The reason for MicroStrategy's stock price big dump last week has been found: was it caused by the boss himself?

How much will BTC fall before MicroStrategy truly collapses? Not 70,000, but 10,000? What is the likelihood of them selling coins in the near future? How will they maintain their cash flow in the future?
Deep dive into where the death spiral trigger line of MSTR really is!

In the past two days, discussions have increased regarding whether MicroStrategy @Strategy will experience a big dump in the future and whether it will trigger a spiral risk.

Yesterday, MicroStrategy announced a new reserve of $1.44 billion.. @saylor also elaborated on their future cash flow model.

I also took this opportunity to study their current financial model.. to see how big their upcoming risks really are..

Their current basic situation

The company's current market value is 68 billion, holding 650,000 BTC, with a market value of about 59 billion.. The total cost for buying coins is 48 billion, with an average cost price of 74k..

mNAV 1.2 (the ratio of company market value to the value of held BTC, which can be likened to the premium of company market value over the value of BTC they hold)

[How did they get the 48 billion USD from buying coins over the years?]

Mainly relies on three models

1 convertible bond = extremely low interest, or even zero interest debt. After holding until maturity, you can get back the principal. You can also choose to convert to MSTR stock at maturity (if the stock price is high).

For MSTR, this wave of debt has future maturity risks. If the stock price is really not high at maturity, the other party can request to repay the principal. If they do not have enough cash at that time and the stock price is not high, if the other party does not want the stock and cannot raise new funds to repay the debt, they may have to sell coins to repay.

So this wave of debt has always been a risk. So they didn't issue much debt after 25 years.

2 Sell common stock = Directly issue new shares to the market, sell them for cash..

This will dilute the old shares, but if the shares are sold when mNAV is at a high premium, it is equivalent to selling shares at a high premium to get cash, and then using the cash from the sale to buy coins that are "non-premium". Although the shareholding ratio of the old shareholders is diluted, because more coins are bought after selling the shares at a premium, the "holding amount" per share increases.

So for old shareholders, using this model when the mNAV is at a high premium is not an issue. However, when mNAV < 1, this approach cannot be used.

Therefore, as long as the stock price premium is high, this is the perfect financing method. There is no need to pay interest, nor to repay debt, it will only dilute equity.. New shareholders at a high premium foot the bill for old shareholders...

3 perpetual preferred stocks = a new thing created this year..

This thing has no expiration date after subscription, and there is no need to repay the principal forever (unless the company wants to redeem it), just need to receive dividends every year (8-10%). There is no voting rights, but there is priority during liquidation.

This thing has two sides.. Although it does not dilute equity and there is no need to repay the principal.. it will put pressure on future cash flow.. 10% every year..

So after a lot of issuance this year, we need to solve the problem of where the money for the 10% dividend in the future will come from. After all, the money you raised has been used to buy coins, and now BTC has no cash flow.

For a long time, MSTR's model has been to sell shares when the stock price premium is high (above 2) and to issue bonds when the stock price premium is low (1).
However, this year the premium has decreased, and I don't want to issue bonds.. So I came up with a way of 3.

Currently, out of the 48 billion they used to buy coins, 8.2 billion is from issued bonds, and 7.8 billion is from sold perpetual preferred shares.. Apart from this 16 billion, the remaining 32 billion is all raised by selling stocks (almost for free).

It can be seen that the vast majority of MSTR's cash flow is financed through the above three means.. Their software revenue can only cover basic expenses.. Moreover, most of their cash flow is used to buy coins.

So there has been talk in the market recently that if BTC falls below their cost price, will they be forced to sell their coins? If they really need cash, where will their money come from? This is the question that this article will continue to address.

[Besides buying coins, where else do they need to use cash now? ]

The place where they "might" need a large amount of cash in the future is their batch of 8.2 billion convertible bonds.. They originally had an early repayment due in the past two years, but they have already paid it off early.

The convertible bonds that need to be repaid in the future are shown in Figure 4.
The earliest wave to be repaid is in September 2028, approximately 1 billion.. Other repayments over the next 29 years amount to 3 billion, with 2.8 billion in 2030, 600 million in 2031, and 800 million in 2032..

Currently, one of the transactions amounting to 5 billion USD in 2029 and 2030 is at a discount (may require principal if BTC or MSTR stock prices remain at current levels). The others are all at a premium (can be directly converted to shares).

But at least until 2028, these convertible bonds do not have the risk of large cash repayments.

In addition to convertible bonds, they now have a wave of dividend payments, which are the perpetual preferred shares they started issuing this year, with a 10% annual dividend. Currently, 7.8 billion has been issued. According to their own calculations, the annual dividend expenses amount to 800 million per year.
Every time I close my eyes and open them, 2.2 million dollars has to go out of the account..

So the market began to question them. Although your convertible bonds don’t need to consider the repayment issue until 2028, what are you doing with the 800 million each year? Holding BTC without paying interest... Your cash flow relies solely on financing, so if you can’t secure financing, will you have to sell coins to pay the annual 800 million dividends?

This is the reason they announced this $1.44 billion reserve today.. It's to tell the market that we don't need to sell coins now, and in the future, we can obtain cash flow through the following means, so you don't have to worry.

