Strategy May Sell up to $1.25 Billion of Crashing Bitcoin. Should Investors Hit the Panic Button?

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Strategy (MSTR), the largest bitcoin treasury firm, was buying bitcoins just weeks ago. Now it’s readying itself to sell up to $1.25 billion in bitcoins, the company said on Monday. The news signals that bitcoin – already down by more than half from its all-time high – may fall even further.

Bitcoin traders have been racing to get out of the way of potential sales by Strategy, which holds about 4% of the maximum total bitcoin issuance.

The move is a sharp U-turn for executive chairman Michael Saylor, who has long promised that Strategy would never sell bitcoins. But it’s a necessary move, given the firm’s poor handling of its cash reserves – it was buying bitcoins in April at a much higher price – and a suddenly diminished ability to raise more cash as needed.

Strategy’s plan is about more than just selling bitcoins, however. It’s a re-evaluation of its entire cash management process.

Strategy announced the following moves:

• A repurchase program of up to $1 billion for its common stock.

• A repurchase program of up to $1 billion for four series of its preferred stock.

• A reserve of U.S. dollars that equals management’s expectation of the next 12 months of payments on preferred stocks and debt obligations.

• A monthly review of its dividend policy for its Variable Rate Series A Perpetual Stretch Preferred stock (STRC), including a new coupon rate of 12%.

• A revision of its bitcoin investment policy that allows the sale of up to $1.25 billion in bitcoins and more over time as money is needed to fund preferred stock dividends.

Frankly, some of these moves are long overdue. Saylor has long bluffed that he would never sell bitcoins. But without a strong cash management policy, Strategy was always susceptible to a run on the stock. These new plans don’t preclude a run from happening, of course, but they make it much clearer and more transparent how the company will prepare for and act during a sustained downturn.

Strategy is engaging in intense “financial engineering,” the kind of wheeling and dealing that requires significant investor confidence that the company will be managed adequately.

These new rules clearly show that Strategy is backing away from Saylor’s big bluff that the company would be “the” force pushing bitcoin’s price higher forever. Strategy may now be a seller, too, and that has taken the wind out of the sails of the largest cryptocurrency.

This shift in its “no-sell” posture was telegraphed a few weeks ago, when the company said that it was selling a paltry 32 bitcoins for about $2.5 million. Now it’s back with a much bigger sale.

This shift is likely to hurt Strategy’s stock price and bitcoin’s value in the short term. Saylor has learned that without an infinite supply of cash, Strategy can’t just keep pushing up bitcoin, with its obligation to pay interest on its debts. He’ll need to respond to the market’s zigs and zags moving forward – just like every other investor.

Strategy and its Preferred Stocks Plunge

Both Strategy’s common stock and its preferred stocks have declined sharply in recent months, as investors increasingly question the company’s ability to succeed as a digital asset treasury.

The common stock’s 52-week high is more than $450 a share, compared with a recent trading price of $85. In fact, it was just in May that the stock topped more than $190 a share.

Three of its preferred series – STRF, STRD, and STRK – have been trending down over the past year, with significant declines in recent weeks. They’re fixed-rate preferreds, so their price is apt to adjust with the perceived riskiness of the issuer and its ability to repay its obligations.

But even its variable-rate preferred stock, STRC, plunged below $75 in recent weeks, compared with its $100 par value. The stock had been trading around that par value for much of the past year. Strategy’s dividend boost to 12% may help bring investors back, but it also increases the cost of holding its bitcoins, of course.

The declines of the company’s various stock classes show that investors have grown increasingly skeptical of Strategy’s outlook. They don’t think these already-high dividend yields – payouts that put these securities in deep “junk bond”-like territory – are adequate for the risks they’re running here.

With the prices of preferreds moving lower and its common stock trading just above the asset value of its bitcoin holdings, Strategy is in a tough spot. Because it doesn’t generate cash flow from its operating business, it needs access to capital markets to issue securities to buy crypto.

That’s where Strategy’s newly announced cash management plan seeks to intervene by instilling confidence that the company will have cash on hand to pay its preferred dividends over the next year and will raise additional cash through bitcoin sales if needed. If it can instill that confidence and raise the prices of its securities, then it may be able to begin issuing more of them again.

For the moment, Strategy is not in immediate danger of running out of cash. It has about $2.55 billion in cash after raising money near the end of June by selling common stock.

In the meantime, bitcoin continues to trend lower, hurting Strategy’s ability to raise cash as well.

Bitcoin Market Is Now Working Against Strategy

With serious concerns about Strategy’s ability to avoid selling bitcoins, traders seem to be steering clear of the world’s largest corporate bitcoin holder. Bitcoin has already been in a severe bear market since peaking at more than $126,000 in October. Now, traders may worsen the decline by trying to stay out of Strategy’s way if it needs to liquidate more coins.

These actions may hasten a self-fulfilling cycle in which a declining bitcoin price makes it even more likely that Strategy will need to sell its coins. This dynamic means Strategy’s stock would decline even faster given its heavy reliance on leverage to finance its bitcoin purchases.

It’s the kind of thing that can spin out of control quickly, creating the volatility that traders love.

So, even if you’re not a Strategy stockholder but are a bitcoin believer, you need to pay attention here. Bitcoin may continue to decline, further pressuring Strategy to liquidate even more coins.

With bitcoin already down due to declining economic sentiment, don’t be surprised to see an even more pronounced drop as traders look to avoid a Strategy-induced plummet.

Regards,

James Royal, PhD

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