You may have heard the saying, “you got to risk it for the biscuit.” In life there is no free lunch, you typically got to risk something in order to gain something. The same rings true for investing as any investment you make will have some sort of risk associated with it. Because of this it is important to go over the risks associated with Strategy. The main risks I have determined for Strategy include Bitcoin risk, bankruptcy risk, company/internal risk, and unknown Black Swans.
To start, Strategy is centered around the idea of Bitcoin. Being that it is, investing in Strategy means you take on any risk associated with Bitcoin. If Bitcoin goes to zero, then expect Strategy to go to zero as well. Of course, this unlikely to happen as Bitcoin has never been hacked in its entire existence. The longer Bitcoin exists then the more the network grows making it stronger and more durable from attacks. This does not mean nothing can happen, but that it is incredibly unlikely. I would say regulatory risk cracking down on Bitcoin has gotten much lower over the years as the ETF’s were approved in early 2024, many institutions and pension funds own Bitcoin, nation states are looking to adopt it. At this point I do not see Bitcoin being banned. The main threat to Bitcoin is the advancements of quantum computing, which could be used to break Bitcoin’s SHA 256 hash algorithm that is used to secure the protocol. According to experts, this is not a super imminent threat, but it is something to definitely be keeping a close eye on. Luckily, the Bitcoin protocol can adapt and implement quantum resistant technology. Overall, Bitcoin has proven to be durable and do not see it as much of a risk towards Strategy’s well-being, but of course anything can happen, which is the risk you assume when you buy Bitcoin or a Bitcoin derivative like Strategy.
Another risk that many critics of Strategy talk about is their debt and how they will blow up when Bitcoin goes into a bear market. One of Strategy’s tools to raise capital to buy Bitcoin is to issue convertible bonds, which is debt that can be repaid back with shares of the company. Debt can only be converted to shares if the stock price passes an certain price set at the issuance of the bonds. If it does not go past this specified conversion price, then the principal must be repaid back with cash. Strategy’s goal is to have all of their convertible debt to be closed out through the issuance of new shares. Because of this they structure their debt in a way that falls in line with Bitcoin’s price movement to ensure their stock is above a certain price level when the bonds expire.
As stated previously on another page, if you have bought Bitcoin at any point in its history and held for 4 years you would have made money. To go a step further, if you were to track the price change between any date and the day exactly 4 years before that, you would find Bitcoin has at least more than double no matter what date you picked. The average of this stat from the beginning of 2021 to the end of 2024 is over 800%. Saylor and Strategy use this behavior when issuing debt. Their convertible debt is typically set to convert at least 4 years out with the conversion price set at about 50% out of the money. Of course Strategy’s stock price is not directly linked to Bitcoin’s price, but it is highly correlated. So, expecting a 50% increase in the stock when the underlying asset has historically gone up at least 100% means these bonds have a very high chance of converting. This phenomenon is reflected in the fact that at the time of this writing in late 2024, 5 out of Strategy’s 6 outstanding convertible notes with expiration dates ranging from 2027 to 2032 are already eligible to convert. Of course, past results do not necessarily indicate future performance. However, being that Bitcoin is at its early stages of institutional adoption with nation states looking to adopt it, I would be surprised to see this trend not continue moving forward.
Many Strategy critics say the company is going to blow up if Bitcoin takes a huge dive. Being that Saylor and his team knows Bitcoin’s behavior, they have planned accordingly. One way they have done that is by making their debt be unsecured. This means that if Bitcoin were to crash down, they would not get margin called. Even if it were to go as low as one penny. So, they will never be force liquidated. Along with this, Strategy has a very low leverage ratio. As of writing this in late 2024, their leverage ratio is about 17% at they have roughly $7 billion in debt and about $40 billion in Bitcoin. This is incredibly low and as Strategy continues to buy more Bitcoin and Bitcoin continues to appreciate this number will continue to go down until they issue more debt. The company has a target leverage ratio of about 25%, which is pretty conservative. A good analogy I have heard to realize how conservative a leverage ratio like this is would be to compare it to a mortgage. Most people when they buy a house take out a mortgage with a 20% down payment meaning their leverage ratio is 80%, in which most people do not bat an eye at as this is seen as normal. Being that 80% leverage on a house is the standard, 25% leverage on Bitcoin is pretty conservative and allows for major dips in Bitcoin’s price.
Most of Strategy’s debt is 0% interest with a cumulative interest rate among all of their debt being lower than 1% resulting in an interest expense of about $35 million. This is roughly 50% of their net income from their software business, so they do not have too much to worry about in terms of servicing their debt. Even if their business were to drop off in profits, they could instead issue shares to pay of their debt. This is a relatively easy task as their annual interest expense is less than .1% of the entire market cap of the company.
