"Unless It Hits an Asteroid". What are the Market Risks for MicroStrategy?

MicroStrategy could continue to buy Bitcoin thanks to new investments in MSTR shares and if the price of the leading cryptocurrency continues to be positive.

MicroStrategy (MSTR), the largest holder of Bitcoin, will become the first organisation focused on the leading cryptocurrency to be included in the NASDAQ-100 index. Experts assessed the company's financial position and also suggested that this event will give MSTR access to new investments worth billions of dollars. And all this could have a positive impact on the price of Bitcoin.

According to Eric Balchunas, Senior ETF Analyst at Bloomberg, the inclusion of MSTR in the NASDAQ-100 corresponds to a purchase of about $2.1 billion in shares by all indexed ETFs. According to him, this figure does not include other passive index-based strategies, which is why the capital inflow could be even greater.

"Now that MicroStrategy is in the NASDAQ, index funds can buy its shares. This will help the company raise capital to buy more bitcoin," Sean McNulty, chief trading officer at liquidity provider Arbelos Markets, told Bloomberg.

An even bigger opportunity for MSTR is the prospect of being included in the broader market index, the S&P 500, said Mark Palmer, an analyst at Benchmark, quoted by TheBlock. He also noted that the company's financial performance could improve dramatically. Thanks to the new financial accounting standards for bitcoin, which will go into effect in early 2025, the company could post billions of dollars in capital gains at one time.

Last December, the US Financial Accounting Standards Board (FASB) issued new guidelines that allow companies with digital assets on their balance sheets to measure them at fair value and account for changes in value in each reporting period. The new rule will go into effect on 1 January 2025.

"If this net gain was sufficient to produce a positive 12-month result, along with MSTR's losses for the past three quarters, the company would qualify for inclusion in the S&P 500," Palmer concluded.

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Analysts believe that if the current financial performance and price of Bitcoin remain in the $100,000 range, MicroStrategy could continue to buy more Bitcoin.

"Inclusion in the Nasdaq-100 further increases MSTR's market liquidity, enhancing its ability to raise capital and support its Bitcoin purchase programme," wrote Bernstein analyst Gautam Chhugani.

Chhugani also noted that, with this level of leverage (he currently estimates the company's debt-to-Bitcoin ratio at around 18%), MSTR has the ability to issue additional debt: "And if the price of Bitcoin remains in the $100,000 range, we expect MicroStrategy to continue its Bitcoin buying trajectory."

Since Donald Trump's victory in the US presidential election, MicroStrategy has reported the purchase of 186,780 Bitcoins totalling $17.13 billion, more than 40 per cent of all Bitcoins purchased by the company since 2020.

Although MicroStrategy's strategy has been a success to date, there are always financial risks due to the debt-based nature of the company's operations. Coinmetrics estimates that the company's total debt, based on bond issues, is $7.2 billion. However, although a risk exists, experts consider it insignificant.

As noted by the founder of blockchain analytics platform CryptoQuant, Ki Yan Ju, "MicroStrategy will only go bankrupt if an asteroid hits the Earth." He drew these conclusions based on his analysis of transactions, which suggests that the average purchase of Bitcoin by long-term investors was around $30,000 per coin. And the conditional settlement price of MicroStrategy's Bitcoin position is about $16,500.

"For 15 years, Bitcoin has never fallen below the base value of long-term investors, which is currently $30,000. MicroStrategy's debt is $7 billion, while its Bitcoin assets are worth $46 billion. Based on the Bitcoin price alone, the settlement level would be $16,500," wrote Ki Yan Ju.