Turmoil in the digital asset market is intensifying as Bitcoin's price falls below critical support levels, placing immense pressure on Strategy (MSTR), a company at the epicenter of the storm.

The firm, founded by Michael Saylor, confirmed on Thursday a net loss of $12.4 billion for the fourth quarter, driven primarily by a significant write-down in the fair value of its Bitcoin holdings. The loss was largely attributable to an unrealized fair value loss of $17.4 billion, mandated by mark-to-market accounting rules.

As Bitcoin dropped below $63,000, Strategy's stock plummeted 17.1% on Thursday. This not only erased all gains made following the U.S. election but also pushed the stock nearly 80% below its November 2024 all-time high.

The company's Bitcoin holdings are now valued at approximately $46 billion, with an average purchase cost of $76,052 per coin. This marks the first time since 2023 that the market value of its Bitcoin portfolio has fallen below its cumulative cost basis.

Confronting the market downturn, Michael Saylor acknowledged during an earnings call that "selling Bitcoin is an option," despite his public exhortations on social media platform X to "HODL" (hold on for dear life).

Adding to market unease, the self-reinforcing cycle of using equity premiums to fund further Bitcoin purchases has stalled. With the company's cost basis now exceeding the market price for the first time, its financial experiment faces a severe test.

As MSTR's stock price collapses, convertible bond investors are likely to seek early cash redemption rather than conversion. An initial $1 billion redemption could be due by September 15, 2027, with another $6.4 billion potentially due in 2028, bringing the total potential cash demand to $8.2 billion.

The logic behind using financing to buy Bitcoin is being tested. Strategy had served as a high-beta proxy for Bitcoin, with its stock surging over 3500% between 2020 and 2024. However, this engine was built on shaky ground. The launch of spot Bitcoin ETFs provided investors with cheaper, more direct exposure, diminishing Strategy's unique appeal.

More critically, the valuation premium has collapsed. Strategy's enterprise value once approached twice the value of its Bitcoin holdings, but this premium has now nearly vanished. If Bitcoin prices remain at current levels, Strategy's market capitalization would only need to fall by approximately 13% more for the premium to be completely eliminated. Should the ratio of enterprise value to crypto assets (mNAV) fall below 1, indicating the company is worth less than the Bitcoin it holds, the core financing model would be rendered entirely ineffective.

During the post-earnings call, CEO Phong Le attempted to reassure investors, stating, "This is your first downturn, my advice is to hold on." However, this comment sparked anger in the live stream's comment section. Benchmark Co. analyst Mark Palmer noted that the market's focus has shifted to how the company will raise funds under these challenging conditions.

The deteriorating financial data has heightened concerns about Strategy's solvency. Data shows that as of February 1, the company held over 713,000 Bitcoins with an average cost basis of $76,052. With Bitcoin trading significantly below this cost level, Strategy is technically insolvent on paper.

Strategy carries $8.2 billion in convertible debt. While Saylor emphasized the company has a $2.25 billion cash reserve, sufficient to cover interest and dividend payments for the next two years with no margin call risk, market worries persist.

The structure of Strategy's convertible bonds reveals different pressure points. The $1.01 billion convertible bond issued in September 2024 has a conversion price of $183.19, with holders able to exercise a put option on September 15, 2027. The $3 billion zero-coupon convertible bond issued in November 2024 has a high conversion price of $672.40, with a put option available on June 1, 2028. Additionally, several other bonds with conversion prices ranging from $149.77 to $433.43 will face put pressure in 2028.

S&P Global had previously warned that severe pressure on Bitcoin prices at debt maturity could force the company to liquidate assets at low levels, an event that would be viewed as a debt restructuring "tantamount to default."

Phong Le admitted on the call that if Bitcoin were to fall by 90%, the company would be unable to repay its debt solely by selling Bitcoin and would have to seek debt restructuring.

Despite the pressure, Saylor maintained an optimistic stance on the earnings call. "We have a crypto president who is determined to make America the Bitcoin superpower, the world's crypto capital, and a leader in digital assets," Saylor stated. "You cannot underestimate the importance of having support for this industry and digital capital at the highest level of the political structure."

Saylor also downplayed the threat of quantum computing to Bitcoin, calling it "FUD" (fear, uncertainty, and doubt) and stating the threat is "at least 10 years away." He reiterated his consistent position that selling Bitcoin remains one option among others to respond to market conditions.

Strategy reiterated on Thursday that it does not expect to generate net income or profit for the current year or the foreseeable future. Based on these expectations, the company stated that current distributions to perpetual preferred shareholders are expected to be tax-free.

However, prominent short-sellers like Michael Burry have issued sterner warnings. According to Bloomberg, Burry reiterated his scrutiny of Strategy this week, warning that Bitcoin's decline could trigger a "death spiral" among corporate holders. This view aligns with long-time critics like Jim Chanos, who have long pointed out the risks of Strategy's reliance on non-yielding assets and speculative leverage.

While management attempts to maintain an optimistic tone and describes profitability as a distant prospect, investors are facing a harsh reality check with Bitcoin trading below cost and financing avenues narrowing.