Strategy’s debt plan is very conservative as they keep a low leverage ratio and their debt is incredibly cheap. The main risk with their debt is not having their stock price go up enough for the debt to convert. Even if it did not convert they still have a couple options. One is that they could rollover the debt with issuance of new debt. They may or may not be able to get 0% interest with that option as their debt not converting would appear more risky than before. Another option is to use ATM selling to pay off their debt. Doing this would result in not as accretive BTC Yield because when the bonds convert they are converting at a higher price meaning less shares are needed versus being below the conversion price and having to use the ATM. Alternatively, they could sell off some Bitcoin to pay off the debt, though I think this would be the last case scenario as I believe Strategy would do anything in their power to not have to do this. Again any of these 3 scenarios only happen if the convertible debt does not become convertible, which will really only happen if Bitcoin stagnates in price for several years.
This is really the main risk that comes to investing in Strategy, Bitcoin not continuing to become globally adopted and stagnating or dropping in price over the long run. This is why when investing in Strategy you are not only betting on Saylor and his team, but you are also betting on Bitcoin. Strategy and Saylor are all in on Bitcoin and when investing in Strategy you are doing the same. It is like Saylor has said before, “Bitcoin will become everything or nothing.” Bitcoin becoming nothing will lead to the downfall of Strategy. This is a binary, either or, investment where you either make terrific gains or you lose it all. Being that Bitcoin has persevered through so much chaos and attacks on it and is now being touted by financial kingpins like Larry Fink of Blackrock, praised and recognized by world leaders like Trump and others, and many large institution and funds that once criticized Bitcoin are now buying it, I would expect Bitcoin to continue on making great strides in the near and longer term future. Of course, this is my own personal opinion, but that is what is great about Strategy. It gives you options. If you agree with the thesis that Bitcoin will continue to become globally adopted then go long Strategy, and if you do not agree then you can short it.
There are some other risks to Strategy that I think are worth going over but are not as imminent. One is you could say Strategy’s core business going defunct. I am not even sure if this is a risk. Most of their market cap and stock performance is from their Bitcoin treasury operations. Their software business drives a little less than $100 million in net income and does provide a role in servicing their debt payments. As I have stated previously, even if their software business were to drop to nothing they could still service their debt through very minor ATM selling. A downfall of their software business could hurt their credit rating leading possibly to higher interest debt, but being that Strategy often has their convertible debt oversubscribed due to its volatility from its Bitcoin holdings there is a good chance it would stay at 0%. From my understanding, MicroStrategy has a core group of longtime customers that very much like their business intelligence software. So, I do not see Strategy’s business going away and even if it did I do no see it as much of a threat anyways as it is so small compared to what they are doing with Bitcoin.
Another risk you could say is if something were to happen to Saylor. It is no question Saylor is probably one of if not the most influential person in the Bitcoin space over recent years and has done great work to spread the good word about Bitcoin especially in the more institutional and traditional settings. If something were to happen to him that would for sure be a big loss to not only Strategy but Bitcoin as a whole. Saylor has commented on this topic before and is not too worried about it. One is that Strategy as well as Bitcoin are bigger than Saylor. There is a whole executive team at Strategy that are also bought in on their Bitcoin strategy. Not to mention all of their shareholders are bought in on the strategy as well. If something were to happen to Saylor then the rest of his team can continue on with the strategy. So, while losing Saylor would definitely be a major loss and would definitely cause some short term turbulence it would still not stop Bitcoin and Strategy from moving forward and continuing on their growth trend.
The last set of risks I would consider would be Black Swans, anything that we cannot necessarily predict. This is something that applies to every type of investment as we cannot predict the future. There could be circumstances in the future that could impact Bitcoin’s growth and Strategy’s treasury operation. Maybe it be something regulatory or a large scale world war or something of that nature. There is always that unknown and is something you can never totally eliminate. Being that Bitcoin has persevered through so much and Strategy has been running their strategy for over 4 years, I do not see anything on the horizon that would disrupt either, but of course you never know.
Overall, the main threat I see to Strategy is Bitcoin stagnating in growth and not continuing its long term upward trend. This would cause their convertible debt to not be convertible, which would most likely require either interest bearing debt, non-accretive share issuance, or the sale of Bitcoin. Since Strategy is an all out bet on Bitcoin, I see this threat as something to intrinsic to investing in Strategy. Meaning this is part of the price of admission when investing in Strategy. Taking a long position is essentially a bet that Bitcoin is a revolutionary technology that will continue to be globally adopted as more people learn about it and build an ecosystem around it. It is all or nothing, a 0 or 1, type of bet. You either make it big or lose it all. If you have put in the time to understand Bitcoin and what Strategy is doing you will most likely come the conclusion that the potential upside is well worth the possible downside risk. Of course, that is a decision for every individual investor to come to themselves. Do your own research to give yourself the adequate knowledge to make the decision that makes the most sense for you.
