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#304 - MicroStrategy Is Collapsing (Will It Crash Bitcoin?) · Money Grows on Trees

• 0:00
  MicroStrategy just lost $17 billion in three months
• 0:03
  and almost no one's talking about what happens next. Michael Saylor has
• 0:06
  bet everything on Bitcoin. He's borrowed a billion. He's convinced
• 0:10
  the world that he's a genius. He's told everyone that Bitcoin is the future and
• 0:13
  that MicroStrategy is the smartest play in
• 0:17
  the market. But here's what he's not telling you. If Bitcoin falls
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  to $13,000, which it can, and likely at some point will, MicroStrategy
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  goes bankrupt. And when it does, it's going to take Bitcoin down with it. It's
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  going to be like a domino effect. It's going to be forced liquidations, margin calls,
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  like a house of cards falling down in crypto. And it's starting to
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  wobble. And I've been warning you about this for months and months and months. And now
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  it's starting to happen. In this video, I'm going to explain to you exactly why
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  MicroStrategy is on the edge of collapse. and
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  what happens to Bitcoin when it does. I'm Lloyd James Ross, seven-figure
• 0:49
  investor and entrepreneur, and I've helped thousands of business owners and
• 0:52
  professionals turn financial stress into success. If
• 0:56
  you're stuck in old money habits, overwhelmed by investing, or unsure where
• 0:59
  to start, this is for you. I'll give you the mindset and
• 1:02
  strategies to take control, grow your wealth, and achieve financial
• 1:06
  freedom. It's time to make your money work for you. Firstly, what
• 1:10
  is microstrategy? Well, incidentally, now it's just called strategy. Okay,
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  now it owns, I believe 687,000 Bitcoin.
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  And the investment strategy is to borrow convertible notes,
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  and then buy Bitcoin. So it's a highly levered bet on
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  an asset in a speculative bubble, an asset that doesn't produce any income.
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  And assets like this, assets... Strategies
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  like this, I should say. Strategies like this, where you're borrowing money
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  to buy a non-income producing speculative asset. In
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  the history of mankind, they have never survived.
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  So, that's the first part. And then
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  we've got to look at the history of Michael Saylor, the character, right?
• 1:54
  We've got to look at the history of what has happened to MSTR, which
• 1:57
  is MicroStrategy in the dot-com bubble. Remember, if
• 2:00
  you go back, he lost $6 billion in one day. He nearly sunk the
• 2:04
  company due to an accounting scandal. And the
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  company was, well, it's never technically insolvent. The SEC brought
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  a charge against them and he had to pay a huge personal penalty. So would
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  you trust someone like that who's got that history? Would you trust him
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  with your money? And so far, this last 12 months,
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  MSTR has fallen by 50%. Why is it
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  falling? Let's jump into the detail. Here's what's happening. Here's
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  a full breakdown. At its simplest form,
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  micro strategy structure obeys one immutable rule.
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  Equity equals assets minus liabilities. You
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  don't have to be an accounting genius to understand this, that
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  equity is assets minus liabilities. That's very important
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  to understand before I jump into this. So here's the thing, when assets
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  are volatile and liabilities are fixed, equity
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  becomes a levered option. So
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  if at some point liabilities exceed assets, Basically,
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  you're insolvent. There is no equity left. It's wiped out and
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  that's accounting. I imagine having Static
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  liabilities, which is what happens when you also get a mortgage It's a static
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  repayment to the bank and your asset prices are very volatile
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  and move a lot You can quickly go insolvent. You can get margin called as well.
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  Okay, so just just a very important distinction to
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  kick off with now I want to explain here
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  illustratively, very, very simply, so you don't tune out. I
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  want to make this very simple, all right? I want to explain to you a
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  scenario where this can happen. So I want to strip down to first
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  principles, all right? First accounting principles. So let's assume,
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  for the sake of this exercise, that the Bitcoin
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  holdings of MST are, I know they're 687,000, but for this exercise, let's
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  say they're 200,000. And let's say the Bitcoin price for
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  argument's sake right now is 50,000, just to make the numbers
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  nice and simple. So the total asset value of the holdings that
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  they have is 200,000 times 50,000. Let's call it 10 billion, which
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  it is. Let's say it's 10 billion. Even though I know it's more, stay
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  with me. And let's say then the total debt that has
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  been borrowed to buy that Bitcoin is $7 billion.
