MSTR's Tribulation: Shorting and Palace Intrigue

Author: Lin Wanwan

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

The “Bitcoin Central Bank” that was once elevated to a pedestal has experienced a bloodbath in its stock price. As Bitcoin rapidly retraced from its historical high of $120,000, MSTR's stock price and market value have significantly shrunk, plummeting over 60%, and there is even a possibility that Strategy could be removed from the MSCI stock index.

The price of cryptocurrencies pulling back and stock prices halving are merely superficial. What truly makes Wall Street nervous is the increasing signs that MSTR is being caught up in a power struggle over currency.

This is not an exaggeration.

In the past few months, many seemingly unrelated events have begun to connect: JPMorgan has been accused of significantly increasing its short position on MSTR; users have experienced delivery delays when transferring MSTR shares from JPM; there have been frequent suppression actions in the derivatives market against Bitcoin; and discussions on “Treasury stablecoins” and “Bitcoin reserve models” have quickly heated up.

Moreover, these are not isolated incidents.

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

On one side of the palace intrigue 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 backed by Bitcoin as a long-term collateral.

In this structural conflict, Bitcoin is not the target, but rather a battleground for palace intrigue. And MSTR 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 stable, MSTR is the node that must be suppressed.

Therefore, the recent plunge of MSTR is not simply an asset fluctuation, but is driven by three overlapping forces: the natural adjustment of Bitcoin prices; the vulnerability of MSTR's own risk structure; and the conflict spillover caused by the internal power shift within the dollar system.

Bitcoin has strengthened the future monetary framework of the Treasury while weakening that of the Federal Reserve. The government faces a tough choice; if it wants to maintain the opportunity for low-price accumulation, it needs to let JPM continue to suppress Bitcoin.

The method of hunting MSTR is systematic. JPMorgan understands this set of game rules too well, as they are the ones who established the rules. They put MSTR on the operating table, clearly distinguishing its blood vessels (cash flow), skeleton (debt structure), and soul (market belief).

We are here to break down the four possible “death postures” that MSTR may face, which are also the four lethal symbols meticulously prepared for MSTR by the old order.

Posture One: Take Advantage of the Fire

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

This logic is very simple, but it is not the most central issue.

Because everyone knows that “BTC has fallen too much, MSTR will have problems,” but very few people know: to what extent will MSTR go from “steady as a rock” to “not able to hold steady.”

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

1. Total BTC position exceeds 650k coins (approximately 3% of the total Bitcoin supply)
2. The average position cost is approximately $74,400
3. Some debts have implicit price risks (although not forced liquidation, they affect net assets)

Many stories about “MSTR will go to zero” treat it as a forced liquidation style of 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 creditor does not force him into liquidation, 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 to add to his position.

The old forces of JPMorgan are joining hands to short MSTR through the US stock options market. Their tactic is simple: taking advantage of the Bitcoin pullback, they are crazily dumping MSTR to create panic. Their only goal is to break the myth of Michael Saylor.

This is the first blow for MSTR, as the price of Bitcoin has fallen to a point where the outside world is no longer willing to give him money.

Posture Two: Debt Collectors at the Door

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

Many newcomers think that MSTR simply uses the money it earns to buy coins, but that's wrong. MSTR is playing an extremely bold “leverage arbitrage game.”

Saylor's core strategy is to issue convertible notes, borrow dollars, and buy Bitcoin.

MSTR has raised a substantial amount of $20.8 billion this year, a scale that is extremely rare in the annual fundraising of publicly listed companies in the United States. The sources of funding 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 very low interest rates to investors (some even less than 1%). Why would investors buy them? Because these bonds include a “call option.” If MSTR's stock price rises, the bondholders can convert the bonds into shares and make a significant 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, bondholders are happy, the stock premium is high, and bonds are issued again to buy more coins.

This is what is called a “spiral ascent.” Wherever there is a spiral ascent, there must also be a death spiral.

This kind of explosive situation is called “forced deleveraging under liquidity exhaustion.”

Imagine that in a future year, Bitcoin enters a long period of sideways movement (no need for a crash, just sideways). At this time, old bonds have matured. The creditors see that MSTR's stock price has fallen below the conversion price.

Creditors are not philanthropists; they are vampires of Wall Street. At this time, they would never choose to convert bonds into stocks; they coldly say, “Pay up. Cash only.”

Does MSTR have cash? No. It has converted all its cash 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 price and poor market sentiment, the interest on newly issued bonds would be terrifyingly high, directly devouring that meager cash flow from its software business.

Either sell 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 into 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 crash in MSTR stock prices, the crash in stock prices results in more bonds unable to convert into stocks, and more creditors demand repayment.

This is the “Soros-style” sniping moment.

This type of explosive situation 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 sharper than the sound of glass shattering.

Posture Three: Killing the Heart

If the second posture is “out of money”, then the third posture is “no one believes 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 calculations for everyone. If you buy one share of MSTR now, assuming it costs 100 yuan. But out of this 100 yuan, in reality, it only contains 50 yuan worth of Bitcoin. What about the remaining 50 yuan?

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

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

In the case of spot ETFs, such as BlackRock's IBIT, before they were available, compliance agencies could only buy stocks. After the spot ETFs were released, people continued to buy because they believed Saylor could “nurture the coin” through bond issuance, outperforming mere coin hoarding.

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.

Imagine this, but what if Wall Street continues to suppress, and the White House also pressures MSTR to give up its chips? What if the SEC suddenly issues a document saying “holding coins by listed companies is non-compliant”? In that moment, everyone's faith would collapse.

This kind of explosive posture 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 to buy BlackRock's ETF? They are 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 it 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, MSTR's stock price could be halved directly.

This is the collapse of the narrative. It is not as bloody as a debt default, but it is more soul-crushing. You look at the Bitcoin in your hand which 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 to Hit the Dog

The fourth posture, the most concealed, the least known, but also the most ironic.

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

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

As the old saying goes, blessings often lie within misfortunes.

Since 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, leading to panic selling by retail investors.

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

It wants to leverage Wall Street's rules to rise, but may ultimately die by those same rules.

Epilogue: The Destiny of Palace Intrigue

Michael Saylor is a genius and also a madman. He has seen through the essence of fiat currency devaluation and seized the dividends of the times. He turned a mediocre software company into an ark of Noah carrying the dreams of millions of gamblers.

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

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

The method is either to directly exchange MSTR's equity with U.S. Treasury bonds, or to support MSTR in issuing government-backed preferred shares, or even direct administrative intervention to forcibly enhance its credit rating.

The climax of this grand drama is not completely over; the palace intrigue of the old and new financial order in the U.S. is still ongoing. The structure of MSTR is fragile, going long on volatility and shorting time.

As long as Wall Street loosens one of the screws on MSTR, the four scenarios mentioned above: price collapse, debt default, premium disappearance, and index strangulation, will cause the structure of MSTR to become unbalanced in a short period of time.

But conversely, when the chain is running simultaneously, it may become one of the most explosive targets in the global capital markets.

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