MicroStrategy’s Bitcoin debt loop: Stroke of genius or risky gamble?
2025-01-09
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MicroStrategy co-founder Michael Saylor has adopted an aggressive Bitcoin acquisition strategy that onlookers say is either a visionary stroke of genius or a reckless gamble.
Those in the latter camp warn that MicroStrategy’s heavy reliance on a volatile asset like Bitcoin is fraught with risk. A significant drop in Bitcoin’s price could strain the company’s balance sheet and heighten financial pressures, potentially undermining its ability to meet debt obligations or raise additional funds.
Despite the risks, Saylor remains resolute. The American entrepreneur says he has “no reason to sell the winner.”
MicroStrategy is the largest corporate Bitcoin holder in the world, with 447,470 BTC in its trove as of publication. These massive holdings raise the stakes for the company and the entire Bitcoin ecosystem.
Funding MicroStrategy’s BTC purchases
MicroStrategy is a business intelligence software firm on paper, but its aggressive Bitcoin accumulation means it essentially functions as a Bitcoin treasury firm.
Saylor’s Bitcoin shopping spree started with a $250 million corporate cash purchase in August 2020. He then turned to debt issuance, starting with convertible notes — debt that can convert into equity. These notes, often carrying low interest rates, helped raise $650 million in December 2020, with succeeding issuances raking in billions.
In June 2021, MicroStrategy issued $500 million in senior secured notes, offering higher interest rates and backed by company assets.
Most recently, on Dec. 24, 2024, MicroStrategy proposed increasing its common stock from 330 million to 10.33 billion shares and its preferred stock from 5 million to 1.005 billion shares. The plan provides flexibility to raise capital as needed over time rather than issuing all new shares at once.
This aligns with the company’s 21/21 Plan, which aims to raise $42 billion over the next three years — half through equity sales and half through fixed-income instruments — to fund further Bitcoin purchases and explore initiatives such as developing a crypto bank or offering Bitcoin-based financial products.
A heedless Ponzi scheme?
According to David Krause, emeritus professor of finance at Marquette University, Saylor’s strategy is “inappropriate.”
He warned that a sharp Bitcoin price drop could severely impact MicroStrategy (MSTR), eroding shareholder equity, jeopardizing debt repayments and potentially leading to financial distress or bankruptcy, which might trigger a sell-off of its shares.
“As someone who has studied and taught corporate finance and investments for most of my career, and having served as a [chief financial officer] for over a decade, I firmly believe that treasury assets should consist solely of liquid and low-risk securities, such as money market instruments,” Krause told Cointelegraph in a written statement.
MSTR has largely traded above the net asset value (NAV) of its Bitcoin holdings. On Jan. 9, the company’s Bitcoin holdings accounted for 51% of its market capitalization, according to BitcoinTreasuries.net.
When MSTR trades above its Bitcoin NAV, the company raises funds through debt or equity to buy more Bitcoin. Still, this strategy risks shareholder dilution, Kruger warned.
This approach theoretically creates a loop where the company’s Bitcoin holdings boost its market position and stock price, enabling further debt issuance and additional Bitcoin purchases.
Some social media analysts have likened this looping strategy to a Ponzi scheme.
“The cycle only works if BTC keeps rising,” according to financial analyst Jacob King. “If BTC stalls or crashes (which it will), the loop collapses. This is unsustainable and is a giant Ponzi.”
MicroStrategy did not respond to these critiques when Cointelegraph reached out. But in a recent media interview, Saylor compared the approach to Manhattan real estate practices.
“Just like developers in Manhattan, every time real estate goes up in value, they issue more debt to develop more real estate,” he said. “That’s why your buildings are so tall in New York City, it’s been going on for 350 years. I would call it an economy.”
Kruger, who has been mostly critical of MicroStrategy’s Bitcoin reliance, said in a recent paper that it does not meet the US Securities and Exchange Commission’s formal definition of a Ponzi scheme.
The securities watchdog describes a Ponzi scheme as an “investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.”
Gracy Chen, CEO of crypto exchange Bitget, agreed with Kruger’s analysis.
Chen told Cointelegraph, “This strategy is more akin to Charles de Gaulle’s challenge to the Bretton Woods system by converting dollars to gold. It’s about exploiting perceived weaknesses in modern monetary theory to gain from asset appreciation.”
The undeniable success of Saylor’s Bitcoin blueprint
As of the Jan. 8 close, MSTR shares traded at $331.70, reflecting about a 2,200% increase since the company’s first Bitcoin purchase on Aug. 11, 2020, when it closed at $14.44. Over the same period, Bitcoin’s price rose by about 735%.
Whether one agrees or disagrees with Saylor, his plan has undeniably boosted MicroStrategy’s crypto portfolio and stock performance, earning the company a spot in the Nasdaq-100 index in December.
While shareholder equity may face dilution, proponents argue that Bitcoin’s long-term growth potential could offset these risks. In addition, Chen pointed out that MicroStrategy’s convertible debt structure may act as a protective cushion during crises.
“A prolonged bear market could expose the company to liquidity challenges and heightened debt management risks. However, its unsecured convertible debt structure offers some protection against immediate forced liquidations,” Chen explained.
The Bitcoin exit strategy
In a nutshell, MicroStrategy’s mission is simple: Keep buying Bitcoin. 
The asset serves as a long-term strategic holding, a hedge against economic uncertainties, and a means to enhance shareholder value. It can also be used to secure loans or raise capital for future business opportunities without requiring the liquidation of its Bitcoin.
“There’s potential to make profits out of that huge liquidity pool of Bitcoin,” Alexander Panasenko, head of product management at VixiChain said. “When you are holding a huge amount of liquidity of that inflationary-proof asset that actually stores value, you can make money just from holding it, or lending and borrowing it.”
Critics, however, point out the absence of a clear exit strategy for Saylor. Bitcoin maximalists dismiss the need for one, as they hail Bitcoin as the ultimate exit from traditional financial systems.
Stock dilution remains an immediate concern, but the strategy has largely benefited MicroStrategy and the broader Bitcoin ecosystem, inspiring imitators worldwide.
“As long as [MicroStrategy] continues to spark the conversation about the role of digital assets in our economy going forward, and you can see broader adoption in new companies, bringing to light new strategies [for] tapping into digital assets... it’s really good,” Panasenko said.
“In case of a failure of such propositions that involve digital assets, it puts a shadow on the entire industry and it basically rolls us back.”