Is MicroStrategy’s Borrow-to-Buy Bitcoin Strategy a Risk Too Big to Take on?

MicroStrategy Incorporated (NASDAQ:) announced on Wednesday afternoon that it intends to issue up to nearly $1 billion worth of corporate debt.

Much of the proceeds from that debt will be used to redeem/pay off other debt, but MicroStrategy also expects to use some of the proceeds to purchase .

Previously known mainly as a software developer, MicroStrategy has lately been in the headlines for hoarding large quantities of Bitcoin.

A Form 10-Q filing for this year’s second quarter reveals that, from June 30 through August 5, 2024, MicroStrategy purchased approximately 169 Bitcoins.

That’s a lot of Bitcoins, but evidently, MicroStrategy seeks to expand its cryptocurrency hoard. Whether it’s a prudent strategy to incur a sizable debt load to purchase Bitcoin is a matter for consideration and discussion.

Not MicroStrategy’s first Bitcoin purchase

MicroStrategy Executive Chairman Michael Saylor is effectively the company’s figurehead and mouthpiece for all intents and purposes. Under his leadership, MicroStrategy has shifted its focus to stockpiling Bitcoin.

It’s been an interesting year for MicroStrategy, to say the least. The MSTR share price has made a multi-bagger move in the past 12 months. MicroStrategy enacted a 10-for-1 stock split in August.

Furthermore, as alluded to earlier, MicroStrategy has amassed a vast hoard of Bitcoins in 2024 and demonstrated a willingness to incur debt to increase that hoard.

In June 2024, MicroStrategy completed an $800 million offering (i.e., issuance and sale) of convertible senior notes (a fancy term meaning corporate bonds that typically can be converted to stock shares and/or cash), with a 2.25% interest rate and maturing in 2032.

MicroStrategy made no bones about its intentions for the proceeds from that debt issuance. Specifically, the company stated that it “intends to use the net proceeds from the sale of the notes to acquire additional bitcoin and for general corporate purposes.”

That debt-sale closure occurred in June. According to Yahoo Finance, a fellow crypto company, Marathon Digital Holdings (NASDAQ:), proposed a private offering of $250 million worth of convertible senior notes in August, with the net proceeds from that sale to be used to “buy more bitcoin and use for general corporate purposes” (I think we’re starting to detect a common theme here).

MicroStrategy incurs more debt despite net loss

Now, MicroStrategy is basically doubling down on its borrow-to-buy-Bitcoin strategy. The company announced its intention to offer $875 million worth of 0.625% convertible senior notes due 2028, which could be increased by as much as $135 million worth of additional notes.

With that, MicroStrategy could generate net proceeds of roughly $997.4 million in total from this new debt sale. Using those potential net proceeds, MicroStrategy plans redeem all $500 million of the company’s outstanding 6.125% senior secured notes due 2028.

With whatever’s left after that $500 million in debt has been settled, MicroStrategy expects to use “any balance of the net proceeds to acquire additional bitcoin and for general corporate purposes” (there’s that common theme again).

At this point, MicroStrategy isn’t just doubling down on its borrow-to-buy-Bitcoin strategy; I’d say the company is “tripling down,” if there is such a thing. It’s debatable whether this is a prudent plan, however.

Bear in mind MicroStrategy reported a net loss of $102.559 million in the quarter that ended June 30, 2024. That’s quite a fall-off when compared to the company’s net gain of $22.243 million in the year-earlier quarter.

Thus, caution-minded investors might not support MicroStrategy’s aggressive debt issuance at this time.

Even if you’re a staunch Bitcoin bull, it’s wise to consider MicroStrategy’s bottom-line stats before taking a share position in this ultra-aggressive crypto collector.

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