Strategy, which has the world’s largest corporate Bitcoin reserve, shared its resilience plans against a possible collapse in the cryptocurrency market. The company’s senior management argues that they can maintain their financial structure even in the most extreme scenarios where the Bitcoin price drops to 8 thousand dollars. This strategy, detailed at the fourth quarter financial results meeting held at the beginning of February, aims to eliminate question marks about how to manage the huge debt burden.
The Thin Line Between Debt Load and Bitcoin Reserve
Strategy’s current balance sheet contains a huge Bitcoin treasury worth $49.3 billion, against a net debt of $6 billion. The coverage rate, which the company calls “BTC Rating”, is currently at a very safe level of 8.3 times. However, the management has also discussed the possibility of a dramatic 88% decline in the value of the leading crypto asset. If the Bitcoin price drops to $8,000 in a possible collapse, the total value of the company’s assets will drop to $6 billion, exactly equal to the amount of debt.
To reassure investors, Chairman Michael Saylor has drawn a clear road map for managing long-term liabilities. In his statement on social media, he announced that convertible debt will be converted into shares in the next 3 to 6 years. Thanks to this move, the company will neither have to consume its cash reserves nor touch its Bitcoin treasure. The company aims to maintain its financial balance by converting existing liabilities into equity rather than incurring new senior debts.
Although a massive net loss of $12.6 billion was reported in the fourth quarter due to changes in the valuation of cryptocurrencies, most of this figure consists of unrealized losses. Michael Saylor and his team emphasize that sudden sharp declines in the market, that is, “flash crashes”, cannot lead the company to bankruptcy. The main focus of the strategy is on keeping long-term asset protection mechanisms alive rather than short-term volatility.
Critical Scenario Threatening the Future of the Company
According to CEO Phong Le’s statements, what will challenge the company is not only that the Bitcoin price will fall, but that it will remain at these low levels for a very long time. Le states that there could be a real risk if the price remains stuck at the $8,000 level for half a decade, that is, a full five years. In such a scenario, the company’s reserves will barely cover its debts and its room for maneuver will be narrower.
When the company reaches such an impasse, it is left with three basic options: Restructuring its debts, increasing capital by issuing new shares, or seeking additional debt. However, the current plan envisages getting rid of the debt spiral by “equating” convertible bonds, that is, by turning them into stocks, before things reach this point. With this method, bond holders will become partners of the company instead of the cash they will receive at the end of maturity.
The possibility of a “liquidity crisis”, which is the biggest question mark for investors, seems to have been eliminated for now with this proactive approach of the management. Since the company determines preserving the amount of Bitcoin it has as its most sacred goal, it structures its operational processes in a way that it does not have to sell these assets. As a result, Strategy claims that it is mathematically ready for even the darkest days of the cryptocurrency world.
