Bitcoin, the world’s largest cryptocurrency, has been walloped this year as the crypto winter has dragged on.
Few investors have felt that more than the Bitcoin-treasury company Strategy (MSTR 6.20%), which is essentially a levered play on Bitcoin.
Just as leverage lifts gains on the way up, it also exacerbates losses on the way down. Strategy’s stock is down close to 45% this year.
With Bitcoin trading below $59,000 per token, as of this writing, Strategy just announced a major revamp to its business model.
Here’s what investors need to know.
Image source: Getty Images.
Building up reserves
Strategy rose to prominence in 2020. At the time, former CEO Michael Saylor, who is now the company’s executive chairman, made a big pivot.
Strategy’s data analytics business was struggling at the time, so Saylor decided to use the firm’s remaining capital to invest in Bitcoin. While investors saw this as a last-ditch effort to save the company, the move paid off when Bitcoin, which traded below $10,000 midway through 2020, took off.
From then on, Strategy became a Bitcoin-treasury company, which eventually gained the ability to tap the capital markets for funds to buy more Bitcoin.
Strategy now owns roughly 3% of all outstanding Bitcoin in circulation. It has also sparked a whole new wave of Bitcoin-treasury companies.
Over the years, despite various corrections or dips, Strategy hasn’t sold Bitcoin. But now that is likely to change under the company’s new strategy.
Strategy’s new framework includes five components: A U.S. dollar reserve policy, a revised preferred stock policy, a digital credit securities repurchase program, a common stock repurchase program, and a Bitcoin monetization program.
Strategy’s Board of Directors will now require the company to maintain reserves equal to at least one year of preferred stock dividend payments. Strategy has historically issued preferred stock to fund its Bitcoin purchases without initially diluting the common stock.
The company also plans to repurchase up to $1 billion of its preferred stock to lower annual dividends and up to $1 billion of common stock.
Today’s Change
(-6.20%) $-5.75
Current Price
$86.93
Key Data Points
Market Cap
$32B
Day’s Range
$83.42 – $88.26
52wk Range
$81.81 – $457.22
Volume
35.4M
Avg Vol
20.3M
Gross Margin
68.11%
The board has also authorized the company to sell Bitcoin from its stockpile to generate up to $1.25 billion to fund all of the new initiatives under its new framework.
“Strategy is evolving from one-way capital issuance to active capital management,” Strategy’s CEO Phong Le said in a statement. “We intend to move between issuing securities when capital is attractive and repurchasing securities when our instruments trade at levels that make buybacks accretive. This flexibility is designed to create shareholder value, improve corporate performance, and strengthen the quality and market standing of Strategy’s securities in the eyes of investors.”
No need to buy the stock
Strategy currently has about $2.55 billion in U.S. dollar reserves. If it sells $1.25 billion of its Bitcoin, it would have $3.8 billion in reserves, which would cover over 2 years of projected preferred dividends and interest expense, not including any repurchases.
While this adds a buffer, I still see no need to buy Strategy stock.
Not only is Strategy extremely volatile and ill-suited for the common portfolio, but it has historically traded at a premium to its net asset value, which has long confused many investors.
Perhaps it had to do with being a pioneer of the Bitcoin-treasury strategy. Still, if you believe that Bitcoin is due for a rebound, which still could happen, I would just buy the token itself.
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