What’s Next for the Micro Strategy Bitcoin – Bitcoin Magazine
MicroStrategy (MSTR) currently has a large loss on their bitcoin purchases. Based on a current bitcoin price of $ 20,300, their 129,699 total bitcoin holdings are worth $ 2.6 billion, down from a total purchase cost of about $ 4 billion (average cost of $ 30,700). Therefore, they are sitting on unrealized losses of ~ 1.4 billion dollars on their purchases.
The last couple of years have been a wild ride for MSTR shareholders, and ironically, the stock price ($ 186) is not so far above the stock price in the summer of 2020 when they announced their first bitcoin purchase (about $ 140).
Michael Saylor has seemed confused over the ongoing online speculation at MSTR, which has liquidated their bitcoin holdings for around $ 21,000 due to the recent $ 200 million loan with Silvergate. Even after searching for Michael Saylor’s name on Twitter, the autocomplete phrase “Michael Saylor was liquidated”.
This speculation is quite misleading, but even, where does the recent market turmoil in Bitcoin leave them? To assess this, let us simply outline the terms of the various debts they have incurred over the past few years, including the Silvergate loan.
First convertible banknote offer – December 2020
MicroStrategy completes $ 650 million offer on 0.750% convertible senior notes maturing in 2025
The first convertible banknote offer was $ 650 million, maturing in December 2025. The interest rate MSTR had to pay for these was only 0.75%, which made servicing this debt quite simple – just under $ 5 million in interest costs per year.
Therefore, these convertible bondholders do not receive much interest, but they have the option to convert their investment into MSTR shares to $ 398 per share. This thus represents a type of call option on the future price of MSTR shares, although one that is now less valuable at current market prices.
To illustrate the convertible portion, let’s say the MSTR stock is priced at $ 500 per share by the redemption date in December 2025 – if you had $ 1 million of convertible notes, they would be worth $ 1.25 million, since you could buy the shares for $ 398 and immediately. sell them for $ 500. This, and other upside scenarios, explain the low interest rate to be paid.
Other convertible banknote offers – February 2021
MicroStrategy completes $ 1.05 billion offer of convertible senior banknotes maturing in 2027 at 0% coupon and 50% conversion premium
This offer (which raised $ 1.05 billion) is much along the same structure as the first, albeit on even better terms from an MSTR point of view, and worse terms for convertible bondholders. This time the interest rate is 0%, so there is no interest cost and the redemption date is February 2027.
The convertibility of these notes only contains value if the share price of MSTR is above $ 1,432 per share – therefore much less likely to be converted than the previous offer. It seemed relatively more likely at the time, given the stock price closed at $ 955 on February 16, 2021.
Skeptics will question the benefit of raising so much debt to buy bitcoin, but one element seems clear in retrospect – MSTR and Michael Saylor got a pretty good deal on borrowing on these terms at the time.
Senior Secured Notes – June 2021
MicroStrategy completes $ 500 million offer of 6.125% Senior Secured Notes maturing in 2028 with Bitcoin revenue use
This represented a more conventional bond offering. MSTR borrowed $ 500 million until 2028, at an annual interest rate of 6.125%. This makes the annual interest cost of these bonds approximately $ 30.6 million, significantly more than the previous interest cost of convertible notes combined.
This announcement also coincided with the establishment of a subsidiary – “MacroStrategy” – which would hold the existing 92,079 bitcoins that they owned. While the new debt was senior-secured banknotes – with a high priority to be paid in relation to other creditors in the event of future insolvency – they are not secured against 92,079 bitcoin. This becomes relevant when we consider the later Silvergate bitcoin-supported loan.
Silvergate Bank Loan – March 2022
This loan was a little different – borrowing $ 205 million for three years backed by the macro strategy-held bitcoin. As linked to slides 11 and 12 in this presentation, this was initially supported by 19,466 bitcoin, but more can specifically be provided as collateral should the price of bitcoin fall.
Presentation of financial results for the first quarter of 2022
The ratio between collateral and collateral is 50%. It is this fact that has probably led many to quote the MSTR liquidation price of the loan as the price of bitcoin falls below $ 21,000 – at this point the 19,466 bitcoins would be worth under $ 410 million (2 x 205) and they would need to provide more security according to the loan terms. But as Michael Saylor pointed out and the slides above show, there are another 95,643 bitcoins that have not yet been pledged, and may be.
