#304 - MicroStrategy Is Collapsing (Will It Crash Bitcoin?)

MicroStrategy just lost $17 billion in three months and almost no one's talking about what happens next. Michael Saylor has bet everything on Bitcoin. He's borrowed a billion. He's convinced the world that he's a genius. He's told everyone that Bitcoin is the future and that MicroStrategy is the smartest play in the market. But here's what he's not telling you. If Bitcoin falls to $13,000, which it can, and likely at some point will, MicroStrategy

goes bankrupt. And when it does, it's going to take Bitcoin down with it. It's going to be like a domino effect. It's going to be forced liquidations, margin calls, like a house of cards falling down in crypto. And it's starting to wobble. And I've been warning you about this for months and months and months. And now it's starting to happen. In this video, I'm going to explain to you exactly why MicroStrategy is on the edge of collapse. and

what happens to Bitcoin when it does. I'm Lloyd James Ross, seven-figure investor and entrepreneur, and I've helped thousands of business owners and professionals turn financial stress into success. If you're stuck in old money habits, overwhelmed by investing, or unsure where to start, this is for you. I'll give you the mindset and strategies to take control, grow your wealth, and achieve financial

freedom. It's time to make your money work for you. Firstly, what is microstrategy? Well, incidentally, now it's just called strategy. Okay, now it owns, I believe 687,000 Bitcoin. And the investment strategy is to borrow convertible notes, and then buy Bitcoin. So it's a highly levered bet on an asset in a speculative bubble, an asset that doesn't produce any income. And assets like this, assets... Strategies like this, I should say. Strategies like this, where you're borrowing money

to buy a non-income producing speculative asset. In the history of mankind, they have never survived. So, that's the first part. And then

we've got to look at the history of Michael Saylor, the character, right? We've got to look at the history of what has happened to MSTR, which is MicroStrategy in the dot-com bubble. Remember, if you go back, he lost $6 billion in one day. He nearly sunk the company due to an accounting scandal. And the company was, well, it's never technically insolvent. The SEC brought a charge against them and he had to pay a huge personal penalty. So would

you trust someone like that who's got that history? Would you trust him with your money? And so far, this last 12 months, MSTR has fallen by 50%. Why is it falling? Let's jump into the detail. Here's what's happening. Here's a full breakdown. At its simplest form,

micro strategy structure obeys one immutable rule. Equity equals assets minus liabilities. You don't have to be an accounting genius to understand this, that equity is assets minus liabilities. That's very important to understand before I jump into this. So here's the thing, when assets are volatile and liabilities are fixed, equity becomes a levered option. So if at some point liabilities exceed assets, Basically, you're insolvent. There is no equity left. It's wiped out and

that's accounting. I imagine having Static liabilities, which is what happens when you also get a mortgage It's a static repayment to the bank and your asset prices are very volatile and move a lot You can quickly go insolvent. You can get margin called as well. Okay, so just just a very important distinction to kick off with now I want to explain here illustratively, very, very simply, so you don't tune out. I want to make this very simple, all right? I want to explain to you a

scenario where this can happen. So I want to strip down to first principles, all right? First accounting principles. So let's assume, for the sake of this exercise, that the Bitcoin holdings of MST are, I know they're 687,000, but for this exercise, let's say they're 200,000. And let's say the Bitcoin price for argument's sake right now is 50,000, just to make the numbers nice and simple. So the total asset value of the holdings that

they have is 200,000 times 50,000. Let's call it 10 billion, which it is. Let's say it's 10 billion. Even though I know it's more, stay with me. And let's say then the total debt that has been borrowed to buy that Bitcoin is $7 billion. So right now, it's got, and let's say it's got even assets, it's got a software, incidentally, MSTR has got a software business, an actual

business, and let's say that's worth a billion dollars. So for the argument's sake here, the starting position of this MSTR example is assets of $11 billion, total liabilities of $7 billion. The equity is 11 minus seven, which is four. So that implies right now, as this example suggests, that it's got asset leverage over equity of 2.75 times. So it's basically got 2.7 times, the equity in leverage. Does that make sense? That's

important to understand. Now, in this example, if Bitcoin falls by 50%, which is actually not an extreme correction

by Bitcoin standards, done it before, right? In fact, historically, it's dropped by 70 to 85% in a bear market. So 50% is probably conservative. Now, if we go back to our example, the new Bitcoin price might be 25,000 from 50 to 25. Yes. So the new asset value is not 11 billion, but 5 billion. So let's have a look at our original example. You've now got the Bitcoin asset at five. You've got other assets at one. So you've got total assets of 6 billion and liabilities of seven. Uh-oh. Uh-oh. The

equity is negative 1 billion. So the equity is wiped out. Bye-bye. So this is insolvency. On a mark to market basis, it's insolvent. So this isn't a real life example. It could happen. I know what you're thinking. They don't have to sell, but here's why that's false. This is where people misunderstand economic law versus intention or hype. I know you want to believe in it. I get it. But debt introduces what's

