MSTR's Tribulation: shorting and Palace Intrigue

Original Title: MSTR's Tribulation: Shorting and Palace Intrigue

Original author: Lin Wanwan

Source of the original text:

Reprinted: Mars Finance

Text | Lin Wanwan

Recently, the holders of MSTR (Strategy) are probably having a hard time sleeping.

The “Bitcoin Central Bank” that was once idolized has experienced a bloodbath in its stock price. As Bitcoin rapidly corrected from its historical high of $120,000, the stock price of MSTR and its market value plummeted significantly in a short period, dropping over 60%, and there is even a possibility that Strategy could be removed from the MSCI stock index.

The price of cryptocurrencies falling and stock prices plummeting are just superficial signs. What really makes Wall Street nervous is the increasing number of indications that MSTR is caught up in a struggle for currency power.

This is not an exaggeration.

In the past few months, many seemingly unrelated events have begun to connect: JPMorgan has been accused of significantly intensifying its shorting of MSTR; users experienced delivery delays when transferring MSTR stocks from JPM; there have been frequent suppressive actions in the derivatives market regarding Bitcoin; and discussions on “Treasury stablecoins” and “Bitcoin reserve models” have rapidly heated up.

Moreover, these are not isolated incidents.

MSTR is standing at the fault line of two American monetary systems.

On one side of the palace struggle is the old system: the Federal Reserve + Wall Street + commercial banks (with JPMorgan Chase at its core); on the other side is the emerging new system: the Treasury + stablecoin system + a financial system collateralized by Bitcoin over the long term.

In this structural conflict, Bitcoin is not the target, but rather the battleground for palace intrigue. MSTR, on the other hand, is the key bridge in the conflict: it converts the dollar and debt structure of traditional institutions into Bitcoin exposure.

If the new system is established, MSTR is the core connector; if the old system is solid, MSTR is the node that must be suppressed.

Therefore, MSTR's recent plunge is not simply a matter of asset volatility, but rather the result of three overlapping forces: the natural adjustment of Bitcoin prices; the inherent vulnerability of MSTR's risk structure; and the spillover of conflicts caused by the internal power shifts within the dollar system.

Bitcoin has strengthened the future monetary framework of the Treasury and weakened the framework of the Federal Reserve. The government faces a tough choice: if it wants to maintain the opportunity for low-priced accumulation, it needs to let JPM continue to suppress Bitcoin.

So the method of hunting MSTR is systematic. JPMorgan understands these game rules too well because they set the rules. They put MSTR on the dissection table, clearly distinguishing its blood vessels (cash flow), skeleton (debt structure), and soul (market faith).

We are here to break down the four potential “death postures” that MSTR may face, which are also four death warrants carefully prepared by the old order for MSTR.

Posture One: Take Advantage of the Fire to Rob

This is the most intuitive and also the most discussed model in the market: if BTC continues to plummet, MSTR's leverage amplifies, and the stock price keeps falling, leading to a loss of refinancing capability, ultimately resulting in a chain collapse.

This logic is simple, but it's not the most fundamental issue.

Because everyone knows that “If BTC falls too much, MSTR will have problems,” but very few people know: to what extent does it have to fall for MSTR to go from “as steady as a dog” to “not steady at all.”

MSTR's asset-liability structure has three key figures:

Total BTC positions exceed 650k coins (approximately 3% of the total Bitcoin supply)

Average position cost is about 74,400 dollars

Some debts have implicit price risks (though not forced liquidation, but it affects net assets)

Many stories of “MSTR will go to zero” consider it in the style of forced liquidation in exchange contracts, but in fact: MSTR does not have a forced liquidation price, but there is a “narrative forced liquidation price.”

What does it mean?

Even if the creditors do not liquidate him, the market will crash his stock price. When the stock price falls to a certain level, he will no longer be able to issue bonds or convertible bonds to continue averaging down.

The old forces of JPMorgan are joining hands to short MSTR through the US stock options market. Their tactic is very simple: take advantage of the Bitcoin correction to smash MSTR and create panic. Their only goal is to break the myth of Michael Saylor.

This is the first point of collapse for MSTR: the price of Bitcoin has dropped to a level that makes outsiders unwilling to lend him money.

Posture 2: Debt collection at the door

Before discussing convertible bonds, we first need to clarify how MSTR's CEO Micheal Saylor's “magic” is performed.

Many newbies think that MSTR only uses earned money to buy coins, which is wrong. MSTR plays a very bold “leverage arbitrage game.”

Saylor's core strategy is: issuing convertible notes, borrowing USD, and buying Bitcoin.

MSTR has raised a significant amount of $20.8 billion this year, which is extremely rare in the annual fundraising of publicly listed companies in the United States. The sources of funds are $11.9 billion from common stock MSTR, $6.9 billion from preferred stock, and $2 billion from convertible bonds.

This sounds very ordinary, but the devil is in the details.

These bonds offer investors very low interest rates (some even less than 1%), so why do investors buy them? Because these bonds include a “call option.” If MSTR's stock price rises, the bondholder can convert the bond into stock and make a big profit; if the stock price does not rise, MSTR will repay the principal and interest at maturity.

This is the famous “flywheel”: issuing bonds to buy coins, the coin price rises, MSTR stock price skyrockets, the bondholders are happy, the stock premium is high, and then more bonds are issued to buy more coins.

This is what is known as “spiral ascent.” However, wherever there is a spiral ascent, there must be a death spiral.

This posture of explosion is called “forced deleveraging under liquidity exhaustion.”

