Key Points
- Strategy acquired 3,273 bitcoins between April 20 and April 26, bringing its total holdings to 818,334.
- The company issued 1.45 million shares of common stock to fund the purchase, buying the coins at an average price of $77,906 for a total of $255 million.
- Because of its use of leverage, Strategy’s stock acts as a higher-risk, higher-reward proxy for bitcoin, often moving more sharply than the cryptocurrency itself.
Another week, another large bitcoin purchase from Michael Saylor’s Strategy (MSTR). Between April 20 and April 26, Strategy bought 3,273 bitcoins, bringing the company’s overall stake to 818,334.
The company formerly known as MicroStrategy purchased the crypto coins at an average price of $77,906, for a grand total of $255 million. To buy those coins, it issued about 1.45 million shares of its common stock, which is trading at a 21% premium to Strategy’s net asset value.
Strategy has paid about $61.8 billion to acquire its trove of coins, an average price of $75,537. At current prices, Strategy is around break-even on its bitcoin investment.
As Strategy’s executive chairman, Saylor is using financial leverage to turn the company into a higher-risk, higher-reward way to play bitcoin. This approach makes Strategy’s stock an even more volatile – but potentially more lucrative – way to trade the world’s largest cryptocurrency.
The latest purchase continues to solidify Strategy’s position as the world’s largest corporate holder of bitcoin. It owns about 3.9% of the total potential issuance of 21 million coins. However, with as much as 20% of this maximum lost forever, Strategy’s stake of coins in circulation is greater.
Strategy continues to stick with its approach, buying bitcoins while the price is down. In the past 52 weeks, bitcoin peaked above $126,000 but bottomed at around $60,000 in February.
To ensure that it can buy more coins, Strategy has authorized the sale of billions of dollars of common stock and several series of preferred stock. In late March, Strategy increased the authorization on its common stock by $21 billion and on its STRC variable rate preferred stock by $21 billion. The authorizations allow the company to sell shares at its discretion in the future.
Its financial structure makes Strategy a more volatile trade than bitcoin itself, which already has legendary volatility. Over the past 52 weeks, Strategy’s stock price has ranged from $104 to $457.
MORE: Bitmine’s Massive Ethereum Buying Spree – How Tom Lee’s Strategy Works
How Strategy Invests in Bitcoin
This huge swing in Strategy’s stock shows how it’s a higher-risk, higher-reward play on bitcoin. While bitcoin’s high is about 2 times its 52-week low, Strategy’s stock price has been as high as 4 times its low in just the past year. This high level of volatility attracts fast-money traders.
What makes Strategy so volatile is how it finances its purchases of the coin. It doesn’t use cash generated from profits on its operating businesses, since it doesn’t typically earn money. Instead, it issues debt, preferred stock, and its own common stock to keep buying bitcoin.
Because of its potential to appreciate faster than bitcoin itself, traders may pay more than the stock’s net asset value – the value of its crypto holdings minus debts. That is, they’re often willing to pay 120%, 130%, 140% and sometimes more, even though they could buy one of the best bitcoin exchange-traded funds (“ETFs”) at just 100% of the fund’s net asset value.
When the premium is high enough, Saylor can simply issue common stock, buy more bitcoins, and take advantage of the arbitrage. This approach doesn’t dilute the stock’s value. In fact, it helps support the stock price by adding more coins to the vault, while pushing up bitcoin’s price.
If Strategy’s stock does not trade at a premium that’s high enough, Saylor can turn to preferred stock, which functions a lot like high-rate bonds, with one notable exception. The company can defer payment on the preferred stock if it decides that’s in its best interest, without defaulting.
Strategy has four different series of preferred stock to fund its purchases. It issued its Variable Rate Series A Perpetual Stretch Preferred Stock (STRC) in early April to fund $1 billion in bitcoin purchases. This series of preferreds pays a variable rate with an initial rate of 9%.
Strategy has arranged its financing so that it can issue these preferreds whenever it finds the pricing attractive. It can effectively use these authorizations whenever it wants to act.
Counting its preferred and common stock, Strategy can currently raise more than $53 billion. That gives it a lot of “dry powder” to buy more bitcoins when pricing looks good. If Strategy issued it all, it could increase the dollar value of its bitcoin holdings by more than 86%.
So, when Strategy finances crypto buys with preferreds or more traditional debt, a rise in bitcoin’s price pushes the net asset value of its stock up faster than the coin itself. But the net asset value also falls faster as bitcoin declines, creating a high-risk, high-reward setup.
The Biggest Risks Strategy Faces
All this debt makes Strategy riskier, of course, and it could lead to some nasty outcomes. One of the most obvious is the possibility that Strategy may need to start issuing preferred stock to pay the dividends on its preferred stock. That could lead to Strategy circling the drain.
But it’s holding on to about $2.3 billion in cash as of year-end 2025, which it can use to pay those preferred dividends as they come due. At current burn rates, this pile of cash gives the company about 2.5 years of cushion to pay dividends and interest.
Every issuance of preferreds increases the burn rate, so it’s important that Strategy keep a careful eye on its financing. The issuance of common stock – as in the most recent purchases – helps the company avoid cash-depleting dividends while still taking advantage of the arbitrage.
But another potential problem is more fundamental: What if demand for bitcoin simply dries up?
Strategy’s approach is based on the belief that cash will continue to flood into crypto markets, but what if it doesn’t? But what if crypto becomes an asset traded among fewer and fewer people?
Strategy converted to a digital asset treasury in August 2020, with a $250 million purchase of bitcoin.
If bitcoin prices remained unchanged and Strategy issued all remaining stock authorizations, it could acquire almost 9.1% of the total existing bitcoins. Strategy can increase its authorizations at any time, meaning it can keep buying as long as investors accept its common and preferred stock.
But if demand dries up, bitcoin could become worthless. There are no assets or cash flow of an underlying entity that support the price. Very few merchants will accept it in trade for goods and services.
The big bet from bitcoin investors has been that never-ending demand will run into fixed supply and trigger a lollapalooza effect on the coin’s price. All it takes for the crypto fever dream to end is for demand to dry up, even if big investors such as Strategy keep buying it furiously.
If no one shows up to buy Strategy’s bitcoins later, they’re essentially worthless. This could leave Strategy as a bitcoin bagholder.
MORE: Best Cryptocurrency ETFs for Bitcoin, Ethereum, and Popular Altcoins
Regards,
James Royal, Ph.D.
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