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No one knows, time will tell“If you survive until tomorrow, it could mean that either a) you are more likely to be immortal or b) that you are closer to death.” — The Black Swan by Nassim Nicholas TalebIn November 2022, FTX filed for bankruptcy, and two years have already passed since then. The market, as if forgetting the collapses of FTX and Terra, has recovered rapidly, with Bitcoin now approaching the $100,000 mark.While the market's steady progress is exciting, as an investor who entered the crypto market in 2020, I’ve witnessed so many crash events that I can’t help but worry about what the next black swan event might be.The collapse of FTX and Terra had different causes, processes, and outcomes, but they share one clear similarity: the cycle of virtuous and vicious loops. Both were structured in a way that allowed for explosive growth in favorable market conditions but also endless downward spirals when things turned sour.Although not as significant as FTX or Terra, a similar characteristic can be currently observed in another entity: MicroStrategy. Personally, I believe MicroStrategy carries less risk compared to the other two, but its practice of leveraging debt to purchase Bitcoin is not without danger. I'd like to briefly discuss this.

1. Status Quo

1.1 Company Overview

MicroStrategy was originally established as a business intelligence company by Michael Saylor in 1989. In its early years, the company focused on analytics software, eventually expanding into mobile applications and cloud-based services in line with technological advancements.

(Source: companiesmarketcap.com)The company went public in 1998 with a valuation of approximately $1 billion. Aside from a brief surge during the dot-com bubble, MicroStrategy's market value hovered around $1 billion, making it a relatively unremarkable stock up until 2020. However, everything changed on August 11, 2020, when MicroStrategy, as a publicly traded company, announced its first Bitcoin purchase. Since then, it has consistently added BTC to its holdings, driving its market capitalization to an exponential growth of around $90 billion today.

1.2 Where Do Funds Come From?

(Source: SaylorCharts)MicroStrategy has acquired a total of 402,100 BTC at an average price of $58,263, representing approximately 1.9% of Bitcoin's total supply of 21 million—a staggering amount. The company primarily funds its Bitcoin purchases through three main methods:1.2.1 Cash Reserves

(Source: SEC)As a software company, MicroStrategy generates revenue through product licenses, subscription services, and product support. According to its 10-K reports, the company generated ~$499M in revenue in 2022 and ~$496M in 2023 from its core business.After deducting the cost of revenues and operating expenses (excluding cryptocurrency price fluctuations), MicroStrategy was left with $10.5M in 2022 and $0.8M in 2023. These funds can be used for purchasing BTC or paying interest on existing debt.1.2.2 Convertible Senior Notes & Stock Offering

(Source: MicroStrategy Q3 2024 Report)MicroStrategy’s primary method of raising funds is by offering convertible senior notes. As of Q3 2024 Financial Results, the company has accumulated ~$4.26B in debt through such notes, with an average annual interest rate of 0.811%, resulting in $34.6M in yearly interest payments.Recently, on November 21, 2024, MicroStrategy offered an additional $3B in convertible senior notes. This brings its total debt to over $7B. Notably, the new $3B offering carries a 0% coupon, meaning no interest expense is incurred. Instead, investors can convert these notes into stock at a 55% premium in the future.Besides convertible notes, MicroStrategy also conducts stock offerings. In Q3 2024, the company issued $1.1B in Class A common stock.Looking ahead, MicroStrategy announced plans to raise an impressive total of $42B over the next three years from 2025 to 2027. Of this, $21B will come from equity offerings, while the remaining $21B will be raised through fixed-income offerings. The timeline includes raising $5B annually in 2025, $7B in 2026, and $9B in 2027 from each funding source.

1.3 Statistical Highlights

Here are some interesting data and facts about MicroStrategy:

(Source: SaylorCharts)

(Source: MSTR-tracker)

(Source: MSTR-tracker)

2. Is Microstrategy The Next FTX?

While structural issues played a role in the collapses of FTX and Terra, the moral hazard of their founders also significantly contributed. By definition, black swan events are inherently unpredictable, making it impossible to assess whether there is any moral hazard within MicroStrategy based on publicly available information. Therefore, the focus here will be on analyzing structural risks.Although the title of this discussion may sound grand, the structural risk associated with MicroStrategy is actually straightforward: Bitcoin investment through leverage. If the company were only investing its own equity in Bitcoin, the impact of a price crash would be relatively minimal.

(Source: MicroStrategy)However, as highlighted in the Q3 2024 Report, MicroStrategy’s goal is to use prudent leverage to acquire as much BTC as possible, enhance shareholder value, and outperform Bitcoin itself.As everyone knows, leverage is a double-edged sword. It inherently comes with interest costs on debt, and if the value of BTC purchased with leverage declines, the company may be forced to sell its holdings to repay creditors.Michael Saylor has repeatedly stated in the media that he has no intention of selling BTC, which means any forced liquidation could severely impact the company’s value. This would likely lead to a decline in MSTR’s stock price, difficulty in future funding, and the potential collapse of its leverage strategy, with significant ripple effects on the market.To evaluate whether MicroStrategy’s leverage strategy is sustainable, I’m gonna examine two key aspects:

2.1 Can MicroStrategy Manage Its Interest Costs?

First, let’s consider the interest costs. With the recent issuance of $3B in convertible senior notes at a 0% coupon, MicroStrategy’s total debt stands at approximately $7.3B, with an average interest rate of 0.476%, resulting in $34.6M in annual interest payments. The key question is: can MicroStrategy continue to manage these payments?

