Crypto Analyst Flags Convertible Debt-Induced Liquidation Risk To Michael Saylor's MicroStrategy

Influential cryptocurrency analyst Willy Woo shared his perspective on the potential liquidation risk of MicroStrategy Incorporated (NASDAQ:MSTR), a firm whose aggressive Bitcoin (CRYPTO: BTC) acquisition strategy has sparked significant interest lately.

What Happened: On Wednesday, Woo took to X to state that the primary risk lies in the company’s convertible debt offerings.

He said that if the buyers of the convertible debt do not convert to shares before maturity, MicroStrategy would be forced to sell Bitcoin to repay the debt holders.

Woo argued that this scenario would occur if MicroStrategy’s stock didn’t increase by roughly 40% within the next 5-7 years.

Thoughts on MSTR Liquidation Risk:

The only liquidation risk I can see is via their convertible debt offerings:

1) If convertible debt buyers do not convert to shares before maturity, it forces MSTR to sell BTC to reimburse debt holders.

2) This would happen if MSTR doesn't… pic.twitter.com/GFIOeAqQPL

— Willy Woo (@woonomic) November 27, 2024

The analyst also underlined several other risks of varying degrees.

He argued that other corporations replicating MicroStrategy’s playbook could result in reducing its net asset value (NAV) premium—the ratio of the firm’s market value to its Bitcoin holdings value.

Furthermore, risks such as the SEC acting to limit future Bitcoin purchases and the U.S. government nationalizing and confiscating the asset were raised.

See Also: Here’s How Much $100 Invested In XRP Token Today Will Be Worth If Crypto Returns To All-Time Highs

Why It Matters: For the curious, a convertible note is a hybrid instrument that can be exchanged for equity in the company at a later date. The conversion feature of these notes eventually helps the debt holders to participate in the equity upside on conversion.

The Michael Saylor-led firm has been issuing these bonds at 0% interest, using the proceeds to fund its future Bitcoin purchases.

Woo’s comments followed renowned investment adviser Gary Black’s aspersions on the valuation of MicroStrategy.

Black estimated that MicroStrategy's shares should be worth about $105/share, a figure 73% lower than its current trading price.

Price Action: Over the past month, MicroStrategy’s stock has surged 58.94%, outperforming even the famed "Magnificent 7" group of companies. The stock popped 9.94% to $388.84 during Wednesday’s regular session.

Image via Shutterstock

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