Is Strategy "too big to fail"?

Source: PortaldoBitcoin Original Title: Is Strategy “too big to fail”? Original Link: Fears that Strategy, a Bitcoin treasury company, may collapse have increased after a series of negative news, including the possible removal from stock indexes and the acknowledgment that the company may have to sell Bitcoin for the first time.

Three observers of the company, which holds 650,000 bitcoins valued at around $60 billion and representing 3.1% of the total BTC supply, stated that the company is not too big to fail, as some larger companies have failed in the past.

“Public companies can implode completely, and in fact they do,” said a corporate lawyer. “Enron and Lehman Brothers are the most famous examples. More recently, Silicon Valley Bank, Silvergate, and Signature were all public companies that failed, and shareholders lost everything.”

Strategy shares (MSTR) dropped 30% to $185.88 in the last month, partly due to Bitcoin’s 13% drop in the same period. The stock is down 65% from its all-time high reached in November 2024, while Bitcoin fell 6% in that period.

Enron, an energy sector company, was the seventh largest company in the US before its catastrophic collapse in 2001, when its shares plummeted from $90 to just $0.26.

Its executives inflated revenues and hid debts through fraudulent accounting practices.

The concept of “too big to fail” emerged during the global financial crisis of 2008, when several large financial services companies collapsed, shocking analysts who considered these companies immune to such calamity.

Analysts following the digital asset market once had a similar view of the exchange giant FTX and other crypto-focused companies that failed, including the crypto hedge fund Three Arrows Capital.

But some Strategy observers argue that the Bitcoin custody company cannot collapse. They believe that, since Strategy has publicly traded shares, events similar to those that brought down other crypto companies won’t occur.

They note that Strategy is the 433rd largest company in the world by market cap and that someone would rescue the company rather than risk the consequences of a disastrous collapse.

Others argue that failure is, at the very least, unlikely.

“It probably has enough inertia to survive, despite being a clear target for misinformation/attacks,” said a member of the board of a treasury company.

“In the event its net asset value (mNAV) drops below zero, to the point where it needs to start selling BTC, opportunists might be ready to deposit more of the asset as part of deals, or take advantage of falling shares,” he added.

Other observers highlighted the company’s solid fundamentals and that there will inevitably be ups and downs with its big bet on Bitcoin.

But some experts said that no entity would rescue Strategy in the same way as the financial aid packages that helped several struggling institutions in 2008 stay solvent.

“It doesn’t have the same vital connections to the financial system as the big banks do, despite what some people may believe,” said one analyst.

“No one is going to save them,” added another. “If MSTR fails, shareholders will lose most or all of their investments. Also, any recovery will take years.”

An expert who worked in crypto asset auditing stated that “the real danger for the company is a liquidity crisis.”

“If a company doesn’t have cash reserves—whether from operations or credit lines—to buy back its own shares when they trade at a discount,” he said, “if that discount persists and the company is low on cash, shareholders will eventually pressure management to sell balance sheet assets to finance the buybacks.”

Strategy acknowledged this imminent threat, publicly stating that the company could sell Bitcoin if its market-adjusted net asset value (mNAV) dropped below 1—it is currently at 1.14.

To avoid such an outcome, Strategy recently created a $1.44 billion cash reserve to pay dividends if necessary and prevent this possibility.

Analysts believe that selling Bitcoin would be a ‘good addition’ to its strategy, but the public stance against selling Bitcoin has complicated this task. For this reason, a public sale of Bitcoin by Strategy could trigger increased fear in the market, since the company holds approximately 3.1% of the total Bitcoin supply.

“Any decision by Strategy to sell BTC would likely lead to very negative market reactions and could, in fact, prompt market participants to try to get ahead of the news, increasing sales and short positions,” said one expert.

“While it’s unlikely that this would lead to a total price collapse, the crypto market in general is looking for the next ‘Terra Luna or FTX-style’ collapse, and this would feed into that bearish confirmation bias,” he concluded.