced liquidation.

Edited by Sebastian Sinclair

Bitcoin, Liquidation, Debt