Link MicroStrategy Investor Relations Tweet.
The calculation works as follows regarding the $ 3,562 referred to in the tweet. At that price point, the total of 115,109 bitcoin available to support the loan would only be worth $ 410 million, so MicroStrategy would have to provide some other security to keep the 50% loan-to-value ratio going.
What about the interest cost on this loan? It is based on a 30-day average SOFR (Secured Overnight Funding Rate) plus 3.7%. At the time of writing (end of June 2022), SOFR is approximately 1%, so this amounts to 4.7% in total. Based on 4.7% interest, it will cost them around $ 9.6 million annually to service the interest at the moment. However, the 1% SOFR rate is expected to be higher. However, further SOFR increases would not prove to be too significant – with 4%, for example, (and thus 7.7% in total) the interest expense would be $ 15.8 million.
Conclusions
So what can we conclude with all this?
1. The total interest expense from all the debt raised to buy bitcoin looks manageable, totaling around $ 45 million ($ 5m + $ 0 + $ 30.6m + $ 9.6m) per year at present. This seems reasonable to service – the latest quarterly results show the gross profit for the last quarter of 94 million dollars.
MicroStrategy announces financial results for the first quarter of 2022
2. Although given the huge drop in the price of bitcoin recently, MSTR’s holdings should not be affected by the price in the short term, unless it falls massively, to $ 3500k. This is due to the large amount of bitcoin they have available to support the Silvergate loan, to keep the support at a 50% loan-to-value ratio.
3. What is striking, of course, is the current huge loss of paper that MSTR is sitting on when it comes to its bitcoin purchases, given that their average cost base is $ 30,700 per bitcoin. It would no doubt be a problem for them if the bitcoin price stays below this in the long run and some of the debt starts to approach redemption. The first loan to mature is the Silvergate loan in March 2025. Given that this is with bitcoin as collateral, it may actually be possible to roll this over in a similar way.
The next maturity is the first convertible banknote offer in December 2025. If MSTR is still facing large bitcoin losses at this time, they may find it difficult to roll over the $ 650 million debt in the market. This would lead to a difficult decision as they would probably avoid selling bitcoin at a loss to repay the debt.
However, one aspect is very much on their side: In the Bitcoin world, or in fact even the broader macroeconomic environment, December 2025 feels like a very long time away.
4. It seems unlikely that MSTR will seek (or in fact be able to) raise much more debt under current market conditions – as Michael Saylor points out in the interview clip below, they previously borrowed on fairly favorable terms. It also seems unlikely right now that they will sell additional equity into the market to buy more bitcoin, which they have also done in the past, since the stock price is currently so low.
5. They could continue to buy more bitcoin at a profit, and in fact, as they wrote this, MSTR announced another small bitcoin purchase of $ 10 million.
6. What seems likely next to this is to choose to keep some future earnings in dollars for options over the next few years instead of buying more bitcoin with it, despite the lower price of bitcoin. The results for the first quarter of 2022 linked above (see point 1) suggest that they are currently building up some cash reserves, with $ 93 million in cash compared to $ 63 million three months earlier.
One last option would be to buy back some of their own shares with profits from the business, given that their share price has fallen by a higher percentage in the last 6-12 months than the bitcoin price. This will essentially send a signal that the market is underestimating MSTR in relation to even the bitcoin price, and will constitute a defiant, albeit risky, belief in their strategy.
In the end, it’s worth seeing this video link from CNBC for some recent thoughts from Michael Saylor, which include the following quotes:
Interviewer: “Would you consider buying more?”
Michael Saylor: “Yes. If your time horizon is one month, Bitcoin looks like a volatile risk asset. But if your time horizon is ten years, it looks like a risk outside the stock of value assets …”
“… we borrowed $ 2.2 billion at a mixed interest rate of 1.8% before interest rates doubled. It seemed like a sensible thing to do. $ 1.7 billion is unsecured, the rest is a term of 7 years after we borrowed the money. The margin loan is well managed … ”
“… Bitcoin is the first and only legitimate scarcity in the universe.”
None of the contents of this article shall be construed as financial advice or taken as an endorsement for buying or selling shares in MSTR. The author owns shares in MSTR.
Thanks to Will Schoellkopf for reviewing this article.
This is a guest post by BitcoinActuary. Expressed opinions are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