called external constraints. Because once the equity price collapses, the credit risk explodes, bond prices fall, refinancing costs spike, and counterparties tighten the terms. So they're not going to have the same terms of their convertible bonds that they're raising to buy Bitcoin. It's going to get way harder. The rates are going to be higher. The constraints will be more. And so it's not gonna be like it is

now and that's what happens because credit risk increases. Yeah, this is what's called a Minsky moment in financial instability So here's the hypothesis in action. Here's what I think will happen So

the initial stability creates the leverage but leverage creates fragility and the fragility then creates collapse right, so if we look at the The issue of volatility versus the debt. So if an asset price is volatile, it means the asset price moves a lot like this. And Bitcoin is known for that. It's a very volatile asset. So when you have a volatile asset against a steady debt instrument, you're going to have a myriad of different things that can happen, right? So as I said,

Bitcoin is one of the most volatile assets in financial history, period. That's why people love it because they're making all these trades and they're trying to, you know, volatility is a friend of the trader for sure. But debt instruments obey one different law. Debt's fixed, interest is fixed, and maturity dates are fixed. So this violates a fundamental risk matching principle. And it's this. You cannot safely fund a hypervolatile asset with fixed liabilities. That

mismatch guarantees stress. And

here's what happens. Convexity then starts to turn against them. What do I mean by that? Let me explain it. Micro strategy or strategy structure has what's called negative convexity. So here's what I mean. On the way up, meaning as Bitcoin goes up in value, up in price, gains are capped by dilution and debt servicing. So on the way down, That means they can service their debt okay. On the way down, losses accelerate faster than Bitcoin itself. Yes, this is because the

asset will fall linearly, yeah? Equity falls then exponentially because of the leverage. That's why. So when you have leverage like it does, it amplifies gains. But when you have losses, it amplifies losses. Debt itself doesn't fall, it's a static liability, but the assets will fall way faster than the price correction because of the debt. It amplifies losses and people don't even realize this. This is what happened in the 2008 real estate collapse in

America. You know, People are like, oh yeah, I love property because it's leverage and it goes up. Leverage only works when the asset price rises. When it goes down, it amplifies losses. And I didn't tell you this. This is what happened to all of the crypto bros recently when they all got liquidated and jumped off buildings because they were like 100x leveraged. And it fell by 1% or 3%. And they just got liquidated because it amplifies losses.

And people don't realize this, right? That's why the equity collapses long before the Bitcoin bottoms. The Bitcoin, that's before BT bottoms. This is why, right? Because you gotta

remember, micro strategy is equity. People are buying shares in a company, that's equity. They're not buying Bitcoin directly. They're buying a levered Bitcoin position in shares. So it can be massively, it will, it will implode if the price adjusts like it has in the past. I think it's only a matter of time, frankly, right? Just quickly, if you're ready to take control of your finances but feel stuck on where to

start, I have a solution. My book, Money Buys Happiness, simplifies investing and wealth building with practical steps to help you achieve financial peace. Get your copy via the link in the show notes and let's get your money working for you. Now back to the episode. So, the debt doesn't need a default to destroy the equity at all. All it needs is a bit of refinancing pressure. The underlying process by which Michael Saylor is trying to make money is this, effectively,

in its simplest form. He's borrowing money from

institutions that are convertible notes, okay? And whilst he can't be margin called on that, those particular notes, they attract an interest charge. Because if you're lending money to someone, even Michael Saylor, you're going to ask them to pay you some interest on the borrowings, yes? On the loan. That's how it is. That's finance. It's the oldest business in the world, money lending. So you lend money to MicroStrategy. And you're going

to have to get paid interest on that. So here's what MicroStrategy does. It doesn't sell any Bitcoin to pay it because that would then curtail the price rise of Bitcoin and it would go into a negative convexity. But here's what does happen. They borrow money, right, and they repay the preferred stock dividends to the shareholders, the coupon rate back to the bondholders, I should say. They pay the

interest based on the borrowings. And that's why a lot of people are calling it a Ponzi scheme, because they're borrowing money to buy an asset and they're paying the interest on the borrowings with the borrowings. Yeah, it's wild, right? And of course, the strategy is to borrow more, buy more Bitcoin, price goes up, borrow more, buy more Bitcoin, price goes up, etc, etc, etc. But here's the thing. Whenever

that happens, the two things are happening. One, they're getting more leverage. Two, they're also issuing more shares and they're actually diluting the current equity holders. That's why you've seen a huge fall of 50% lately, because people are realizing they're diluting the value of the shares. especially because the asset value is falling. So the actual value of the shares, if Bitcoin falls, is also falling. And then you're

getting all this debt. So the debt to equity ratio is just flipping. It is just getting wildly high, okay? Anyway, so these bonds that they're getting, they will mature. So these convertible notes have a term. So they mature. And then as

