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
it and I'll see you in the next episode. Thanks for listening to Money Grows on Trees. If
you enjoyed the episode, leave a five-star review on Apple Podcasts and
Spotify and subscribe to us on YouTube so you never miss
an episode. And if you're serious about building wealth, make sure to check out
the links in the show notes and follow me on all social media platforms at