Bankruptcy risks cloud MicroStrategy as it announces another Bitcoin purchase

Image by Andrew Khoroshavin from Pixabay

China’s crackdown on crypto mining and trading has continued unabated.
Bitcoin and digital asset markets responded by freefalling to multi-month lows.
But amidst this bloodbath and dance of FUD, MicroStrategy has continued buying Bitcoin.
What if prices fall further and the company goes down?

MicroStrategy: BTFD

Currently, Bitcoin and cryptocurrency markets are mired in a bull-bear crusade, and clearly, the bears have the upper hand. But there are a few bullish stalwarts who have continued to fight on with no signs of dropping arms. MicroStrategy is one of them. The business intelligence company announced another round of Bitcoin purchases (13,005 BTC at $37,617 per coin) even as the benchmark cryptocurrency retested its post-May crash lows.

Also Read: MicroStrategy Plans Another $400 Million Bitcoin Purchase as Price Eyes $20K-Retest

This comes as stocks of the Michael Saylor-led company fell 7% on Wall Street’s opening bell.

As of writing, the company holds close to 105,085 bitcoins. It has spent nearly $2.74 billion from its reserves to build its said BTC stash. Out of the six-digit Bitcoin holdings, MicroStrategy’s subsidiary MacroStrategy has approximately 92,079 coins on its balance sheet. The average holding price of its BTCs stands at $26,080.

Bankruptcy Looms Large

The Virginia-based firm has set new milestones on its “Bitcoin-gobbling roadmap.” But it seems the boss and the “brass managing the brass” have ignored the risk of the company’s financials with the frequent BTC purchases.

Noted trader Sven Henrich was quick to point this out soon after Michael Saylor went public on Twitter with the latest $500 million Bitcoin buy.

“Understand the conviction. Question though: As the price average and employed leverage have both been rising, what’s the risk profile/consequence if #Bitcoin were to drop below the average holding price?” he asked in response to Saylor’s tweet.

Sven went on further to explain that he was not calling MicroStrategy’s latest Bitcoin buy decision wrong. Instead, “Just asking what the risk profile is if the price drops below the average holding price.”

To which AI/ML engineer Quinn Pertuit replied:

“It’s simple. He will dump shares of MicroStrategy, and the company would likely go under as chaos ensues.”

It is important to note here that MicroStrategy bought the latest stash of Bitcoins by selling junk bonds. Which essentially translates to “borrowing money from the market” to buy BTC.

Also Read: MicroStrategy Now Owns 91,850 Bitcoins

Financial journalist and Seeking Alpha contributor Josh Arnold pointed the lacuna of the above move in his latest article. Arnold talked about how terrible it is for MicroStrategy to buy Bitcoin with such enormous amounts of leverage. His closing comments in the article read:

The one thing I do know is that MicroStrategy’s leverage and share issuances are not good things for shareholders, and I worry about its ability to service the debt without having to sell Bitcoin, which sort of defeats the purpose of owning it in the first place.