it gets riskier, the interest rates will get higher when they refinance. And as Bitcoin continues to get lower, the credit spread widens. Okay, the risk becomes more. And then new debt that they get to buy more Bitcoin becomes prohibitively expensive. Then equity issuance becomes massively diluted, which is exactly what I just said and exactly what's happening. And then the asset sales become the only option

to service that debt. And that means they've got to sell Bitcoin. And that means the forced selling is gonna create this massive domino effect, right? Here's the thing, forced selling is not, at that point, is not price sensitive. And this is critical to understand. Voluntary sellers, they'll wait for a good price, then they sell. But forced sellers, like in this scenario, they'll sell at any price. They don't care, they've got debt to service. It's like a liquidation

sale, it's a fire sale. So once MicroStrategy starts to sell Bitcoin, the liquidity thins, order books, you know, the price overshoots downward,

the reflexivity starts to kick in. And what that means is price changes alter the fundamentals, right? So it alters, more or less what it means is lower prices because of the selling create lower prices. That's what it means. And why this can drag it down further is because then Bitcoin starts to fall in price, especially if you've got a massive, massive company like this selling large holdings to cover itself. you're gonna have a bit of a domino effect

on the price of Bitcoin itself. And this just starts to quantify and cascade the losses of strategy more and more and more and more. It just can't continue to do its old strategy, right? They're gonna change the name of the company to the strategy doesn't work anymore, Inc. So here's what happens. Bitcoin drops 60%, the equities, listen to this. If Bitcoin drops 60%, the equity is obliterated by E, Zero. What are they lending money on then, right? They're insolvent. 70% debt

coverage is then questioned. Like, hey, you can't even cover your debts. We're in trouble here. And then 80% liquidation risk. It becomes existential. And we know that Bitcoin can fall by 80%. So this strategy ain't so good. I mean, can you honestly believe that this strategy is going to continue as it has for the next 20 years? Honestly,

truly, really? You don't think at any point that shitcoin is not going to go through an 80% correction? You don't think that? Even though it has? That's what you're betting on here. And it's levered. I mean, anyone who owns shares in this company, man, I think you deserve to lose money. I hope you don't, but it's not looking good. So as I said, Bitcoin's

already done that multiple times. So it's going to happen again. And it's just going to get worse because the leverage is more and more and more and more and the dilution is more and more and more and more. So it's gonna trigger some sort of like algorithmic selling. There'll be redemptions, there'll be contagion, and it's never gone through a credit crunch ever, in its current form, with its current strategy. So this is how it'll overshoot, and it'll just get worse. So

here's the economic law that basically ends it all. The entire structure collapses under what's called the Irving Fisher's debt deflation theory. Bit of a mouthful, isn't it? But hear me out. When asset prices fall, The debt burden rises and then it forces liquidation which drives prices even lower and cascades. Yeah, that's exactly what kind of happens, right? So Micro strategy is long. Listen up long

the most volatile asset ever. It's leave it with fixed debt Which is dependent on rising prices to remain solvent that's Yeah, that's not investing, that's speculation leverage. Because it's a speculative asset and it's leverage. Simple, right? So here's the bottom line. Bitcoin itself, like as the underlying asset itself, it doesn't need microstrategy. But

microstrategy needs Bitcoin to keep rising for the strategy to play out. That asymmetry really guarantees one There's a lot of pain coming for selling before any recovery deeper drawdowns a lot of dilution potential insolvency You know, so Bitcoin may survive but leverage Bitcoin companies don't So it's not bearish, it's just financial physics more or less. And you can't break, this is first principles economics. You can't argue with it. So I don't even think, it's not a matter of if, but

a matter of when. It's gonna be so interesting. And the fact that the stock's already fallen by 50% suggests the market's already seen this. Because markets afford, they're like a glimpse of the future. It already knows these things before you do. So it's saying, hey, don't think these shares are worth much anymore because we can see this coming apart. That's what the market's telling you with the stock price. That's why people are selling. That's why there's so much selling pressure

on this stock. And so I look, all I wanted to do with this episode is suggest that in many regards, there's Ponzi like features to how they're borrowing money to pay the coupon rate of the debt they're taking just to buy a speculative asset. And you can see with the convexity that once Bitcoin falls by 80%, boom, it's game over. I'll do another episode when it happens. And if it doesn't happen for 30 years, you'll see me here with probably gray hair, grey beard going,

Marco's strategy is going to like flat. I'm happy to do it. I'm happy to be wrong. I don't think I am. So I just want to do this episode because I think people are misunderstanding what this is. And it's a very good example of why fundamental investing that I preach and talk about is so much more effective. than borrowing against a speculative asset. Okay. So I hope that makes sense. If you've enjoyed this,

what do you think? Do you think it's a Ponzi scheme? Do you think it's going to, do you, are you betting the house on this? This is your thing. If it is comment below, let me know. And if it ain't and you agree with me, give me some love in the comments and I'll come and talk to you there and hit the subscribe button. Share this with a friend if they need to see

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