MicroStrategy's flywheel has failed; can it only use Bitcoin to pay shareholder interest? Researchers provided three outcomes.

The Bitcoin reserve pioneer MicroStrategy (Strategy) announced this morning the establishment of a $1.44 billion reserve fund to ensure that dividend payments in the next one to two years are secure. While this may stabilize market sentiment, it also officially declares the failure of its stock-selling and coin-buying flywheel. Researchers analyze three possible outcomes for the company, and whether it is deleveraging or strengthening expansion, it will undoubtedly bring significant impact and risk to the Bitcoin market.

( Bitcoin reserve pioneer MicroStrategy takes action: $1.44 billion to safeguard dividends, are investors reassured? )

Can MicroStrategy's $1.44 billion reserve alleviate market concerns?

MicroStrategy announced that it raised nearly $1.5 billion through the issuance of common stock, with only a small portion of the funds used to increase its Bitcoin holdings, while the rest is stored in a $1.44 billion reserve fund to pay dividends and interest over the next 12 to 21 months, aiming to stabilize market sentiment and ensure short-term solvency.

However, the pressure has not completely eased. MicroStrategy has heavily relied on preferred stocks such as STRC as new financing channels this year, but the annualized return of STRC has been raised to 10.75% due to the decline in stock prices, causing its interest expenses to continue to swell. The scale of preferred stocks has reached 7.7 billion dollars, with annual interest expenses of about 750 million dollars.

As the company's mNAV remains close to 1 for a long time, it symbolizes that the traditional “selling stocks to buy coins” flywheel is difficult to maintain in the short term. CEO Phong Le recently admitted that if funding runs out, the company may ultimately have to sell some BTC, and the potential selling pressure is becoming a key concern for the market.

(Will MicroStrategy sell coins? Strategy CEO admits: If financing is difficult, selling BTC will be a last resort)

Three future paths emerge: Where will MicroStrategy go?

In this regard, independent researcher Spreekaway deduced that the future of MicroStrategy can be roughly divided into three scenarios:

Scenario 1: “De-leveraging Survival Mode” pauses expansion and accepts discounted trading.

In this context, the company will reduce the issuance of STR preferred stock and other debts, as well as lower the scale and speed of Bitcoin purchases, while trying to maintain reserves without selling BTC.

However, this represents the failure of MicroStrategy's flywheel and narrative, and they must accept that MSTR's stock price will trade at a discount for the long term:

Worse still, the collapse of dreams will stifle options trading volume and implied volatility, putting financing strategies such as convertible bonds in jeopardy.

He candidly said, “This is very painful for both the shareholders and Saylor, so I believe the likelihood of this situation occurring is low.”

Scenario 2: “External Rescue Mode” Macroeconomic Situation Temporarily Saves the Flywheel

If the macro environment provides strong support, such as the Federal Reserve restarting quantitative easing or Bitcoin experiencing external upward momentum, this will temporarily allow MicroStrategy to break free from its predicament and restart the stock selling flywheel model:

This will buy them time, but it is likely just delaying the outcomes of scenario A or C. The nature of the company's cash inflow means he can only buy at high points each time. This is also why he has the right direction but is always on the edge of breakeven.

He stated: “In the short term, this is the best result for Bitcoin prices, and Saylor can also slightly reduce debt risk.”

Scenario 3: “High Leverage Full Speed Expansion” Preferred Shares Become the New Flywheel

If the microstrategy chooses to continue large-scale issuance of preferred stocks such as STRC, attracting retail funds with higher interest rates, replacing the previous stock selling flywheel, then this could grow to a debt scale of billions to tens of billions.

There is no need to worry about selling Bitcoin for now, but the final bill will eventually come due. The larger the debt they owe to retail investors, the greater the likelihood of selling Bitcoin to repay the debt.

He stated that this kind of deleveraging will be very painful for the market: “This route is the easiest to create systemic risks, and it is also the situation that the Bitcoin market is least willing to see.”

Reserves alleviate short-term worries, but the risks in capital structure remain unresolved.

MicroStrategy's decision to sell reserves can be said to be second only to dumping Bitcoin as a poor strategy, directly exposing the company's capital structure's fragility. Now facing the accumulation of high-interest burdens and still not finding new stable financing methods, whether it can overcome the current challenges and boast about surviving the 2022 bear market in the future has also become a market focus.

This article discusses whether MicroStrategy's flywheel has failed and if it can only use Bitcoin to pay shareholder interest. Researchers provide three outcomes, first appearing in Chain News ABMedia.