MicroStrategy’s Bitcoin funding loop at risk, exec warns

Arca Chief Investment Officer Jeff Dorman warned that MicroStrategy’s funding structure has come under pressure after the company spent most of its cash to repurchase $1.5 billion of zero-coupon convertible notes due 2029. The company held about $871 million in cash after the buyback and carries roughly $15.5 billion of preferred stock with about $1.5 billion in annual preferred dividend obligations. MicroStrategy reported holding 843,738 BTC as of May 25, and bitcoin traded near $72,550, about 6% lower than a week earlier.

In May, MicroStrategy repurchased $1.5 billion in face value of its 2029 zero-coupon convertibles for approximately $1.38 billion in cash, a discount of about 8%. The notes paid no periodic interest; retiring them with cash reduced the company’s liquid reserves that could otherwise be used to meet preferred dividend payments.

The preferred program includes four series-STRC, STRK, STRF and STRD-totaling roughly $15.5 billion. The STRC series pays a variable dividend that the company recently increased to 11.5%. Dorman wrote on X that the preferred issuances amounted to a bet on higher bitcoin prices so future bitcoin sales could fund dividend obligations. He added: ‘MSTR, BTC and Pref holders are really in bind. Someone is going to lose badly here, and it will happen in the next 4 months.’

With about $1.5 billion in annual preferred payouts, the company faces narrower liquidity headroom if it cannot generate additional cash. Common shareholders and management continue to pursue a long-term bitcoin accumulation strategy. Preferred shareholders are entitled to fixed or variable dividend payments under the issued securities. Holders of other debt and convertible securities also have claims on the balance sheet.

Options available to the company include selling bitcoin reserves, raising new capital in markets, renegotiating terms with preferred holders, or seeking alternative liquidity sources. Dorman said the most acute pressure could materialize within the next four months.

Since 2020, MicroStrategy has used debt and equity instruments to fund bitcoin purchases and kept the asset on its balance sheet. The preferred issuances and higher variable dividends have raised recurring cash obligations while the cash outlay to repurchase convertibles reduced liquid reserves. Fluctuations in bitcoin’s price change the value of the company’s primary asset and affect the balance between meeting preferred dividend payments and maintaining bitcoin holdings.