Bull v Bear: Does Strategy’s ‘never sell’ Bitcoin change of heart mark a turning point?

Strategy’s earnings release marked a major shift in the company’s approach to Bitcoin investing as it announced a move to actively managing its balance sheet to maximise the value of Bitcoin- per share. 

It’s an abrupt move away from the passive accumulation ‘never sell’ Bitcoin strategy driven by founder Michael Saylor.

The move came as MSTR posted a $12.5bn loss for the quarter due to mark-to-market losses of $14.5bn on its balance sheet amid a decline in Bitcoin prices this year.

Phong Le, president and CEO of the company, said on the earnings call on Tuesday that the company would “consider” selling Bitcoin to buy US dollar or debt, adding later on the call that “we will sell bitcoin when it’s advantageous to the company”.

By 3 May the company owned 818,334 BTC at a cost of $61.81 billion, representing an average cost of about $75,500 per Bitcoin. In Q1, the company purchased 89,599 BTC at an average price of $80,900 for a total of $7.3 billion. 

Breaking the sacred rule 

For years now Saylor followed a simple ‘Strategy’ – hence the rename from MicroStrategy – issue stock and debt to raise dollars to buy Bitcoin, pay dividends on the stock and repeat. And never sell Bitcoin. MSTR was among the most popular crypto treasury stocks that I flagged as a risk last September - between then and February its shares lost two-thirds of their value before rallying a bit in the last few weeks to trade about 40% down on last autumn.

That’s all fine on the way up as investors enjoy a virtuous cycle of raising fresh debt or equity to buy more tokens that keep going up in value. But when the music stops the and stock price starts to fall, it becomes harder to raise fresh capital. So, in order to keep the party going and punch bowl full you need to start offering an incentive – preferred stock that pays a handsome yield.

Strategy pays juicy dividends of 11.5%on the perpetual preferred stock Stretch(STRC) and its legacy software business does not generate enough free cash to cover it by a long way. Therefore, it must issue more stock just to raise the dollars to pay the divis on its existing obligations. In order to keep STRC trading at par it’s had to raise the yield from 9% at launch in July to 11.5% today. The yield in effect is a transfer payment of new money to finance old obligations.

The thesis is simple: issue the high-yield STRC to purchase Bitcoin, which supports the STRC and MSTR common stock prices, which means it can issue more common stock, which raises the USD to pay the dividends on the preferred stock. In this instance the derivative instrument (STRC) is supporting the underlying instrument. Each time management raises the dividend on STRC it’s raising the cost of capital

If it cannot keep doing this forever – which it can’t - then it needs to be able to actively manage – ie sell – Bitcoins now and then to raise the cash. This looks like a logical step,but the question remains as to whether investors are on board with the new strategy. It risks fundamentally undermining the investment gearing thesis, even if it seems a sensible move.

Meanwhile the stock has risen about +45% in the last month as Bitcoin rallied past $80k to hit its best since January, but the stock is still roughly –50% from last summer’s peak above $457. The rally has helped Strategy buy more bitcoin, further fuelling the gains. Bitcoin itself last traded at $81k where it’s stalled out a bit – considerable resistance above at $84k, the 61.8% retracement of the Jan-Feb decline.