Will Bitcoin's drop to $80,000 disrupt the Strategy model?

Authors: Ekko an, Ryan Yoon, Source: Tiger Research, Translated by: Shaw Jinse Finance

Key Takeaways

• Strategy's static bankruptcy threshold is projected to be around $23,000 in 2025, almost double the $12,000 level in 2023.

• The company shifted its financing model from simple cash and small convertible bonds to a diversified mix including convertible bonds, preferred stock, and ATM issuances in 2024.

• Investors hold call options that allow them to redeem them early before expiration. If the price of Bitcoin falls, investors are likely to exercise these options, making 2028 a critical window of risk.

• Investors' call options allow them to redeem them before expiration. If the price of Bitcoin falls, investors are likely to exercise these options, making 2028 a critical window of risk.

• If the 2028 refinancing fails, assuming a Bitcoin price of $90,000, Strategy might need to sell approximately 71,000 Bitcoins. This equates to 20% to 30% of its daily trading volume, putting significant pressure on the market. 1. Issues Regarding Strategy's Stability The recent decline in Bitcoin has caused DAT's stock price to fall by approximately 50%. This raises a core question in the market: with both the stock price and the company's core assets declining, does Strategy's stability still exist? This concern has intensified after JPMorgan Chase pointed out that Strategy might be removed from the MSCI index. People are not only focused on this stock. **Strategy holds a massive amount of Bitcoin, enough to influence a wider market, far exceeding the size of a typical whale.** This raises two key questions. At what price level would Strategy's balance sheet collapse? This report reviews documents from the U.S. Securities and Exchange Commission (SEC) to determine Strategy's effective bankruptcy threshold, the period of increased risk, and the potential market impact should a stress scenario occur. Before proceeding with the analysis, let's clarify the concept of static bankruptcy. Static bankruptcy refers to a situation where a company cannot repay its debts even if all its assets are liquidated. Simply put, static bankruptcy means that assets are less than liabilities. For example, if Echo owns a property worth 1 billion won and 100 million won in cash, but has 1.2 billion won in liabilities, then from a balance sheet perspective, the company is insolvent. DAT faces the same situation. If the price of Bitcoin falls below a certain level, the book equity will become negative, and the company will be unable to repay its debts. This level is called the static bankruptcy threshold. To determine Strategy's static bankruptcy threshold, we first examine how the company accumulated its Bitcoin holdings. Strategy has held Bitcoin as a strategic asset since 2020, but its accumulation model changed after 2023. Before that, the company mainly relied on cash reserves and small amounts of convertible bonds to purchase Bitcoin. Its holdings remained below 100,000 Bitcoins, and its refinancing needs were relatively limited. Since 2024, Strategy's financing methods have changed. The company raised funds to purchase more Bitcoin by increasing leverage through a combination of issuing preferred stock, an ATM stock program, and large-scale convertible bonds. This led to a rapid acceleration in the accumulation of Bitcoin. This structure created a cycle: the higher the price of Bitcoin, the larger the company's market capitalization, and the higher the leverage, thus supporting even more purchases. The objective remained the same, but the funding structure and risk profile changed. This structural shift has now become a core factor exacerbating Strategy's risk of bankruptcy.

  

  Strategy projects a static bankruptcy threshold of approximately $23,000 by 2025. Below this level, the value of its Bitcoin holdings would fall below its liabilities, resulting in insolvency on its balance sheet.

  The key point is that this threshold has been rising. In 2023, the company could withstand a Bitcoin price of around $12,000. This threshold rose to $18,000 in 2024 and reached $23,000 by 2025.

  As Strategy increases its Bitcoin holdings, this key level also rises. Therefore, the $23,000 threshold represents the minimum price required for stable Bitcoin operations. This means Bitcoin would need to fall by approximately 73% from its current level to trigger bankruptcy risk. 3. Convertible Bonds: The Problem Lies in Holders' Put Options, Not Maturity Dates As mentioned earlier, Strategy's static bankruptcy threshold has risen to $23,000 because its debt is growing faster than its Bitcoin holdings. The next question is how this debt is structured. Between 2024 and 2025, Strategy adopted a new financing model that combined convertible bonds, preferred stock, and an ATM stock program. Of these instruments, convertible bonds accounted for the largest share and had the most significant impact on the market.

  

  The key is not the size or maturity date of the convertible bonds, but the timing of the holders exercising their put option.

  This clause allows investors to demand early redemption, which the company cannot refuse. Most of the large convertible bonds issued in 2024-2025 have redemption dates concentrated around 2028, making 2028 a crucial year for Strategy to demonstrate its refinancing capabilities.