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  So right now, it's got, and let's say it's got even assets, it's
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  got a software, incidentally, MSTR has got a software business, an actual
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  business, and let's say that's worth a billion dollars. So for the argument's sake
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  here, the starting position of this MSTR example is
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  assets of $11 billion, total liabilities of $7 billion.
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  The equity is 11 minus seven, which is four. So that
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  implies right now, as this example suggests, that
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  it's got asset leverage over equity of 2.75 times. So it's basically got
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  2.7 times, the
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  equity in leverage. Does that make sense? That's
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  important to understand. Now, in this example, if Bitcoin
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  falls by 50%, which is actually not an extreme correction
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  by Bitcoin standards, done it before, right? In fact, historically, it's
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  dropped by 70 to 85% in a bear market. So
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  50% is probably conservative. Now, if we go back to
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  our example, the new Bitcoin price might be 25,000 from 50 to
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  25. Yes. So the new asset value is not 11 billion,
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  but 5 billion. So let's have a look at our original example. You've now
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  got the Bitcoin asset at five. You've got other assets at one. So
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  you've got total assets of 6 billion and liabilities of
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  seven. Uh-oh. Uh-oh. The
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  equity is negative 1 billion. So the equity is wiped
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  out. Bye-bye. So this is insolvency. On
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  a mark to market basis, it's insolvent. So this isn't a real
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  life example. It could happen. I know what you're thinking. They don't
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  have to sell, but here's why that's false. This is
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  where people misunderstand economic law versus
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  intention or hype. I know you want to
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  believe in it. I get it. But debt introduces what's
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  called external constraints. Because once the equity price
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  collapses, the credit risk explodes, bond
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  prices fall, refinancing costs spike, and
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  counterparties tighten the terms. So they're not going to have the same terms of
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  their convertible bonds that they're raising to buy Bitcoin. It's going to
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  get way harder. The rates are going to be higher. The
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  constraints will be more. And so it's not gonna be like it is
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  now and that's what happens because credit risk increases. Yeah, this
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  is what's called a Minsky moment in financial instability
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  So here's the hypothesis in action. Here's what I think will happen So
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  the initial stability creates the leverage but leverage creates fragility
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  and the fragility then creates collapse right, so
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  if we look at the The
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  issue of volatility versus the debt. So if
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  an asset price is volatile, it means the asset price moves a lot like
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  this. And Bitcoin is known for that. It's a
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  very volatile asset. So when you have a volatile asset against
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  a steady debt instrument, you're going to have a
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  myriad of different things that can happen, right? So as I said,
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  Bitcoin is one of the most volatile assets in financial history, period. That's why people
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  love it because they're making all these trades and they're trying to, you know, volatility is a friend of
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  the trader for sure. But debt instruments obey one different law.
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  Debt's fixed, interest is fixed, and maturity dates are fixed. So
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  this violates a fundamental risk matching principle.
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  And it's this. You cannot safely fund a
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  hypervolatile asset with fixed liabilities. That
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  mismatch guarantees stress. And
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  here's what happens. Convexity then starts to turn against
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  them. What do I mean by that? Let me explain it. Micro strategy or strategy structure
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  has what's called negative convexity. So here's what I mean. On
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  the way up, meaning as Bitcoin goes up
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  in value, up in price, gains are capped by dilution and
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  debt servicing. So on the way down, That means they can
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  service their debt okay. On the way down, losses accelerate faster
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  than Bitcoin itself. Yes, this is because the
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  asset will fall linearly, yeah? Equity falls
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  then exponentially because of the leverage. That's why. So
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  when you have leverage like it does, it amplifies gains.
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  But when you have losses, it amplifies losses. Debt itself doesn't
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  fall, it's a static liability, but the assets will fall way faster than
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  the price correction because of the debt. It amplifies losses and people don't even realize
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  this. This is what happened in the 2008 real estate collapse in
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  America. You know, People are like, oh yeah, I love property because
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  it's leverage and it goes up. Leverage only works when the asset price rises. When
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  it goes down, it amplifies losses. And I didn't tell you this. This is what
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  happened to all of the crypto bros recently when they all got liquidated
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  and jumped off buildings because they were like 100x leveraged. And
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  it fell by 1% or 3%. And they just got liquidated because it amplifies losses.
