I’m pretty sure my next door neighbors think I’m a kook. They’re probably right.

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There is a lot of demand going around right now to focus on the $MSTR bear case, so i'll do a bit of that today. If there is a desire, I'll go deeper once I'm not on vacation.

Trigger Warning: Wildly long. Probably lots of spelling mistakes in this one, but you'll get my point so please forgive any errors. 🤣

I'll start by saying this, no I don't make the bear case my primary focus right now in posting because I see the first major point in time risk coming in 2028 at the earliest due to MSTR currently being able to call the 2027 bonds and essentially force a conversion if they want. Of note, the 2028 bonds are also eligible for early conversion by the bond holders, but not yet callable by MSTR until December 2027.

Let's start by clearing up that there is no margin call/forced liquidation with the convertible debt. That risk was associated with the bank loan they had earlier, but there is no Bitcoin price at which MSTR gets "force liquidated". I've seen a lot of posts including this, but it simply is not a thing.

Ok, with that in mind let's move forward.

The vast majority of the risks discussed are tied to the convertible debt, or the demand for the convertible debt. When it comes to the converts, you really have point in time risk with the maturity point of each of the notes. Essentially what this means is that your risk you are evaluating is a convergence of bad timing where you get a Bitcoin Black Swan event coupled with a maturity of one of the convertible bonds keeping it below it's conversion price and requiring a cash repayment.

This risk is exactly why MSTR deploys a "ladder strategy" for their convertible bond offerings. They spread the maturities of the bonds so that no more than one bond offering will mature in any given year. This allows MSTR to ride out fluctuations in Bitcoins price and the cycles.

If we look at the upcoming bonds for maturity, there are 2 to be looking at imo: the 2028 and the 2029 (remember my personal belief is the 2027 are as good as converted at this point, so take that for what it's worth).

With the first maturity in September 2028 (they can be converted at any time after March 15, 2028, but not focusing on those clauses for now) this means that if we are to believe the 4 year cycles for #Bitcoin will continue, we will be just 2.5 months earlier in the next cycle than we are in this current cycle at maturity. The largest of the notes, the most recent 2029 $3B notes, will mature in December 2029, which is essentially peak of the next Bitcoin cycles (coincidence? I doubt it. I think 2029 was intentionally left open for the first scaled up offering).

So when looking at a bear case with this in mind, we are first acknowledging that we think the cycles likely won't repeat and further we are assuming the cycle breaks to the downside and stays there for an extended period of time. This, in my opinion, would require a major shift in the regulatory environment, an exploit, or a long term black swan economic event. Out of the question? Of course not, but I can't predict these so I won't try.

Alright, now that we've gone through the fine print let's just focus on a couple scenarios. I'm not making price predictions in this scenario (other than general observations) because like everyone else, I have absolutely no idea where the share price will go. I'm simply looking at what could happen.

What happens if Bitcoin's price goes down in the near term?

Well for starters, it would be unlikely we see more convertible notes in the short term if this happened. If Bitcoin's price declines, it means that the fair market value of their holdings will decline as well. Since the leverage is tied to the value of the Bitcoin holdings (see posts I've done prior for this overview) this would mean that they would drift towards the higher end of their target range. So that puts them in a position where they would be in a holding pattern for converts. Not the end of the world, the leverage is already there.

As long as the shares are trading above book, they could continue to use the ATM to acquire (and keep their leverage ratio in range by adding Bitcoin), but they will likely slow the activities here to just enough to keep in line with guidance.

Does this mean shares will decline during this period? Of course it does, MSTR's share price is tied to the growth rate of their Bitcoin holdings per share and the FMV of their Bitcoin treasury holdings. Volatility goes both directions, never forget that. It's core to the model so don't be caught off guard when it cuts to the downside. This scenario impacts both categories. Their growth would slow, and the value of their holdings would decline. That certainly equals a lower share price.

However, this short term view is not an existential threat to MSTR, just simply a period of lower activity.

What if the share price is below the conversion price when the 2028 notes come due?

In my opinion, this is the first time it gets interesting. While the share price going down temporarily will be painful for investors, it's hardly a threat to collapsing MSTR. But not being able to handle a maturity? That's more of a topic for concern and consideration.

Now the initial thought everyone has is "well they'll just sell Bitcoin!", but I doubt it. We need to be a bit more strategic than that, no problem has just one single solution after all.

