Strategy (NASDAQ: MSTR), the largest corporate holder of Bitcoin (CRYPTO: BTC), sold 3,588 Bitcoins for $216 million between June 29 and July 5, according to a July 6 disclosure. That was its biggest sale ever, and given that Bitcoin’s price is near $62,000, it was executed well below the company’s cost basis of $75,700. In other words, it just took a loss on its investment to pay a dividend for some of its classes of stock.
The article goes on to state that there is no cause for concern because the daily volume is over 100 times more than this amount but I have to wonder if there are other companies that are at risk of having to dump their bitcoin investments because of their own convoluted investment products*.
*For years, the company sold its common stock shares with the ticker MSTR at a premium and used the proceeds to buy more Bitcoin.
This worked well while Bitcoin’s price was trending up, as higher Bitcoin prices boosted the value of common stock, thereby making investors willing to accept dilution of their value through issuance, thanks to the promise of higher future share prices.
That premium has cratered, and the virtuous cycle described above is at risk of unwinding. MSTR briefly traded below the value of its Bitcoin in late June. Issuing shares at that diminished valuation to buy more coins would significantly dilute shareholders.
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This whole story is just crazy. The article got a few details wrong though. Strategy stopped issuing shares of common stock to buy Bitcoin. Instead they came up with a scheme where they issue preferred shares, and used those proceeds to buy Bitcoin. And they come up special feature, where they would adjust the interest rates of the preferreds to keep them at par. Their flagship preferred STRC had a par value of $100 and paid about 11% interest.
The pitch was you get to participate in Bitcoin’s upside potential without the volatility. You can get your money back out anytime you want and collect a nice dividend along the way. And because Bitcoin always goes up and they are using leverage, the underlying company will make a bazillion dollars.
That works as long as Bitcoin’s price goes up. The problem is leverage cuts both ways. Bitcoin’s price started dropping last October and pretty soon MSTR’s Bitcoin holdings were close to being underwater. Panicked investors began selling STRC which dropped the value to about $85 or so.
Now MSTR has a big problem. People don’t want their preferred shares, so they can’t issue more of them but they still need cash to make the dividend payments. So MSTR was forced to sell Bitcoin at a loss.
MSTR now has enough cash for about a year. But if Bitcoin’s price doesn’t recover soon-ish, it will be forced to sell more Bitcoin at a loss. Losing money is bad, but the MSTR’s raison d’etre is that it accumulates Bitcoin. If it is selling Bitcoin there is no reason to own MSTR. It should be noted that its Bitcoin holdings are greater than its market cap.
This part of the article jumped out at me:
Strategy selling 100% of its coins wouldn’t affect any of the fundamental attributes that give Bitcoin value, like its constantly increasing scarcity.
Boy, that’s a dumb thing to say. I have a box that is filled with notebooks with my handwritten field notes. Each is completely unique and therefore scarce. The value is zero, even to me. Scarcity does not equal value. Economists usually describe value something like this: Value ≈ Scarcity × Desire × Usefulness.
Because Bitcoin has little usefulness, desire is doing a lot of heavy lifting here.
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