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  And people don't realize this, right? That's why the equity collapses
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  long before the Bitcoin bottoms. The Bitcoin, that's
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  before BT bottoms. This is why, right? Because you gotta
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  remember, micro strategy is equity. People are buying shares
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  in a company, that's equity. They're not buying Bitcoin
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  directly. They're buying a levered Bitcoin position
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  in shares. So it
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  can be massively, it will, it
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  will implode if the price adjusts like
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  it has in the past. I think it's only a matter of time, frankly, right? Just quickly,
• 9:33
  if you're ready to take control of your finances but feel stuck on where to
• 9:36
  start, I have a solution. My book, Money Buys Happiness, simplifies
• 9:41
  investing and wealth building with practical steps to help you achieve financial
• 9:45
  peace. Get your copy via the link in the show notes and let's get your
• 9:48
  money working for you. Now back to the episode. So,
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  the debt doesn't need a default to destroy the equity at all. All
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  it needs is a bit of refinancing pressure. The underlying process by
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  which Michael Saylor is trying to make money is this, effectively,
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  in its simplest form. He's borrowing money from
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  institutions that are convertible notes, okay? And
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  whilst he can't be margin called on that, those particular notes, they
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  attract an interest charge. Because if you're lending money to someone, even Michael Saylor,
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  you're going to ask them to pay you some interest on the borrowings, yes? On the loan.
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  That's how it is. That's finance. It's the oldest business in the world, money
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  lending. So you lend money to MicroStrategy. And you're going
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  to have to get paid interest on that. So here's what MicroStrategy does. It doesn't sell any
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  Bitcoin to pay it because that would then curtail the price rise of Bitcoin and
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  it would go into a negative convexity. But here's what does
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  happen. They borrow money, right, and they
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  repay the preferred stock dividends to the shareholders,
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  the coupon rate back to the bondholders, I should say. They pay the
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  interest based on the borrowings. And that's why a lot of people are calling
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  it a Ponzi scheme, because they're borrowing money to buy an asset and they're paying
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  the interest on the borrowings with the borrowings. Yeah,
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  it's wild, right? And of course, the strategy is
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  to borrow more, buy more Bitcoin, price goes up, borrow more, buy
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  more Bitcoin, price goes up, etc, etc, etc. But here's the thing. Whenever
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  that happens, the two things are happening. One, they're getting more leverage. Two,
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  they're also issuing more shares and they're actually diluting the current equity
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  holders. That's why you've seen a huge fall of 50% lately, because
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  people are realizing they're diluting the value of the
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  shares. especially because
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  the asset value is falling. So the actual value of the shares,
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  if Bitcoin falls, is also falling. And then you're
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  getting all this debt. So the debt to equity ratio is just flipping. It
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  is just getting wildly high, okay? Anyway, so
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  these bonds that they're getting, they will mature. So these
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  convertible notes have a term. So they mature. And then as
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  it gets riskier, the interest rates will get higher when they refinance. And as
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  Bitcoin continues to get lower, the credit spread widens. Okay,
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  the risk becomes more. And then new debt
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  that they get to buy more Bitcoin becomes prohibitively expensive. Then
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  equity issuance becomes massively diluted, which is exactly what I just said and exactly what's
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  happening. And then the asset sales become the only option
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  to service that debt. And that means they've got to sell Bitcoin. And
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  that means the forced selling is gonna
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  create this massive domino effect, right? Here's the thing, forced
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  selling is not, at that point, is not price sensitive. And this is critical
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  to understand. Voluntary sellers, they'll
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  wait for a good price, then they sell. But forced sellers, like in
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  this scenario, they'll sell at any price. They
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  don't care, they've got debt to service. It's like a liquidation
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  sale, it's a fire sale. So once MicroStrategy starts to sell
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  Bitcoin, the liquidity thins, order
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  books, you know, the price overshoots downward,
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  the reflexivity starts to kick in. And what
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  that means is price changes alter the fundamentals, right?
