Strategy's "Death Spiral": When Bitcoin falls below the cost basis, the billion-dollar leverage empire faces liquidation, triggering a vicious cycle of forced selling, margin calls, and further price declines, threatening the stability of the entire market.

Author: Ye Zhen

Source: Wall Street Insights

As Bitcoin price falls below a key support level, turmoil in the digital asset market is intensifying, and at the center of this storm, Strategy (MSTR) is facing unprecedented pressure.

The company, founded by Michael Saylor, confirmed on Thursday that due to a significant write-down of the fair value of its Bitcoin holdings, its net loss in the fourth quarter reached $12.4 billion. The loss mainly stems from a $17.4 billion unrealized fair value loss caused by mark-to-market accounting standards.

As Bitcoin drops below $63,000, Strategy’s stock plummeted 17.1% on Thursday. This not only wiped out all gains since the U.S. election but also caused the stock to fall nearly 80% from its all-time high in November 2024.

The company’s Bitcoin holdings are currently valued at about $46 billion, with an average purchase cost of $76,052 per coin. This marks the first time since 2023 that the company’s Bitcoin market value has fallen below its total cost basis.

Facing a market collapse, Michael Saylor admitted during the earnings call, “Selling Bitcoin is an option,” even as he loudly proclaims “HODL” on social media platform X.

What’s more unsettling is that the cycle of financing through “equity premiums” to buy more coins has stalled. The company’s cost basis has now exceeded the market price for the first time, and its financial experiment is under severe scrutiny.

With MSTR’s stock price crashing, convertible bond investors are likely to seek early redemption for cash rather than convert. The first $1 billion redemption could mature on September 15, 2027, with another $6.4 billion potentially maturing in 2028. A total of $8.2 billion in potential cash demands are approaching.

The logic of financing to buy coins is being tested

Strategy has served as a high-beta proxy for Bitcoin, with its stock soaring over 3500% from 2020 to 2024. However, this engine is built on unstable ground. With the launch of spot Bitcoin ETFs, investors now have cheaper, more direct risk exposure, weakening Strategy’s uniqueness.

More critically, the valuation premium has collapsed. Strategy’s enterprise value once approached twice the value of its Bitcoin holdings, but now this premium has nearly disappeared. If Bitcoin prices stay at current levels, Strategy’s market cap would only need to fall about 13% to fully eliminate the premium. Once the mNAV (enterprise value to crypto asset value ratio) drops below 1, it means the company’s market value is less than the value of its holdings, and the logic of financing to buy coins will be completely invalid.

In the earnings call, CEO Phong Le tried to reassure investors, saying “This is your first downturn, and my advice is to hold on,” but this statement sparked anger in the live chat comments. Benchmark Co. analyst Mark Palmer pointed out that in the current environment, market focus has shifted to how the company can raise funds under challenging conditions.

Book value already insolvent

Deteriorating financial data has heightened market concerns about Strategy’s debt repayment ability. Data shows that as of February 1, the company held over 713,000 Bitcoin, with an average cost basis of $76,052. As Bitcoin’s trading price remains well below this cost, Strategy’s book value is now insolvent.

Strategy bears $8.2 billion in convertible debt. Although Saylor emphasizes that the company has $2.25 billion in cash reserves, enough to cover interest and dividends for the next two years, and that there is no margin call risk, market concerns persist.

Currently, Strategy’s convertible debt structure shows different maturity pressure points. The $1.01 billion convertible bond issued in September 2024 has a conversion price of $183.19, with holders able to exercise a put option on September 15, 2027. The $3 billion zero-coupon convertible issued in November 2024 has a conversion price of $672.4 and can be put back on June 1, 2028. Additionally, several other convertible bonds with conversion prices between $149.77 and $433.43 will face put options in 2028.

S&P Global previously warned that if Bitcoin’s price faces severe pressure at debt maturity, the company might be forced to liquidate assets at low prices, which would be viewed as a “debt restructuring equivalent to default.”

Phong Le candidly stated during the call, “If Bitcoin drops 90%, the company will not be able to repay debt solely by selling Bitcoin, and will have to seek debt restructuring.”

Saylor remains bullish

Despite the pressure, Saylor remains optimistic during the earnings call. “We have a cryptocurrency president who is determined to make the U.S. a Bitcoin superpower, the world’s crypto capital, and a leader in digital assets,” Saylor said. “You can’t underestimate the importance of gaining support for this industry and digital capital at the highest levels of political structure.”

Saylor also downplayed the threat of quantum computing to Bitcoin, claiming it “won’t pose a threat for at least 10 years,” and reiterated that this is “FUD” (fear, uncertainty, doubt). He maintains his stance that selling Bitcoin remains one of the options to respond to market conditions.

Strategy reiterated on Thursday that it does not expect to generate profits or earnings in the current year or foreseeable future. Based on these expectations, the company stated that current distributions to perpetual preferred shareholders are expected to be tax-exempt.

However, well-known short-sellers like Michael Burry have issued more severe warnings. According to Bloomberg, Burry reaffirmed his scrutiny of Strategy this week, warning that Bitcoin’s decline could trigger a “death spiral” among corporate holders. This view aligns with long-term critics like Jim Chanos, who have long pointed out the risks of Strategy’s reliance on unprofitable assets and speculative leverage.

Meanwhile, Saylor downplayed the threat of quantum computing again during the meeting, calling it “FUD,” and said this threat would only materialize at least 10 years from now.

Despite management’s efforts to maintain an optimistic tone and describe profitability as a distant prospect, investors are facing a harsh reality test amid Bitcoin’s price falling below cost and tightening financing channels.