For a while now, Michael Saylor’s Strategy has been on a wild ride of criticism. Now, major players like JPMorgan are beginning to issue some warnings. In fact, the banking giant recently called out Strategy’s Bitcoin sales policy.
For context, Strategy has long relied on a straightforward business model: Raise capital through debt and equity offerings, then use that money to purchase additional Bitcoin [BTC].
As a result, a sizeable amount of the circulating supply was essentially locked away rather than actively traded due to its enormous treasury of 847,363 BTC. However, the company’s most recent capital structure is now altering that dynamic.
Strategy’s new game plan raises red flags
To pay dividends on its preferred stock or other financial commitments, Strategy has now formally permitted itself to sell a limited quantity of Bitcoin. At the same time, it authorized preferred stock repurchases and launched a $1 billion common stock buyback program.
Even though the company’s cash reserves of about $2.55 billion cover about 17 months’ worth of preferred dividends and interest costs, JPMorgan thinks this buffer is still insufficient to completely rule out the possibility of future Bitcoin sales.
The team led by Nikolaos Panigirtzoglou argued,
A higher coverage of 24-36 months would be needed (by issuing common equity to further increase dollar reserves even if this leads to the common equity trading at a discount to NAV) to make investors more comfortable with the idea that Strategy would not need to sell bitcoins in the foreseeable future.
What is the underlying issue?
The primary issue is the rise of what JPMorgan refers to as “two-way risk.”
In the past, Strategy operated virtually solely as a Bitcoin buyer, continuously consuming supply whenever it raised new funds. However, under the new framework, the business can switch between buying and selling based on how much cash it needs.
The fact that Strategy is no longer assured of removing Bitcoin from the market—it might even turn into a source of supply when money is needed—introduces uncertainty.
What’s ahead?
In fact, in one of the few times the company has sold Bitcoin for operational rather than portfolio adjustments. Even though the $1.25 billion authorized sale capacity only makes up a small portion of its total holdings, the psychological impact could be far greater than the volume of sales.
Unfortunately, these shifts occur at a time when the U.S. Spot Bitcoin ETFs are facing net withdrawals, and the price of Bitcoin is also struggling.
Henceforth, the only hope at this point is the approval of the CLARITY Act. It has the potential to restore market integrity and the price of Bitcoin, in turn improving the air surrounding Strategy.
Final Summary
- Instead of an actual warning, JP Morgan has suggested a higher coverage of 24-36 months for Strategy.
- Though the recent sell-off by Strategy was minimal, it has still induced fear and uncertainty in the market.