But just for fun, what would the price of Bitcoin need to be before just the Bitcoin couldn't cover this maturity?

The answer is $2,611 (2028 debt / total Holdings). Realistically, people will track the value at which MSTR goes into the red collectively on their debt vs. just the one point in time, but this is a view into a catastrophe scenario (we all probably have a lot more problems if BTC is $2,611 than our MSTR shares).

As it stands today, the price at which MSTR would not be "fully covered" on their debt from just Bitcoin alone is $18,784. So also a long way from this scenario and this is why they manage their leverage ratios to allow for market fluctuations.

But let's think a little less binary and a little more strategic. How do we address this?

We have to look at what our other options would be that don't include selling the Bitcoin (you know the rules, you never sell your Bitcoin).

I see 3 primary options available: Bonds, Traditional Debt, ATM.

We have only seen one evolution of bond offerings here. So for this scenario, if converts are not in favor anymore we would have to look for a new customer base to draw from. We could do this by looking at new bond categories.

Depending on market conditions overall, we may have to approach these differently. It's possible they can still offer unsecured bonds with either a fixed or floating rate. Fixed will be more desirable if rates are low at the time while floating would be great if rate conditions are anticipated to get better throughout the term. However, if the market conditions are really bad, they may need to pivot and provide some collateral backing. This would likely be done with "Bitcoin Secured Bonds" and these would also have fixed or floating rates, but because of the collateral the coupons may be lower than the unsecured.

The goal here is to "roll the debt" further out in the future. This basically buys time for conditions to change in the Bitcoin market. The proceeds would be used to cash redeem the 2028 notes and the new bonds would likely go out another 4-5 years before maturity. So this doesn't come with additional Bitcoin (unless upsized), but it makes sure that no Bitcoin is sold and also doesn't come with any equity attached like the converts.

The obvious consideration here is that these require cash flow to support them, so one consideration to work through will be the health of the operating company. I'm not going to make any projections on that as I have no inside view to the demand they are seeing over the next 4 years.

Traditional debt is simple. It basically just means take out a loan to cash redeem the notes. Bank loans come with a lot of stings (debt service covenants, collateral requirements, etc.) so it's not ideal, but it does the same thing as the bonds and moves the maturities out. These will also come with market interest rates that the operating company needs to cover.

For both the new bonds and the traditional debt, we are looking to move these out far enough to allow conditions to improve. Once conditions improve, we can look at redeploying convertible bonds once again to help clear this debt at some point in the future.

The other option is the ATM. It's possible in advance of a maturity MSTR starts using the ATM to hold cash to minimize the upcoming maturity risk. If it all works out at a conversion is able to take place, they always have the option to deploy the cash they built up into more Bitcoin.

Keep in mind, the ATM isn't an all or nothing approach. It could be used in conjunction with one of the other options as well to decrease the amount of debt they are rolling forward. There is an analysis to be done at the time to determine how best to preserve shareholder value.

What if this happens for many years in a row?

This becomes a question of how much can the operating company cash flow at that time. The options from the last scenario remain on the table to roll the debt. If several years go by and the debt all has to be cash redeemed then we start having to consider the potential for Bitcoin to be sold, or highly dilutive ATM issuances being deployed.

Nobody should be under the illusion that there is no risk in the model, of course there is. Our job as investors is to weigh the risks and make an assessment of how real they are and whether risks many years in the future are probable enough to keep us out of an opportunity today.

What about mNAV?

This is more discussed from an investment perspective vs. an existential risk to the organization. There are any number of scenarios that can compress the mNAV, including Saylor himself and the ATM use. Let's not pretend that's not real, of course it is. For now, it is an accepted risk as the belief of many (myself included) in this investment is that Bitcoin is going to be hitting a major adoption curve and the goal should be acquire quickly before bigger buyers (i.e. nations) enter the scene. That timeline is getting shorter each day.

As MSTR uses the ATM aggressively the mNAV compresses. It shouldn't be a secret that MSTR selling their own shares does absorb some of the buying pressure in the market, it absolutely does. This is often why we see price climb during quiet periods before earnings when they stop using it. It's also why the ATM will be used more aggressively during periods of bullishness when volume rises. Conversely, it will be used less during price declines and bearish periods for Bitcoin.

mNAV will ebb and flow, likely quite wildly. I see it more as a sentiment indicator of Bitcoin than I do as some concrete law for market cap valuations for MSTR. Everyone gets to assign their own values to the strategy of MSTR, there will never be consensus. I share mine based on my thesis, but that doesn't need to be yours. If you don't believe there is a justification for a premium, then this isn't the trade for you to be in. No arguments needed, this is how markets work.

