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Partners at crypto accelerator resource Alliance express concerns around MicroStrategy’s Bitcoin liquidation event but overlook certain important details.
Over four years later, MicroStrategy‘s Bitcoin acquisition strategy continues to be a polarizing subject within the crypto space and broader financial circles.
Questions linger over how the company’s debt-backed Bitcoin purchases affect its health and whether they also pose a risk to the digital asset itself.
Debates around these questions have reached a fever pitch in recent weeks as the firm has ramped up purchases and unveiled plans to raise an additional $42 billion to buy Bitcoin in the next three years.
In the latest instance, fears expressed by core contributors to leading crypto accelerator Alliance suggesting that the firm’s liquidation price may not be so far off and that such an event could lead to an outcome 100 times worse than Terra and FTX have surfaced. However, a key consideration appears to be missing from their analysis.
MicroStrategy Liquidation Price Around $60K?
Fears expressed by Alliance core contributors Imran Khan and Qiao Wang about MicroStrategy’s Bitcoin acquisition strategy in a November 27 episode of their Good Game podcast have recently made the rounds online, thanks to reporting from Wu Blockchain.
Alliance DAO partners said on the podcast that they hope that Bitcoin will not fall below 58,000 in the next four years. Because that is the liquidation price of MicroStrategy. If it does happen, it may trigger a crisis 100x bigger than Luna and FTX. The best case scenario is…
— Wu Blockchain (@WuBlockchain) December 22, 2024
During the podcast, Wang asserted that Bitcoin could trigger a black swan event 100 times worse than Terra and FTX combined if it fell below the $60,000 price range, which he estimated to be MicroStrategy’s liquidation price for its now over 439,000 BTC worth over $42 billion purchased at an average price of $58,219 and backed by about $7.6 billion in loans.
For context, Terra and FTX are widely recognized as the two major collapses of the 2022 bear market.
Bitcoin dropped as much as 30% at the peak of the Terra collapse chaos, from highs of around $36,124 to lows of $25,401. Also, during the FTX collapse, the asset wiped off nearly 37% in value, dropping from about $21,364 to a low of $15,632. As such, the statements from Wang have sparked significant concern amongst some, especially considering Bitcoin’s historical tendency to drop around 70% during bear markets.
However, there is one problem with Wang’s analysis: MicroStrategy has no forced liquidation price for its Bitcoin holdings.
Understanding MicroStrategy’s Debt Structure
MicroStrategy’s Bitcoin holdings are purchased by loans obtained from convertible senior notes instead of traditional loans secured by collateral. Simply put, lenders do not hold any of MicroStrategy’s Bitcoin as collateral and do not have the right to seize any assets to force repayment of the loan.
Convertible payments only allow lenders to convert their debt to equity stake at an agreed future price before a set deadline or accept cash repayments on the loans if the deadline elapses and the note is not converted. Until conversion, however, lenders receive interest payments on their notes.
In the case of MicroStrategy, most of its outstanding notes have maturation dates far into the future, between 2027 and 2029, at very low interest rates.
In this structure, there is no set price for MicroStrategy to be required to sell its Bitcoin to cover loans, though the firm could consider doing so in an unforeseen case of a cascade of redemptions in a market panic or cash crunch.
Redemptions happen when lenders decide to accept repayment in cash instead of equity in a sign that they lack confidence in the company’s future potential or when the company fails to hit the share price target at the maturation of the note.