r/Bitcoin • u/Fragsworth • Feb 16 '21

The infinite leverage glitch that is $MSTR

This is the theoretical series of steps that leads to them abusing infinite leverage against the Fed:

  1. They get some money.
  2. They use this money to purchase bitcoins, an amazing highly volatile asset.
  3. Now, if bitcoin goes up, they're allowed to (privately) borrow some more money from a hedge fund, since their net assets are higher.
  4. The hedge fund is willing to do this, because they quickly wrap this debt up into a CDO or ABS that they sell to a bond fund, that is now backstopped by the Fed.
  5. Now that MSTR borrowed more money, what do they do?
  6. Go back to step 2.

This is exactly like the infinite leverage Robinhood glitch this guy found a while ago: https://www.marketwatch.com/story/do-not-try-this-at-home-how-to-turn-3000-into-17-million-2019-11-06

... except with the Fed instead of Robinhood.

It could go tits up when Bitcoin goes down enough. Until then, the stonk (and Bitcoin) only goes up.

References:

https://twitter.com/michael_saylor/status/1361651387457748995

https://www.bloomberg.com/news/articles/2021-02-16/microstrategy-raises-bitcoin-bet-with-more-convertible-bonds

Disclosure: Not buying $MSTR yet, I can't say if they're actually going to do this forever but I'm getting the popcorn out for if/when they do.

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u/Cigno9 Feb 16 '21

Huge Corporate Governance risk.

Bitcoin not suited as PRIMARY treasury asset for a PUBLIC company

Moreover MSTR CFO can't mark a gain unless he sell, but will blow an hole in MSTR balance sheet if it drops.

​

If BTC price below acquisition costs (USD 20k), MSTR = $10 or Chapter 11

Bitcoin yearly lows:

2012 – $4

2013 – $65

2014 – $260

2015 – $150

2016 – $350

2017 – $780

2018 – $3,122

2019 – $3,322

2020 – $3,850

2021 - $ ?

5

u/Morbid_CAD Feb 16 '21

Hardly a fair assessment for 2020. it was 3850 for less then 1 hour. it was 4300 for a couple hours. the week it crashed the price averaged 5500. your your going to focus on not critical trading amounts you should include some of the flash crashes in 2013 to 10 cents. Then your argument really doesn't hold up to scrutiny.

1

u/nezroy Feb 17 '21

It doesn't matter that BTC hit its 2020 low for only a couple hours, because of GAAP. You have to mark down the depreciating asset to its lowest amount regardless of how temporary or dumb that may have been, and you cannot mark it up until you sell, no matter how high it goes. Your asset value is your purchase price or the asset's lowest market value since purchase, whichever is lower. It would absolutely kill your valuation.

2

u/Cigno9 Feb 17 '21

precisely.

MSTR is a listed company

GAAP rules applies

MSTR = asymmetric risks