Recently, the S&P 500 once again rejected the inclusion of MicroStrategy in its index, and the market price of the cryptocurrency is also falling.
Here's a brief explanation of MicroStrategy's (MSTR) Bitcoin investment strategy, including its risks. This is considered one of the most aggressive leverage experiments in financial history.
Their core tactic is to use convertible bonds (CBs) to borrow money to buy cryptocurrency, creating a cycle of "issuing bonds -> buying cryptocurrency -> rising stock price -> debt-to-equity conversion -> issuing bonds again".
I. MicroStrategy's Convertible Bond Issuance Mechanism
Convertible bonds (CBs) are essentially bonds (with a repayment period and interest), but they come with a "call option" that allows investors to convert the bonds into stocks when the stock price rises to a certain level.
Convertible bonds issued by micro-strategy typically have the following characteristics:
Extremely low coupon rate: MicroStrategy issues bonds with very low interest rates, and has even issued bonds with 0% interest rates on multiple occasions. This means that MicroStrategy pays almost no interest costs when borrowing money.
Conversion Premium: The conversion price is usually set at 30% to 40% above the current stock price.
Example: If the current stock price is $100, the conversion price might be set at $135. Only when the stock price exceeds $135 will the creditors want to convert their bonds into stocks (to profit from the price difference); otherwise, they will hold onto the bonds until maturity to receive their principal.
Why would anyone buy them? Hedge funds and arbitrageurs buy these bonds because they are bullish on the volatility of MSTR's stock price driven by Bitcoin. They typically buy CB bonds while simultaneously short MSTR stock for convertible arbitrage, or simply bet on the potential for huge profits from a Bitcoin surge and subsequent equity conversion.
II. Infinite Loop: How to Use CB to Buy BTC (Flywheel Effect)
The operational logic of micro-strategies is known as the "flywheel of the capital market," and its core lies in the premium of stock price relative to Bitcoin's net asset value (NAV).
Step 1: Raising funds through bond issuance
MicroStrategy issued convertible bonds, raising hundreds of millions of dollars in cash. Market demand was strong as investors viewed MSTR as a "leveraged Bitcoin ETF."
Step 2: Buy Bitcoin
The company will use all the cash raised to buy Bitcoin (BTC).
Step 3: Boost net asset value and stock price
When the price of BTC rises, the value of the assets held by MSTR increases. And because MSTR is one of the few US stocks that can directly expose Bitcoin, the market often gives it a premium higher than its holding value (e.g., each share contains $100 of BTC, but the stock price is $200).
Step 4: Debt "disappears" (debt-to-equity swap)
If a rise in BTC causes MSTR's stock price to surge and exceed the "conversion price," creditors will choose to convert their bonds into shares.
Benefits of the micro-strategy: Debt is eliminated, and there's no need to repay! Although equity is diluted (new shares are issued to creditors), it still benefits existing shareholders because the company's assets (BTC) appreciate faster than the dilution rate.
Step 5: Reload
Since the old debt has been converted into stocks, the balance sheet has become clean again. In addition, with high stock prices and good credit, MicroStrategy can issue new convertible bonds again and repeat the above steps.
Core logic:
As long as the MSTR price premium exists, it can continuously exchange "overvalued stocks/bonds" for "hard assets (BTC)," which is known in finance as BTC per share appreciation.
III. Where are the crisis points and problems?
While this flywheel is currently functioning perfectly, it is built on several fragile assumptions. If circumstances reverse, it could trigger a chain reaction.
- A "debt repayment crisis" caused by the cryptocurrency price collapse
This is the most obvious risk. If Bitcoin prices remain low for an extended period or crash:
MSTR's stock price will subsequently plummet, falling far below the "conversion price".
Creditors will absolutely not convert bonds into stocks (because they would lose money if they did), they will insist on holding the bonds until maturity and demand that MicroStrategy return the cash principal.
