If the price of Bitcoin increases, MicroStrategy will benefit in various ways. Conversely, if the price of Bitcoin drops drastically or even crashes, MicroStrategy may have difficulty recovering from debt.
According to a recent report by Bernstein, as reported per Coindesk, MicroStrategy (MSTR) intends to raise long-term debt. However, the company is under pressure as it may have to sell all of its Bitcoin holdings, especially if the price drops drastically. This would be done to protect the company from the negative effect that a possible fall in the price of Bitcoin could have on its finances by 2025, when the debt will be due.
MicroStrategy, founded in 1989, gained attention for its large investment in Bitcoin. The company uses Bitcoin as a reserve asset to help protect and improve its long-term finances. MicroStrategy owns approximately 152,000 bitcoins purchased at an average price of $29,600, totaling $4.49 billion and representing 0.77% of the total Bitcoin supply. With this, the company is one of the largest institutional crypto holders.
The report points out that the value of Bitcoin held by MicroStrategy represents 95% of its market capitalization. However, when considering the debt the company incurred to acquire BTC, the value of these assets is only 49% of the company’s market capitalization.
The Potential Effects of Bitcoin Exposure on MicroStrategy’s Finances
If the price of Bitcoin increases, MicroStrategy will benefit in various ways. The event will help strengthen its financial position, increase the value of its shares and facilitate the repayment of its debt. If an increase in stock price accompanies the rising Bitcoin price, the company will be able to raise more funds for other purposes.
Conversely, if the Bitcoin price drops drastically or even crashes, MicroStrategy may have difficulty collecting the debt when it comes due, as its Bitcoin holdings may not be sufficient to cover the loss. This situation would put additional pressure on the company.
MicroStrategy and the potential influence of its decisions on the crypto market
If an institutional Bitcoin holder like MicroStrategy were to sell their holdings, it could have various effects on the market. The first impact would be price volatility, as the ensuing sell-off and panic selling due to fear would create downward pressure.
Such sell-offs could also trigger negative sentiment in the market, leading to a lack of confidence among investors. Given Bitcoin’s dominance, the selloff could affect other cryptocurrencies as well, potentially causing another prolonged period of market price declines, often referred to as “crypto winter.”
However, it is important to note that the impact of such activity would depend on various factors and other events occurring in the crypto world at the time it occurs.
Temitope is a writer with over four years of experience writing in various niches. He has a particular interest in the fintech and blockchain spaces and enjoys writing articles in these areas. He holds a bachelor’s and a master’s degree in linguistics. When he’s not writing, he trades currencies and plays video games.