A note on forward looking valuation

Another important aspect for people to consider is that your future valuation of MSTR is likely directly tied to your personal outlook on Bitcoin and the future evolution of the use cases for the asset class. Personally, I see a bright future that likely brings many monetization opportunities for MSTR to utilize their Bitcoin as it becomes further engrained in the global financial system.

If you are trying to be early to an opportunity, this takes a degree of looking into the future and seeing opportunities that others can't see yet. I personally think that is the case with MSTR. If you view Bitcoin as static and never changing, then you won't likely have a positive outlook for MSTRs prospects beyond simply "fair value" of their Bitcoin.

This also isn't a topic requiring arguments amongst people (intellectual discussions, just not fights), it's up to everyone to determine their probabilities for these different outcomes and determine how they use it to assign a valuation today. This is specifically why I always reiterate that "investing is an individual sport".

What if there is no longer demand for convertible debt?

There has been a ton of discussion about what happens if volatility is no longer favorable for MSTR and the convertible bonds are no longer sought after.

First, let's keep in mind that the alternative issuers of convertible debt will often have volatility of 20-30%, MSTR is often 100% - 110%. So there is a long way to go before they are no longer desired imo.

But what if it happens and their customers for converts are gone? Well, what happens if demand for iPhones disappears? AAPL stock probably goes down right?

No different with MSTR, if they lost their ability to generate their yield then their growth is "slowing" and their valuation would compress. Nothing magical here, and it doesn't need to be taboo to say this. The question really becomes can they create another product offering that can fill the void left by the converts?

I've been rambling forever now, so I'm not going down this rabbit hole for today, but people can spend some time on that thought process themselves.

Summary

Every single investment contains risks, I'm not going to pretend this isn't the case. MSTR is not immune to this fact of life. However, your job as an investor is to evaluate these risks and future opportunities for yourself and assign probabilities to the outcomes. From there, you can take a position with your eyes wide open.

Don't trust my views, don't trust anyone else's views. You are deploying your own capital and you should take the time to make an independent assessment that determines whether MSTR is the stock for you or not. If you come to the conclusion not to invest, so be it. You won't find me trying to convince anyone to invest, it makes no difference to me and I have no interest in getting into arguments about the topic, it's unproductive to the bigger picture.

Obviously I didn't cover every other risk possible here, just a couple of the ones I see discussed. You also have regulatory risks, key man risk (MSTR has a killer team, I'm not concerned), custody risks, etc. Take the time to become familiar and spend a few minutes thinking about each.

Hopefully this is helpful to many to understand some of my views and thought processes on this topic. I'll try to spend some time discussing some of these in more detail on streams as the opportunities arrive. If I've left out something critical (entirely possible, I'm writing this on vacation so not 100% caught up with all the discussions out there right now) just let me know and I'll try to address them in future posts.

If you made it this far, congratulations! I hope everyone has a wonderful weekend, we'll be back at it next week when the markets open!

There are many new people entering the $MSTR space which is great to see, but because of this I think it may be helpful to give a simplified example people can use and conceptualize from their personal life to understand at a high level what MSTR has been doing with their strategy.

Trigger Warning: It's long, but not as long as yesterday.

Income vs. Net Worth

These are 2 concepts that most people understand at least at a high level in their personal lives. For this example, we will consider your income to simply be the salary from your job.

Net worth is slightly more complex but is essentially what comprises your personal balance sheet (if you've never built one, please do). The formula for your net worth is quite simple, it is Assets - Liabilities = Net Worth. This is essentially saying the value of the items you own less any money you owe on those items (or in general).

The main categories that fall into the assets for most people would be things like cash, investments (401K, IRA, Brokerage, #Bitcoin, etc.), real estate, vehicles, high end jewelry and collectibles. There are many other items that are assets, but these are some of the big ones. When talking assets, it's often worthwhile to split out your "financial assets" from your other less liquid assets. This helps you to focus on categories individually when you are strategically deploying them to create more wealth (i.e. increase your net worth).

