MicroStrategy’s Bitcoin Debt Loop: A Move of Genius or a Risky Gamble?

MicroStrategy co-founder Michael Saylor has adopted an aggressive Bitcoin acquisition strategy that onlookers have viewed as either a brilliant vision or a reckless gamble.

The latter warned that MicroStrategy's heavy reliance on volatile assets such as Bitcoin is fraught with risks. A sharp drop in Bitcoin prices could put pressure on the company's balance sheet, exacerbating financial pressures and potentially undermining its ability to repay debts or raise additional funds.

Despite the risks, Saylor remains steadfast. The American entrepreneur said he had “no reason to sell the winner”.

MicroStrategy is the world’s largest corporate Bitcoin holder, with 447,470 Bitcoins at the time of publication. These large holdings increase risk for the company and the entire Bitcoin ecosystem.

Funding MicroStrategy’s BTC purchase

MicroStrategy is nominally a business intelligence software company, but its aggressive Bitcoin accumulation means it is essentially a Bitcoin finance company.

Saylor’s bitcoin buying spree began with a $250 million acquisition of company cash in August 2020. He then turned to debt issuance, starting with convertible notes — debt that can be converted into equity. These notes, which typically carry low interest rates, helped raise $650 million in December 2020, and subsequent issuances have raised billions more.

In June 2021, MicroStrategy issued $500 million in senior secured notes, which offer higher interest rates and are backed by the company's assets.

Most recently, on December 24, 2024, MicroStrategy proposed to increase its common stock from 330 million to 10.33 billion shares and its preferred stock from 5 million to 1.005 billion shares. The plan provides flexibility to raise capital over time as needed, rather than issuing all new shares at once.

This is in line with the company’s 21/21 plan, which aims to raise $42 billion over the next three years — half through stock sales and half through fixed-income instruments — to finance further bitcoin purchases and explore initiatives such as developing a crypto bank or offering bitcoin-based financial products.

A reckless Ponzi scheme?

David Krause, professor emeritus of finance at Marquette University, said Saylor’s strategy was “inappropriate.”

He warned that a sharp drop in Bitcoin prices could severely impact MicroStrategy (MSTR), eroding shareholder equity, jeopardizing debt repayments and potentially leading to financial distress or bankruptcy, triggering a sell-off in its shares.

“As someone who has spent much of his career researching and teaching corporate finance and investments, and has served as [chief financial officer] for more than a decade, I firmly believe that Treasury assets should consist entirely of highly liquid and low-risk securities, such as money market instruments,” Kraus noted in a written statement.

MSTR has been trading at a premium to the net asset value (NAV) of its Bitcoin holdings, which accounted for 51% of its market value as of Jan. 9, according to data from BitcoinTreasuries.net.

When MSTR trades above its bitcoin net asset value, the company raises money through debt or equity to buy more bitcoin. However, Kruger warned that this strategy could dilute shareholder equity.

In theory, this approach would create a cycle where a company’s Bitcoin holdings would boost its market position and share price, leading to further bond issuance and purchases of more Bitcoin.

Some social media analysts have likened the recycling strategy to a Ponzi scheme.

Jacob King, a financial analyst, said: “This cycle will only work if BTC keeps going up. If BTC stagnates or crashes (which it will), the cycle will collapse. This is unsustainable and a huge Ponzi scheme.”

Source: Jacob King

In a recent media interview, Saylor compared the approach to real estate practices in Manhattan.

“Like developers in Manhattan, every time real estate values ​​go up, they issue more debt to develop more real estate,” he said. “That’s why buildings in New York City are so tall, and it’s been that way for 350 years. I call it economics.”

Kruger has been critical of MicroStrategy’s reliance on Bitcoin, saying in a recent paper that it does not meet the U.S. Securities and Exchange Commission’s formal definition of a Ponzi scheme.

The securities regulator describes a Ponzi scheme as "an investment fraud that involves paying purported returns to existing investors from money invested by new investors."

Gracy Chen, CEO of cryptocurrency exchange Bitget, agreed with Kruger’s analysis.

Unlike a Ponzi scheme that relies on funds from new investors to pay returns to early investors, MicroStrategy’s approach relies on market-driven appreciation in the value of Bitcoin.”

Chen noted, “This strategy is more similar to Charles de Gaulle’s challenge to the Bretton Woods system by converting the U.S. dollar into gold. It is about taking advantage of known weaknesses in modern monetary theory to profit from asset appreciation.”

Saylor’s Bitcoin Blueprint Has Been an Undeniable Success

As of the close of trading on January 8, MSTR stock was trading at $331.70, up about 2,200% since the company first purchased Bitcoin on August 11, 2020, when it closed at $14.44. Over the same period, the price of Bitcoin has risen by about 735%.

Whether or not one agrees with Saylor’s views, his plan has undoubtedly boosted MicroStrategy’s cryptocurrency portfolio and stock performance, allowing the company to become a member of the Nasdaq-100 Index in December.

While shareholders may face dilution, supporters argue that Bitcoin’s long-term growth potential offsets these risks. In addition, Chen noted that MicroStrategy’s convertible debt structure could act as a protective buffer during a crisis.

"A prolonged bear market could expose the company to liquidity challenges and heightened debt management risks. However, its unsecured convertible debt structure provides some protection from immediate forced liquidation," Chen explained.

The company’s approach of raising funds through a stock offering further reduces the risk of selling its Bitcoin holdings, even during a bear market.”

Bitcoin Exit Strategy

In short, MicroStrategy’s mission is simple: keep buying Bitcoin.

The asset is a long-term strategic holding, a hedge against economic uncertainty, and a means of enhancing shareholder value. It can also be used to obtain loans or raise funds for future business opportunities without having to liquidate their Bitcoin.

“It’s possible to profit from the huge liquidity pool of Bitcoin,” said Alexander Panasenko, head of product management at VixiChain. “When you hold a large amount of liquidity in this inflation-resistant asset that can actually store value, you can make money just by holding it, lending it.”

However, critics point out that Saylor lacks a clear exit strategy, which Bitcoin maximalists believe is unnecessary as they see Bitcoin as the ultimate exit from the traditional financial system.

Stock dilution remains a looming issue, but the strategy has largely benefited MicroStrategy and the broader bitcoin ecosystem, inspiring copycats around the world.

“As long as [MicroStrategy] continues to spark conversation about the role of digital assets in the future economy, you’ll see new companies adopting it more broadly, revealing new strategies for leveraging digital assets … that’s really great,” Panasenko said.

“If such proposals involving digital assets fail, it would cast a shadow over the entire industry and essentially set us back.”