  If Bitcoin prices approach the bankruptcy threshold in 2028 or market conditions deteriorate, investors are likely to exercise put options rather than wait for expiration. A wave of put option exercises would require Strategy to immediately raise billions of dollars in cash. The problem is that almost all the funds raised through these convertible bonds have been used to purchase Bitcoin. If these funds were invested in productive assets that generate cash flow, the company would naturally have a source of funds to repay the debt. However, the focus on accumulating Bitcoin leaves very little cash available for redemption. Therefore, repaying the debt will require selling assets. If Bitcoin prices are low when the options window opens, Strategy could immediately face a liquidity shortage. Forced selling would further depress prices, raise the bankruptcy threshold, and could trigger a vicious cycle. 4. Preferred Stock: Why Choose a 10% Dividend Burden? Starting in 2025, Strategy shifted from issuing near-zero-coupon convertible bonds to issuing preferred stock with a dividend yield of approximately 10%. At first glance, this seems like a more costly option. However, this decision reflects the increasing refinancing pressures in 2027-2028. A large number of bondholders opting to put bonds back in 2028 will significantly increase medium-term repayment risk. Any continued cash outflow during this period will increase the risk of bankruptcy. A key feature of preferred stock is that dividends do not need to be paid in cash. Strategy's offering is designed so that dividends can be paid in stock as needed. This allows the company to raise funds without immediately causing a cash outflow and to fulfill its dividend payment obligations without using cash. In effect, preferred stock helped Strategy avoid selling Bitcoin during the critical 2027-2028 period. While a 10% dividend yield may seem high, paying dividends in stock makes it a tool for maintaining liquidity and preventing short-term cash shortages. However, this structure also presents new challenges. Paying dividends in stock continuously dilutes the equity of common shareholders. Strategy already faces potential equity dilution from future convertible bond conversions, and preferred stock adds another layer of equity pressure. Preferred stock also enjoys priority in repayment. If a company faces both debt repayment and operating cost pressures, preferred shareholders must be paid out before common shareholders. While preferred stock does not have a fixed maturity date, its dividend obligations constitute a structural fixed cost and affect the company's effective bankruptcy threshold. By 2024-2025, Strategy had shifted from a model based on low-cost convertible bonds to a hybrid structure combining convertible bonds, preferred stock, and ATM issuances. This shift allowed for a rapid expansion of Bitcoin holdings in the short term. 5. What if Strategy fails? [Image of Strategy failing] The impact on the market if Strategy is unable to refinance in 2028 can be estimated through repayment obligations. The large number of convertible bonds issued in 2024-2025 will generate approximately $6.4 billion in potential repayments in 2028. If market conditions deteriorate and preferred stock issuance, ATM issuance, and new convertible bonds cannot proceed, the company will have no choice but to sell Bitcoin. Assuming a Bitcoin price of $90,000, Strategy would need to sell approximately 71,000 Bitcoins to fulfill these obligations. This is incomparable to the scale of a typical institutional sale. Currently, the daily trading volume in the spot market is between $20 billion and $30 billion. Selling 71,000 Bitcoins at $90,000 is equivalent to approximately $6.4 billion, representing about 20% to 30% of the daily trading volume. Such a large-scale sell-off in a short period would almost certainly put downward pressure on the market. More worryingly, such a sell-off is not a one-off event. As the price of Bitcoin falls, the value of Strategy's assets will immediately shrink, weakening its financial ratios. This will further limit its ability to raise funds and may force it to sell even more Bitcoins. The result is a vicious cycle: failed refinancing leads to forced selling, forced selling leads to price declines, price declines reduce asset value, and the company is forced to sell even more assets. This dynamic, if sustained for several quarters, could deteriorate the balance sheet to an irrecoverable state. Therefore, Strategy's structural risks are concentrated in 2028. Outside this window, the leverage model appears manageable, but failure to refinance in 2028 could trigger selling pressure sufficient to impact the entire Bitcoin market. Therefore, 2028 is crucial not only for Strategy's survival but also for the potential volatility of the entire Bitcoin ecosystem. 6. Strategy is relatively stable, but latecomers face higher risks. Market narratives often simplify DAT risk to a simple question: can a company survive every Bitcoin downturn? However, this analysis suggests that the key to a company's survival is not short-term price fluctuations or stock volatility, but rather the company's balance sheet and its capital structure design. Therefore, evaluating DAT companies requires more than just focusing on declines in their stock price or Bitcoin price. Key indicators include their static bankruptcy threshold, the duration of cash repayment pressure, and the tools they use to cover funding gaps. These factors help us understand their structural resilience, rather than short-term volatility. Not all risks are predictable. ETF flows, macroeconomic conditions, and regulatory changes can reshape the market environment at any time. Even so, the most reliable benchmark remains the bankruptcy threshold implied by financial data and the company's fundamental cash flow mechanism. Strategy stands out in this regard. Entering the Bitcoin market in 2020, it weathered the downturn of 2022 and accelerated its accumulation through leveraged financing in 2024. Its combination of convertible bonds and preferred stock creates a multi-layered buffer. Therefore, Strategy possesses a relatively stable foundation. New entrants have not yet established a mature DAT framework, and their ability to withstand sharp price declines is far less stable.