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, could collapse have increased after a series of pessimistic news reports, 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 about $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 already failed in the past.

“Publicly traded companies can implode completely, and in fact they do,” said Eli Cohen, corporate attorney. “Enron and Lehman Brothers are the most famous examples. More recently, Silicon Valley, Silvergate, and Signature banks were all publicly traded companies that went under, and shareholders lost everything.”

Strategy shares (MSTR) have dropped 30% to $185.88 in the past month, in part due to Bitcoin’s 13% decline in the same period. The asset is down 65% from its all-time high reached in November 2024, while Bitcoin has fallen 6% in that time.

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” arose from the 2008 global financial crisis, in which several large financial services firms collapsed, shocking analysts who considered these companies immune to such calamity.

Analysts who have followed the digital asset market once had a similar view of the giant exchanges and other crypto-focused companies that have gone under.

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 will not 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 of misinformation/attacks by various institutions and policies,” said one observer.

“In the event its net asset value (mNAV) is compressed 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 the drop in shares,” they added.

Others highlighted the company’s strong fundamentals and that there will inevitably be ups and downs with its large bet on Bitcoin.

But some experts said that no entity would bail out Strategy in a manner similar to the financial rescue packages that helped several struggling institutions in 2008 stay solvent.

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

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

According to experts, the real danger to 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’re trading at a discount,” said a consultant, “if that discount persists and the company is low on cash, shareholders will eventually pressure management to sell balance sheet assets to fund the buybacks.”

Strategy has acknowledged this looming threat, with public statements that the company might sell Bitcoin if its market-adjusted net asset value (mNAV) falls below 1 — it is currently at 1.14.

This is despite repeated recommendations to investors to never sell their bitcoins. To avoid such an outcome, Strategy recently created a $1.44 billion cash reserve to pay dividends if necessary and prevent this possibility.

Some 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 spark increased fear in the market, as 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 sell-offs and short positions,” said one observer.

“While it’s unlikely 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,” they concluded.