Original Author: Willy Woo
Original Compilation: Shaofaye 123, Foresight News
On the Risks of MicroStrategy's MSTR Convertible Bonds
The only liquidation risk I can see is its issued convertible bonds:
If the convertible bond buyers do not convert to stocks before maturity, MSTR will have to sell BTC to repay the debt holders.
This will happen if MSTR does not achieve over 40% growth in 5-7 years (varies by each bond, see table below). Essentially, either MSTR's association with BTC fails, or BTC fails.
There are also other varying degrees of risks:
Competitive risk, other companies copying and reducing MSTR's premium over net asset value;
Risk of SEC intervention on future purchases, reducing MSTR's premium over net asset value;
Custodial risks with Fidelity and Coinbase;
Risk of nationalization in the US (seizure of BTC);
Key person risk of Saylor;
Operational risks of MSTR;
Finally, please note the convertible note table, which although provides a rough concept, is not accurate due to my use of Grok AI.
On Other MSTR Issues
Question 1: Why doesn't MSTR have self-custody capabilities?
Willy Woo: From the current situation, the exact custody arrangements have not been disclosed. To our knowledge, MSTR may have co-signing authority in a multi-signature arrangement. This is a prudent way to handle it.
Question 2: Will MSTU and MSTX be liquidated and harm MSTR?
(Translator's note: MSTU: Investing in T-Rex 2 X Long MSTR Daily Target ETF; MSTX: Investing in Defiance Daily Target 2 X Long. These two MSTR ETFs have accumulated over $600 million and $400 million in assets respectively.)
Willy Woo: MSTU/MSTX = Higher risk. The 2x is achieved through paper bets on MSTR, with liquidation levels close to instant liquidation (plus, no claim on actual BTC).
Note: Derivative positions will degrade BTC.
Also, due to the impact of volatility, long-term holding will not achieve 2x (losses more expensive than gains).
Question 3: If a large number of stock holders sell their shares simultaneously due to external events (market downturn)?
Willy Woo: This is only a short-term impact. In the long run, the market always means increased returns, so it is not a real risk. Debt holders can convert within 5-7 years after purchasing the notes. As long as Bitcoin is 40% higher than the initial price within 1-2 macro cycles, there will be no problem.
Question 4: Is there a possibility that the leveraged ETFs are obtaining their risk exposure through options rather than swaps?
Willy Woo: The volatility arbitrage trading desks of TradFi hedge funds have been doing this day in and day out. $70 million is very little, and with the mispricing of volatility in the options market, this amount of capital is sufficient to support any day's trading volume.