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  So it alters, more or less what it means is
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  lower prices because of the selling create lower prices. That's what it means. And
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  why this can drag it down further is because then Bitcoin starts to fall in price, especially
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  if you've got a massive, massive company like this selling large holdings
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  to cover itself. you're gonna have a bit of a domino effect
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  on the price of Bitcoin itself. And this just starts to quantify and
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  cascade the losses of strategy more and
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  more and more and more. It just can't continue to do its old
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  strategy, right? They're gonna change the name of the company to the
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  strategy doesn't work anymore, Inc. So here's what happens. Bitcoin
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  drops 60%, the equities, listen to this. If Bitcoin drops
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  60%, the equity is obliterated by
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  E, Zero. What are they lending money on
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  then, right? They're insolvent. 70% debt
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  coverage is then questioned. Like, hey, you can't even cover your debts. We're in trouble here. And
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  then 80% liquidation risk. It becomes existential. And
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  we know that Bitcoin can fall by 80%. So this strategy ain't
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  so good. I mean, can you honestly believe
• 14:08
  that this strategy is going to continue as it has for the next 20 years? Honestly,
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  truly, really? You don't think at any point that
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  shitcoin is not going to go through an 80% correction? You
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  don't think that? Even though it has? That's what you're betting on here. And
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  it's levered. I mean, anyone who owns shares in this company, man,
• 14:28
  I think you deserve to lose money. I hope you don't, but it's
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  not looking good. So as I said, Bitcoin's
• 14:35
  already done that multiple times. So it's going to happen again. And it's
• 14:40
  just going to get worse because the leverage is more and more and more and more
• 14:43
  and the dilution is more and more and more and more. So
• 14:46
  it's gonna trigger some sort of like algorithmic selling. There'll
• 14:50
  be redemptions, there'll be contagion, and it's never gone
• 14:53
  through a credit crunch ever, in its current
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  form, with its current strategy. So this
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  is how it'll overshoot, and it'll just get worse. So
• 15:03
  here's the economic law that basically ends it all. The entire structure
• 15:07
  collapses under what's called the Irving Fisher's debt
• 15:10
  deflation theory. Bit of a mouthful, isn't it? But hear me out. When
• 15:14
  asset prices fall, The debt
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  burden rises and then it forces liquidation which drives prices
• 15:21
  even lower and cascades. Yeah, that's exactly what kind of happens, right? So
• 15:27
  Micro strategy is long. Listen up long
• 15:31
  the most volatile asset ever. It's leave it with
• 15:35
  fixed debt Which is dependent on rising prices
• 15:38
  to remain solvent that's Yeah,
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  that's not investing, that's speculation leverage. Because it's a speculative asset
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  and it's leverage. Simple, right? So here's the bottom line. Bitcoin itself,
• 15:52
  like as the underlying asset itself, it doesn't need microstrategy. But
• 15:57
  microstrategy needs Bitcoin to keep rising for the strategy
• 16:01
  to play out. That asymmetry really
• 16:05
  guarantees one There's a lot of
• 16:08
  pain coming for selling before any recovery deeper
• 16:11
  drawdowns a lot of dilution potential insolvency You
• 16:16
  know, so Bitcoin may survive but leverage Bitcoin
• 16:20
  companies don't So it's not bearish, it's just financial physics
• 16:23
  more or less. And you can't break, this is first principles economics. You
• 16:27
  can't argue with it. So I don't even think, it's not a matter of if, but
• 16:30
  a matter of when. It's gonna be so interesting. And the fact that the stock's already
• 16:34
  fallen by 50% suggests the market's already seen this. Because
• 16:37
  markets afford, they're like a
• 16:40
  glimpse of the future. It already knows these things before you do. So it's
• 16:44
  saying, hey, don't think these shares are worth much
• 16:47
  anymore because we can see this coming apart. That's what the market's telling you with the
• 16:50
  stock price. That's why people are selling. That's why there's so much selling pressure
• 16:53
  on this stock. And so I look, all I
• 16:56
  wanted to do with this episode is suggest that in many
• 17:00
  regards, there's Ponzi like features to how
• 17:03
  they're borrowing money to pay the coupon rate of the debt they're taking just
• 17:07
  to buy a speculative asset. And you can see with the convexity that once
• 17:10
  Bitcoin falls by 80%, boom, it's game over. I'll do
• 17:13
  another episode when it happens. And if it doesn't happen for 30 years, you'll
• 17:16
  see me here with probably gray hair, grey beard going,
• 17:20
  Marco's strategy is going to like flat. I'm happy to do it. I'm
• 17:23
  happy to be wrong. I don't think I am. So I
• 17:27
  just want to do this episode because I think people are misunderstanding what this is.
• 17:30
  And it's a very good example of why fundamental investing that
• 17:33
  I preach and talk about is so much more effective. than borrowing
• 17:37
  against a speculative asset. Okay. So I hope that makes sense. If you've enjoyed this,
• 17:40
  what do you think? Do you think it's a Ponzi scheme? Do you think it's going to, do you, are
• 17:44
  you betting the house on this? This is your thing. If it is comment below, let me
• 17:47
  know. And if it ain't and you agree with me, give me some love in the comments and
• 17:50
  I'll come and talk to you there and hit the subscribe button. Share this with a friend if they need to see
• 17:54
  it and I'll see you in the next episode. Thanks for listening to Money Grows on Trees. If
• 17:57
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• 18:01
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• 18:04
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