So when you are looking at your options to generate wealth, you are focusing on a combination of your income and your net worth. However, society has essentially told us that your value is tied to your salary and that this should be your sole focus. Every year when review time comes all employees stop what they are doing and look at ways to cleverly try to show their bosses their value in an attempt to get a raise. Often, those raises disappoint so people will shift their focus to opening a job search in hopes of increasing their salary that way. It's exhausting (i've done it too). Who has time for investing?

I'll give some unsolicited advice that I don't typically give. For the first decade of your career, hyper focus on your income (salary). This is where your assets will initially be acquired from. However, you have to make sure you don't allow lifestyle creep to take over and eliminate your "net" income (income left after paying your living expenses). This net income is what you can transfer to your balance sheet (through investments, acquiring assets, etc.).

The reason I say the first decade is because when you start out in your career, the most valuable asset you have to create wealth for yourself is time. Time is the magic input for compounding, and the more time your assets have to compound in value year over year the more impactful they will be to securing your freedom. So ignore everyone else buying flashy things or spending your time wondering how they could afford them (I can tell you, debt). Hyper focus on funding your retirement accounts, HSA accounts, brokerage accounts, buying Bitcoin, etc. These assets being in place early gives you a superpower that most people will not understand until they have lost the most value periods of time they have to kick starts the compounding engine.

After a decade of hyper focus on accumulation of assets, you can essentially let time take the wheel (this doesn't mean quit making money, it means that the value of your assets will start to grow without you needing to do much and hopefully eventually in increments that exceed your total salary). The compounding impact of returns will build wealth for you over time without needing to spend all your time worrying about getting a raise, getting laid off or sitting in a job you hate burning years of your life you can't get back. Your assets will ultimately buy you your freedom and time back, and that needs to be the goal. Life is finite, and the more time you have to focus on passions and not on "surviving" will help make the ride overwhelmingly more enjoyable.

Please always remember, it is very easy to look rich. It is very difficult to become rich.

Alright, enough of my own personal philosophy rambling let's get back to how this pertains to MSTR.

How does this apply to the MSTR Strategy?

MSTR has the same setup. The markets have conditioned us to look at companies and assign value based on how quickly they grow their revenue (salary in our personal example) and net income (take home pay). Markets are constantly looking for growth, but because of that most companies don't get to accumulate assets on their balance sheet from these earnings. They need to redeploy them into the company to fund expansion/sales/hiring/facilities/etc. to continue to show growth in the revenue that will indicate to the market that they are on the trajectory to being a "rich" company despite many showing thin margins.

MSTR started this way as well. For the better part of 3 decades, they focused on building their software products, deploying sales and implementation teams to get companies onboarded to their BI product, and each year had to hyper focus on squeezing every dollar out of their platforms and contracts that they could get. But once growth slowed, the markets determined there was little of value here due to the forward looking nature of valuations.

So Saylor shifted his focus. What he did do during the early periods was create a company that was providing him with steady cash flow that was accumulating on his balance sheet as an asset. They had removed meaningful liabilities, and were actually very strong from a balance sheet perspective (company net worth) and very unencumbered by debt.

Now MSTR had a decision to make. Was it a better use of their time to try to foece a 5-10% raise in their salary (revenue) every year even if it meant little in the terms of take home, or was there a different way to generate wealth?

They turned to utilizing their assets. They initially deployed there cash in to a harder, stronger asset that had a better anticipated return (infinitely better than the negative return of cash) which could generate increasing asset value on their balance sheet. If your asset growth outpaces your liability growth, your net worth is increasing. So MSTR decided their time was going to be better spent accumulating assets than spending all their time and capital on sales/growth efforts (obviously they are doing this still, but you get what I'm saying).

Think of it like this. Let's say that their revenue (salary) was $500M and their net worth after all those years of building the business was $1B (i'm making these up for illustration). Where would their efforts be better served in the long run for generating value through trying to generate a 10% return?

Well, if they increase their revenue 10% that means there is another $50M coming in the door for revenue. But there are expenses, so their take home may only be 10% of that amount or $5M. This would mean that they have $5M available to transfer to their balance sheet to put to work.

On the other hand, if they focused on more efficient and opportunistic deployment of the $1B they had available on their balance sheet then this same 10% target would yield $100M but they get to keep all of it (ignoring taxes in both scenarios for simplicity).