The problem is that MicroStrategy doesn't have any cash on hand; all of it has been used to buy cryptocurrencies. To pay off its debts, it may be forced to sell BTC at a low point. This would further drive down the price of Bitcoin, causing the stock price to fall even lower, creating a "death spiral." However, this is unlikely to happen until 2030.
Maturity Wall
Convertible bonds have a fixed term (e.g., maturing in 2025 or 2027).
If Bitcoin is in a bear market and its stock price is depressed by 2027, MicroStrategy will face enormous cash repayment pressure. Although they have currently staggered their debt maturity dates, refinancing (borrowing new money to pay off old debts) will become very expensive or impossible in an extreme bear market.
But this problem has been resolved; the huge debts originally due to be repaid in 2025 and 2027 have all been "resolved."
Debt maturing in 2025: These debts (0.75% convertible bonds) were fully converted or redeemed in 2024 and are no longer a problem.
Debt maturing in 2027 (originally scheduled to mature on February 15, 2027): This was originally the largest recent debt (approximately US$1.05 billion). However, MicroStrategy executed a "Full Redemption" in February 2025.
Because the stock price was very high at the time, almost all creditors chose to "convert into shares" (debt-to-equity swap), and the company did not have to repay cash, and the debt disappeared directly (converted into equity).
The real "next wall" now: September 2028
Following recent debt restructuring, the maturity date of the most recent major hard debt on MicroStrategy's balance sheet has been postponed to:
Date: September 15, 2028
Project: 0.625% Convertible Senior Notes issued in September 2024.
Size: Approximately US$1.01 billion.
Hidden "Crisis Point" (Early Repayment Right): September 2027
Although the bond nominally matures in 2028, you should pay special attention to a hidden clause – the put option.
What is a put option? Bond contracts typically stipulate that if a certain date (usually a few years before maturity) is reached, investors can "demand that the company buy back the bonds at the original price".
Key Date: September 15, 2027
Risk Scenario: If Bitcoin crashes and MSTR's stock price falls below the conversion price by September 2027, investors may feel that converting to stocks is not worthwhile and will exercise their right to demand that MicroStrategy immediately pay back the money in cash. This would force the money that was originally due for repayment in 2028 to be paid out in 2027.
Therefore, the current debt structure of MicroStrategy is very safe in the short term (within 1-2 years).
Premium Collapse
The reason why micro-strategies can issue unlimited bonds/shares to buy cryptocurrencies is because the market is willing to give them a premium (stock price > value of holding cryptocurrencies).
If the US approves more direct-holding Bitcoin ETFs, or institutional investors find cheaper channels for Bitcoin exposure, the premium on MSTR could converge or even turn into a discount.
Once the price becomes discounted, issuing new shares or bonds to buy currency will become an act of "diluting shareholder equity," and the flywheel will get stuck.
Regulatory and accounting risks
While the new FASB rules (which allow cryptocurrencies to be measured at fair value) are favorable to MicroStrategy, the company still faces operational risks if its core business (software) cash flow deteriorates and cannot cover basic debt interest (although the interest rate is low, some debt still accrues interest).
Summarize:
The mechanism of micro-strategies is essentially to perform leveraged arbitrage on long Bitcoin positions:
When the market is favorable (BTC is rising): Issuing bonds to buy coins -> Stock price rises -> Debt disappears -> The amount of coins in each stock increases.
When things are going against you (BTC is falling): Stock price falls -> Debt becomes a heavy cash repayment burden -> Forced to sell coins to pay off debts.
Michael Saylor's bet is that Bitcoin's long-term gains will far outweigh the interest and time costs of debt.
Current situation:
The current market net asset value multiple (mNAV Multiple) is approximately between 1.14 and 1.3 times.
This is a fairly low level; compared to past bull markets, stock prices can be considered relatively calm, but the risk is extremely high.
Flywheel strategy faces an existential threat.
Microstrategy's strategy relies on "premium" operations. They use a stock price at a 2.0x premium (an overvalued asset) to exchange for 1.0x Bitcoin (a hard asset), thereby increasing the amount of Bitcoin per share.