(Source: SEC)According to the company’s 2023 10-K filing, excluding digital assets, MicroStrategy holds approximately $1.13B in other assets. This is significantly higher than the annual interest payment of $34.6M, suggesting that the company should have no immediate issues covering interest costs.Additionally, as noted earlier, MicroStrategy generates substantial revenue from its core business of business intelligence software. However, a concerning factor is that after deducting the cost of revenues and operating expenses, the remaining profit is relatively small and has been declining over time.The scale of future debt also cannot be overlooked. As mentioned, MicroStrategy plans to issue an additional $21B in convertible senior notes over the next three years. This would increase its total debt to $28.3B. Applying the current average interest rate of 0.476%, annual interest payments could rise to $134.7M, a potentially unsustainable amount in the long term.While MicroStrategy has reduced its interest burden by issuing 0% coupon notes recently, it remains uncertain whether the company can continue to secure such low-interest debt. This issue will be explored further in the next section.

2.2 Is Future Fundraising Sustainable?

2.2.1 Will Investors Continue to Provide Funding?

(Source: MicroStrategy)The first question is the sustainability of fundraising. While the current positive sentiment in the cryptocurrency market makes it seem easy to secure funding, historical data shows that between February 2021 and March 2024, MicroStrategy did not issue any convertible senior notes. This corresponds to the period from Bitcoin’s first crash in 2021 to the recent market recovery.

(Source: Bitbo)While there’s no definitive evidence, Bitcoin’s price cycle has historically aligned with its 4-year halving cycle. This suggests a high likelihood of a bear market around 2026–2027, with the BTC long-term power law model indicating a potential price floor of $53K–$70K during that time. Considering MicroStrategy’s average Bitcoin acquisition price of $58K, a bear market could make securing additional funding more challenging.2.2.2 Volatility Matters

(Source: MicroStrategy)Beyond Bitcoin’s price, volatility plays a critical role in the sustainability of funding through convertible senior notes.Some readers may wonder: Why does MSTR stock trade at a premium over its net asset value (NAV) by more than 2x? Why would investors participate in the recent $3B convertible senior notes offering with a 0% coupon rate and a 55% premium?

(Source: MicroStrategy)The key to these questions lies in volatility. Bitcoin and MSTR exhibit significantly higher volatility compared to other assets, making them attractive to investors. MicroStrategy even highlights its stock’s volatility in its Q3 2024 IR report.High volatility enables various trading strategies, such as delta hedging, gamma trading, and volatility arbitrage.

(Source: MSTR-tracker)As Bitcoin is inherently more volatile than traditional stocks, and MSTR amplifies this volatility through leveraged Bitcoin purchases, MSTR stock and its convertible senior notes attract significant interest from hedge funds. These notes act not only as a debt instrument but also as a call option, allowing the holder to convert them into shares at a specific price, further increasing their appeal.

(Source: Bitbo)For MicroStrategy to maintain smooth fundraising, the volatility of BTC and MSTR must persist. However, with the approval of Bitcoin ETFs and the increasing presence of institutional investors, the market is becoming more stable, leading to a gradual decline in volatility. If Bitcoin’s volatility decreases, MSTR’s NAV premium may shrink, affecting its stock price and reducing the attractiveness of its convertible senior notes for fundraising.

3. In the End, Price Matters

Ultimately, the most critical key factor is the price of Bitcoin. Had the cryptocurrency market not experienced a downturn, FTX could have become a massive exchange rivaling Binance. Similarly, if Curve Finance's UST pool had not been attacked, Terra might have emerged as the third-largest mainnet after Bitcoin and Ethereum.If BTC's price continues to rise steadily, MicroStrategy's current strategy could create an endless virtuous cycle, driving explosive growth for both the company and the cryptocurrency market. However, if BTC’s price crashes, the worst-case scenario could see MicroStrategy selling its Bitcoin holdings to repay debt, initiating a vicious cycle.The silver lining is that MicroStrategy's debt is unsecured. The company had previously issued bonds secured by Bitcoin but fully repaid them by Q3 2024. If Bitcoin were still collateralized, a forced liquidation in the event of repayment difficulties could have been disastrous.In my personal opinion, MicroStrategy does not appear to face significant immediate risks. Its interest costs remain manageable, and fundraising has been smooth thus far. However, the scale of planned future fundraising is unprecedented, and the volatility of Bitcoin, the underlying asset, is expected to decrease. Therefore, I anticipate that the level of risk will be much higher between 2025 and 2027.Bitcoin’s value is rapidly increasing, positioning itself as a challenger to gold’s status. The question remains: will MicroStrategy continue acquiring BTC in a sustainable manner to become one of the world’s strongest companies? Or will it serve as another cautionary tale, trapped in the narrative of a tulip bubble? Only time will tell.