[Why establish a $1.44 billion reserve? ]

It is meant to dispel the market's concerns about their upcoming coin sales. In summary, they have raised another $1.44 billion... specifically to pay for the annual dividends of $800 million in the future. Currently, it can be used to pay dividends for a total of 21 months. In the future, this reserve will be expanded to enough to cover 24 months of dividends.

With this, at least for the next 21 months from now, they have no pressure on their cash flow. There is no need to pay a large amount of cash to repay debts, and they have prepared at least 21 months' worth of money for dividends.

[Recently fell so badly, where did you get this 1.44 billion? ]

This can be said to be one of the most important pieces of information for them today.
They raised this 1.44 billion through issuing new shares and selling stocks between November 17 and November 30. This financing is rare as it was done when their stock premium was very low with mNAV at 1.17.

So why did MSTR fall so badly last week? Originally, BTC was already falling, and their stocks were under selling pressure.. As a result, they continued to sell stocks to finance the big dump!
There is no way, in order to calm the market for the future, I must self-destruct to raise this 1.44 billion.

In their words: This proves that we can continue to raise funds during a fall cycle!

Alright.. You all have said pretty words..

This is probably why, after they released this news today, their stock price started to turn around..

If the previous big dump was due to them forcibly selling stocks to finance themselves when BTC sentiment was low... then this round of financing has temporarily ended... can we understand that this is already a short-term small bottom for them? (Previously, it was equivalent to them creating a big dump in order to raise this 1.44 billion.)
Today, the market rebounded in the second half, probably for this reason..

[What will happen to the money in the future after you have solved the money for 21 months? ]

Today they continued to explain their methods for managing cash flow:

1 If mNAV continues >1, which means the stock price continues to have a premium, their main financing method is still to continue selling stocks..

2 If mNAV < 1 they may 1) sell BTC 2) sell BTC financial derivatives (options, etc.)

They are adamant that they will not sell BTC at all... but explained several scenarios for the future.

1 They believe that 800 million each year is just a very small amount compared to their current market value of 59 billion for BTC.. If we use the current market value of BTC to pay for this, it could last for 74 years.. This is still under the assumption that BTC does not appreciate at all.

As long as BTC grows by an average of 1.35% per year in the future, it can pay this portion of the dividends by selling a little.
(This actually assumes that they will no longer use perpetual shares for financing in the future. If they continue to use perpetual shares for financing, their future dividend pressure will become increasingly large.)

2 They can also choose not to sell BTC but instead sell financial derivatives of BTC.. For example, various arbitrage between futures and spot, selling deep out-of-the-money options, or using methods like covered calls to generate cash flow to cover future dividend pressures.

(For example, the annualized return for futures arbitrage on Deribit can be around 4-7% now.. With their large scale, they can do OTC strategies like covered calls and others. However, this approach may also encounter issues regarding market capacity and regulation in practical operations. It may not be as easy as it looks on paper.)

So they have 3 ways to continue to obtain cash in the future: 1. Stock market (sell stocks) 2. BTC market (sell coins) 3. BTC derivatives market (sell derivatives)

[If it falls below their cost price of 74,000, will MSTR "liquidate"? Will it trigger various spiral declines?]

In my opinion, this won't happen in the short term.. Most of the BTC they currently hold was sold off during times of high premiums when they sold stocks.. The investors are actually the current shareholders of MSTR.. If the BTC price really falls very low, even causing MSTR to drop below the market value of the coins it holds (mNAV<1), they don't need to sell coins recently.. After all, the funds raised from selling stocks have no cost.. The ones who lose are just those who bought their stocks during the high premium period...

If we only look at their debts, their "insolvency" breakeven point would be when BTC exceeds 1W.. This is calculated based on their current convertible bond volume (8.2 billion). They will only be "insolvent" when the value of the 650,000 BTC they hold falls below 8.2 billion..

This currently seems unlikely. In their words, BTC must fall at an average rate of 19% per year for 10 consecutive years to reach this balance line of over 10,000... Even if BTC enters a bear market in the future, they believe they still have 3-5 years to find a way to address this future issue.

And their convertible bonds, even if they need to be repaid, will not be due until at least 28 years later. The earliest wave that needs to be repaid in 28 years is still in a state of significant premium. As long as BTC doesn't drop too low by then, they can smoothly convert to shares without having to repay the principal.

What will happen if MSTR's stock price continues to decline in the long term and the premium disappears?

In my opinion, even if it continues to decline in the long term, there won't be any major crash points at least in the next two years (2026, 2027). It's just a matter of finding enough cash flow to pay the annual 800 million dividend (assuming no more perpetual preferred shares are sold). Selling some stocks and derivatives should still be quite achievable.

However, if the stock price continues to decline (negative premium), this will affect their opportunity to obtain almost interest-free financing (as they can no longer sell their shares), which will greatly weaken their purchasing power as a treasury in the future.

Although they forcibly dumped 1.4 billion in the past week, demonstrating their "financing ability during the downturn".. it feels like this method is not sustainable..

Is there a one-sentence conclusion?

For MSTR, there's nothing to worry about after 28 years.. Regarding the recent talk about a big dump.. That their stock price falling below 74K will trigger a margin call causing a spiral fall or something.. It feels like the news was intentionally released to short them or to suppress BTC, to accumulate.. (pure speculation)

As it stands, their future cash flow doesn't seem to have any issues for the time being, and they shouldn't need to sell coins within the next 2 years.. However, their purchasing power may decline (if stock prices continue to fall over the long term).

$MSTR