This is where compounding kicks in. If the first scenario, that $5M they took home if it gained another 10% the next year would yield $500K in additional value on the balance sheet (total now $10.5M). However, looking at the $100M generated from utilizing the balance sheet instead would generate an additional $10M the next year (total now $110M).

You can start to see the impact here of this happening year after year. But this is misunderstood because the markets have taught us to largely overlook balance sheet strength as a method for valuations. Most often, when balance sheets are evaluated it is to point out that companies have accumulated massive amounts of cash and they can't find ways to deploy it so we start looking for dividends or acquisitions.

MSTR is in constant deployment mode. They made the determination that they will ensure their balance sheet is 100%+ deployed into a new asset they believe will allow them the benefit of compounded value over potentially hundreds of years. This approach to time horizon focus is new in the corporate world, and is why so many don't understand the strategy. They take a short term view while ignoring the evolving nature of the world and capital.

Summary

So in summary, you are witnessing a corporation shift from focusing on income to focusing on net worth. This is a strategy that builds for the long term future.

This is an approach everyone should apply to their own lives. Stop thinking short term about the next thing you want to purchase. Set your sights decades out and make the best use of the assets you accumulate early to achieve those goals.

We always hear "work smarter, not harder", well for your personal wealth this is what that means.

Spend the time working to build your assets, so your assets can get put to work building wealth for you.

I acknowledge this is a simplified overview which skips nuances of leverage, MSTR's access to capital markets, etc. But I think it is a core concept people need to really think about and understand as a foundational component for both their personal lives and for how they understand the strategy MSTR is deploying at a basic level.

Have a great rest of the weekend everyone!

How can we make this happen? nostr:note1v5tdky54regfh5nrlcqt54pzgee9l0dfcp5ql59l4m8wlenxdxyqzpx7qh

I'm good until the end of the year.

🙏

nostr:npub1trr5r2nrpsk6xkjk5a7p6pfcryyt6yzsflwjmz6r7uj7lfkjxxtq78hdpu nostr:npub1a2cww4kn9wqte4ry70vyfwqyqvpswksna27rtxd8vty6c74era8sdcw83a nostr:npub1yezu4atsdgchvlyjz5efwks8n7ze2rssq674qe04m5pp8e5y32tqfdawc7 nostr:npub10afr060h0g3vf2ykynr6cvw2u7ta3tzpgjczfyufp420aeeen0xszf0xj0 nostr:npub1jddnc9ma408dey575wcsqhg5jtc2n7765y4gdnnrswlwgqnnat7swe4s60

What's the nicest complement YOU could give someone?

Positivity Thread 👇

Satoshi Rockamoto 🎸🤘Lugano next week for @Lugano Plan ₿ / nostr:npub1ft69mv46akgwumcxn873948ht0jvhh89c2z95pptfhqyf26g4wnqkatx3v Kick out the jams with the Bitcoin all-stars. nostr:npub1z77juddgcul5la7jq578nsurpxh99633ccanngf863m4gh6gv2msm009sr nostr:npub1jt97tpsul3fp8hvf7zn0vzzysmu9umcrel4hpgflg4vnsytyxwuqt8la9y nostr:npub1excellx58e497gan6fcsdnseujkjm7ym5yp3m4rp0ud4j8ss39js2pn72a @Mir nostr:npub1fk8h6g8zhftw8c7pga2zjd84p2z949up5lc3qdchm9v4m0q7mwws7jcwld nostr:npub1z77juddgcul5la7jq578nsurpxh99633ccanngf863m4gh6gv2msm009sr nostr:npub1r8l06leee9kjlam0slmky7h8j9zme9ca32erypgqtyu6t2gnhshs3jx5dk nostr:npub1rxysxnjkhrmqd3ey73dp9n5y5yvyzcs64acc9g0k2epcpwwyya4spvhnp8 and whoever else!

What excites you the most in your life?

Putting an end to the epidemics of Obesity, Type 2 Diabetes & Metabolic disease!

Please tell me more how the shitcoiner in command and jack of all rugs will be The Bitcoin President…?

Who is this good for? What timeline do you have, the timeline of a house fly?

Bitcoin and nostr alone do not fix this level of naïveté

Papa Gov DID NOT approve this label

Edits coming. 🍷

Based on the comments here, Nostr is absolutely lit when it comes to meditation.

nostr:note1uvyng4zk2ljq2hglyk0z5c785d6zuzu6da0cx74szn9fwh2a2z7q772hd3