Technique inventory has decreased by 55% from its all-time high, but significant liquidations remain improbable – Kobeissi

MicroStrategy’s stock has decreased by over 55% from its peak, leading to speculation that the company might be compelled to liquidate its substantial Bitcoin (BTC) assets.

Holding approximately 499,096 Bitcoin valued at $43.7 billion, the firm has established one of the largest corporate Bitcoin reserves. However, concerns are mounting regarding its ability to sustain this strategy amid market fluctuations.

According to the Kobeissi Letter, the risk of forced liquidation primarily depends on two critical factors: a prolonged and significant decline in Bitcoin’s price and MicroStrategy’s capacity to raise additional capital.

The company acquired its Bitcoin at an average price of $66,350 per coin. Should Bitcoin drop significantly below that threshold and remain there, it could exert pressure on MicroStrategy’s balance sheet.

However, liquidation is not an automatic process. The company’s debt agreements stipulate a “fundamental change,” such as a bankruptcy filing or a stockholder-approved dissolution, before creditors can demand repayment that could lead to a forced sale of assets.

Liquidity concerns

MicroStrategy currently has $8.2 billion in total debt, primarily in the form of convertible notes maturing between 2027 and 2028.

Most of these notes have conversion prices below the company’s current stock value, indicating they are unlikely to trigger an immediate liquidity crisis.

With a leverage ratio of approximately 19%, the company’s Bitcoin holdings still significantly surpass its liabilities, reducing the immediate risk of insolvency.

For years, MicroStrategy has employed a high-risk, high-reward strategy of borrowing funds to acquire Bitcoin. The company raises capital through convertible notes, purchases Bitcoin to enhance its value, and then sells additional shares at a premium to acquire even more Bitcoin.

This approach has proven effective in previous market cycles, enabling the company to maintain its position through Bitcoin’s price fluctuations.

Forced liquidation

The key question is whether MicroStrategy can continue to raise capital amid a declining stock price and market uncertainty.

According to the Kobeissi letter, if investor confidence diminishes and the company loses the ability to issue new shares or refinance its debt, it may need to sell Bitcoin to fulfill its obligations.

Nonetheless, for the time being, MicroStrategy has the opportunity to address its financial challenges since most of its debt will mature several years from now.

While immediate liquidation appears unlikely, the company’s long-term stability will hinge on Bitcoin’s price trajectory and its ability to maintain its financing model. If Bitcoin remains stable or recovers, MicroStrategy may be able to continue its strategy.

However, if the leading cryptocurrency undergoes a prolonged downturn, the pressure to sell could increase, making forced liquidation a more plausible scenario.

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