Imagine that in some year in the future, Bitcoin enters a long sideways period (it doesn't need to crash, just needs to go sideways). At this time, the old bonds mature. The creditors see: MSTR's stock price has fallen below the conversion price.

Creditors are not philanthropists; they are the vampires of Wall Street. At this time, they will never choose to convert bonds into stocks, they coldly say: “Pay up. I want cash.”

Does MSTR have cash? No. Its cash has all been converted into Bitcoin.

At this time, MSTR faces a desperate choice: either borrow new debt to pay off old debt. However, due to the sluggish currency prices and poor market sentiment, the interest on newly issued bonds would be terrifyingly high, directly consuming that meager cash flow from its software business.

Either sell the coins to pay off debts.

Once MSTR is forced to announce “selling Bitcoin to pay off debts”, it will be like launching a nuclear bomb at the market.

The market will panic: “The dead bulls have surrendered!” Panic leads to a drop in cryptocurrency prices, the drop in prices leads to a sharp decline in MSTR stock prices, the sharp decline in stock prices leads to more bonds unable to convert into stocks, and more creditors demanding repayment.

This is the “Soros-style” sniper moment.

This kind of explosive posture is the most dangerous because it does not require a Bitcoin crash to trigger it; it only needs “time”. When the debt maturity date coincides with a market silence period, the sound of the funding chain breaking will be crisper than breaking glass.

Posture Three: Kill the Heart

If the second posture is “out of money”, then the third posture is “no one believes it anymore.”

This is currently the biggest hidden danger of MSTR and the most overlooked blind spot by retail investors: premium rate.

Let me do some math for you. If you buy one share of MSTR now, assuming you spent 100 yuan. However, this 100 yuan actually only contains 50 yuan worth of Bitcoin, so what is the remaining 50 yuan?

It's air. Or to put it nicely, it's “faith premium.”

Why are people willing to pay double the price to buy Bitcoin?

In the spot ETF, such as BlackRock's IBIT, it was because there were no options available that compliance agencies could only buy stocks before it was released. After the spot ETF was launched, people continued to buy because they believed Saylor could “nurture the currency” by issuing bonds, outperforming simple holding of the currency.

However, this logic has a fatal flaw.

The stock price of MSTR is built on the narrative of “I can borrow cheap money to buy coins.” Once this narrative is broken, the premium rate will revert.

Just imagine, what if Wall Street continues to suppress, and the White House also forces MSTR to give up its chips? What if the SEC suddenly issues a document saying “it is non-compliant for listed companies to hold coins”? In that moment, everyone's faith would collapse.

This posture of explosion is called “Davis double kill.”

At that moment, the market will ask itself a soul-searching question: “Why should I spend 2 yuan to buy something worth 1 yuan? Isn't it better for me to buy BlackRock's ETF? It's still 1:1.”

Once this idea becomes a consensus, the premium rate of MSTR will quickly return from the current 2.5 times, 3 times, to 1 time, and may even drop to 0.9 times (discount) due to the operational risks associated with being a corporate entity.

This means that even if the price of Bitcoin doesn't drop by a penny, the stock price of MSTR could be halved.

This is the collapse of the narrative. It's not as bloody as a debt default, but it's more psychologically damaging. You look at the Bitcoin in your hand and it hasn't dropped, but the MSTR in your account has shrunk by 60%, and you start questioning your life. This is called 'valuation kill.'

Posture Four: Close the door and beat the dog

The fourth posture is the most covert, the least known, yet it is also the most ironic.

What is MSTR desperately doing now? It is trying hard to increase its market capitalization and squeeze into more indices, such as the MSCI stock index and the Nasdaq, as well as the S&P 500.

Many people cheer: “Once it enters the S&P 500, there will be tens of trillions of passive funds that must buy it, and the stock price will be a perpetual motion machine!”

As the old saying goes, blessings lie where disasters lurk.

Because entering the US stock index, MSTR is no longer just a simple speculative stock; it has become a screw in the structure of the US financial system. Wall Street is shorting MSTR with one hand while releasing news of MSTR being kicked out of the index with the other, causing panic selling among retail investors.

MSTR has already lost control of itself. It wanted to leverage Wall Street's money, but instead, it was locked down by Wall Street's rules.

It wants to leverage Wall Street's rules to rise, but it may ultimately die from Wall Street's rules.

Epilogue: The Fate of Palace Struggles

Michael Saylor is a genius and also a madman. He sees through the essence of fiat currency devaluation and seizes the dividends of the era. He transformed an ordinary software company into a Noah's Ark carrying the dreams of billions of gamblers.

However, the amount of Bitcoin he holds has far exceeded the capacity that the company itself can bear.

Many people in the market are speculating that the U.S. government might directly invest in MSTR in the future.

The method is either to directly exchange U.S. Treasury bonds for MSTR's equity, or to support MSTR in issuing priority shares backed by the state, or even direct administrative intervention to forcibly enhance its credit rating.

The climax of this grand drama has not completely ended; the palace intrigue of the new and old financial order in the United States is still ongoing. The structure of MSTR is fragile, with long volatility and shorting time.

As long as Wall Street removes one of the screws from MSTR, the four situations mentioned above: price collapse, debt default, premium disappearance, and index strangulation, will all cause the structure of MSTR to become imbalanced in a short period of time.

But conversely: when the chain operates simultaneously, it may become one of the most explosive targets in the global capital market.

This is the charm of MSTR, and it is also its danger.

Reference material:

1.Trump‘s Gambit: The Quiet War Between the White House and JPMorgan