When the premium rate falls to 1.14 times, issuing more shares to buy cryptocurrency will be much less effective and may even lead to shareholder equity dilution, as the cash benefits of issuing shares are not as good as before. The market has already observed that in November 2025, MicroStrategy's cryptocurrency purchase speed had slowed down significantly.
The current big problem is
Index Exclusion Risk
The collapse of the premium, coupled with the fact that more than 77% of the company's assets are in Bitcoin, has led index providers such as MSCI to reassess whether MSTR is still considered a "software technology company".
If MSTR is removed from major indices (such as MSCI USA), it is expected to lead to a sell-off of billions of dollars by passive funds, which would be the biggest short-term negative pressure on the stock price.
Index removal risk is one of the most likely fatal external shocks that the micro-strategy's "flywheel" mechanism will face, and it has the potential to cause the flywheel to collapse.
This is not just ordinary negative news, but a systemic risk that can directly destroy the flywheel's "fuel" and "power".
🚨 How does index elimination "destroy" the flywheel mechanism?
The core of the micro-strategy flywheel (issuing bonds/equities $$$ buy cryptocurrency $$$ stock price rise $$$ issue bonds/equities again) is "premium" and "market confidence". Index removal will attack these two core elements simultaneously from three levels:
Directly stifle the "premium" (premium collapse)
- Mechanism: Major indices like MSCI USA or S&P 500 are backed by billions or even trillions of dollars in passive funds, such as index ETFs.
- Impact: Once MSTR is removed from these indices (especially from the technology sector), these passive funds will be forced to sell their MSTR holdings indiscriminately due to compliance requirements.
- Result: This will cause the stock price to plummet in a short period of time, and the market will no longer give MSTR a premium. The original premium of 1.14 times will be instantly reduced to 1.0 times or even become a discount.
2. Cut off the "flywheel fuel" (paralyze financing capabilities)
- Flywheel fuel: Flywheel operation requires the continuous issuance of new convertible bonds or additional shares to raise funds.
- Impact: When the premium disappears (or becomes a discount), issuing new shares or bonds becomes highly dilutive to shareholder equity. For example, if the share price is equal to the net asset value (a premium of 1.0), selling $1 of stock will only buy back $1 of Bitcoin, with no added value.
- Result: MSTR will lose its ability to raise funds efficiently and at low cost. The flywheel, lacking fuel, will be forced to stop expanding its Bitcoin holdings, ending its growth story.
3. Detonating the "Debt Minefield" (Put Option Crisis)
- Flywheel power: The ultimate power of the flywheel is to enable bondholders to convert debt into stock, thus relieving the company of the pressure of cash repayment.
- Impact: If a stock price plummets due to being removed from the index and falls below the "conversion price" of future bonds (such as the conversion price of convertible bonds in 2028), creditors will lose the incentive to convert their shares.
- Result: As mentioned earlier, creditors will wait until September 2027 or 2028 to demand that the company repay the principal in cash. At that time, MSTR will face a debt wall of billions of dollars, and it will have almost no cash on hand (because it has bought BTC). Ultimately, it may be forced to sell Bitcoin at a low point to repay its debts, forming a "death spiral".
Conclusions and Current Observations
Index removal was the key trigger that directly transformed MSTR's "stock price risk" into "liability repayment risk".
| stage | Current Status/Risks | flywheel effect |
| Currently (premium 1.14X) | The market has already factored in this risk, and the premium has contracted. | The flywheel is still spinning at a low speed, but its efficiency is extremely poor. |
| If excluded (premium of 1.0X or lower) | Billions of dollars in passive funds were sold off, causing a huge drop in the stock price. | The flywheel collapsed, financing ability was lost, and the countdown to a cash and debt repayment crisis began. |
Two indicators we should continue to monitor:
- Premium rate: Once the premium falls below 1.1 times and remains there for a long period of time, it means that the flywheel has stopped.
- Index announcement: Closely monitor whether MSCI or S&P issues review notices for "sector reclassification" or "removal" from MSTR.
