Strategy’s Bitcoin Investment Faces Pressure: Is a Forced Liquidation on the Horizon?

Concerns mounted across markets after Strategy’s stock dropped over 11% on Tuesday morning, sparking fears of a potential forced liquidation from the company, which identifies as a “Bitcoin Treasury.”

Although these concerns are not without basis—given that the firm is the largest corporate holder of Bitcoin—those fears may be exaggerated.

According to analysts from The Kobeissi Letter, structural safeguards render a forced liquidation scenario for Strategy “highly unlikely.”

The analysts explained that the structure of the “convertible notes” with Strategy supports this viewpoint, as they noted on X on Tuesday.

Convertible notes are short-term debt instruments that convert to equity, which usually delays discussions concerning a company’s valuation.

Strategy raises funds via convertible notes, including zero-coupon bonds—like its $2 billion offering expiring in 2030, convertible at an initial rate of $433.43 per share.

This allows the company to obtain capital without immediately diluting shareholders.

Strategy possesses around 499,096 Bitcoin valued at approximately $44.4 billion, constituting roughly 2.3% of the circulating supply of the asset.

The company’s Bitcoin holdings are supported by $8.2 billion in convertible debt, which includes zero-coupon notes and low-interest bonds, maturing from 2028 to 2030.

This alignment makes the company’s debt “heavily contingent on Bitcoin,” remarked Trevor Koverko, co-founder of the security tokens firm Polymath, in an interview with Decrypt.

A recent downturn in the broader crypto market resulted in hundreds of millions in forced liquidations this week, ultimately wiping out $3.7 billion from the value of Strategy’s Bitcoin holdings.

“Though this isn’t an immediate danger, sustained weakness might strain its ability to fulfill obligations,” Koverko observed. “Critical factors to watch include collateral requirements and refinancing possibilities.”

While a bankruptcy or shareholder-approved dissolution could theoretically instigate a liquidation, Strategy’s historical ability to raise equity, including $1.8 billion secured during Bitcoin’s downturn in 2022, makes such an outcome improbable.

Another significant consideration noted by The Kobeissi Letter is co-founder and chairman Michael Saylor’s 46.8% voting stake, which effectively makes it “nearly impossible to carry out a shareholder vote” without his approval, according to the analysts.

In Q3 2024, Strategy disclosed $116.1 million in software revenue, despite recording a net loss of $340.2 million, largely due to non-cash Bitcoin impairment charges reflecting the volatility of its assets.

The operational model of Strategy is inherently cyclical: issuing equity funds Bitcoin acquisitions, subsequently enhancing its net asset value, ultimately facilitating additional capital raises.

In the absence of a “Black Swan” event, involuntary Bitcoin sales are highly improbable before the upcoming debt maturities in 2028, pointing to insolvency—not margin calls—as the likely precursor for any forced liquidation.

Even if Bitcoin’s price were to drop by 50% to $33,000, Strategy’s assets would still exceed its liabilities by more than 100%, as noted by The Kobeissi Letter.

Edited by Sebastian Sinclair