Analysis: Strategy Unlikely to Face Bankruptcy, but Bitcoin Value Per Share May Be Diluted

Strategy, the largest publicly traded corporate holder of Bitcoin, is unlikely to fall into a "death spiral" or face immediate bankruptcy, according to an analysis. The main risk instead is dilution in the Bitcoin value backing each common share.

Wu Blockchain reported on June 26 that analyst Adam Livingston conducted a three-year stress test based on Strategy's financial structure. The test found the core risk was not bankruptcy, but dilution of common shareholders' Bitcoin exposure.

The model assumed a worst-case scenario in which Bitcoin falls to $26,611 within six months, Strategy's market value-to-net asset value multiple, or mNAV, drops below 0.50, access to capital markets is cut off, and the company must sell Bitcoin to repay senior debt.

Under that scenario, the claim ratio for common shareholders rises to 96.7% from 41.5%. At the same time, Bitcoin holdings per share fall about 94% to 7,884 satoshis from 138,161 satoshis. The model showed Strategy's stock falling to $1.01.

The analysis also found that if cash is exhausted within nine months, the company would need to sell a total of 115,727 Bitcoin over the following three years to repay senior obligations.

Even under an extreme stress scenario, Strategy would not face immediate bankruptcy or enter a "death spiral," Livingston said. The problem, he added, is severe dilution in the Bitcoin value per common share.