Key Points
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Strategy recently sold BTC to fund its dividend obligations, a pivotal moment for the business.
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The company and stock thrived as Bitcoin prices rose, but there could be big problems if prices keep falling.
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It’s still early, but Strategy might need Bitcoin prices to rebound to avoid additional BTC sales.
Strategy(NASDAQ: MSTR) became a stock market sensation after pivoting its business from software to Bitcoin. CEO Michael Saylor’s high profile on social media and vocal support of cryptocurrency helped make Strategy a household name among crypto investors. Strategy accumulated Bitcoin for several years, becoming one of its largest holders and issuing preferred shares that pay investors generous dividends with fixed yields.
Shockingly, Michael Saylor recently confirmed that Strategy sold 3,588 BTC for approximately $216 million to fund dividends on its preferred stock and to top off the company’s cash reserve. It’s a watershed moment for investors to evaluate just how durable Strategy’s business model actually is.
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Why Strategy’s BTC sale is a big deal
Strategy enjoys a strong tailwind when Bitcoin’s price rises. The value of its BTC holdings would increase, and the stock has even traded at huge premiums to its BTC reserves at times. These circumstances allowed Strategy to practically print cash by issuing stock or borrowing money, funding its dividends and BTC purchases to grow its reserves, a flywheel that spun for quite a while.
Image source: The Motley Fool
But Bitcoin prices have continued to slide since peaking last fall. Strategy’s common stock now trades roughly in line with the value of the company’s BTC reserves and continues to decline as BTC prices drop. In other words, that flywheel is spinning the other way, and those tailwinds are now headwinds. Strategy selling BTC, below its $75,476 cost basis, mind you, is not a good sign.
Is the business breaking? Not yet.
It’s too early to say that Strategy’s business is breaking. The recent sale was a sliver, less than 1% of the company’s total BTC reserves. That said, some cracks are starting to show. If Bitcoin continues to drop, Strategy may have to sell more of its BTC to raise funds. If so, it’s even worse, as Strategy may need to sell more BTC to raise the same amount of cash.
It’s common wisdom that the goal of investing is to buy low and sell high. Unfortunately, Strategy could face more situations where it bought high and must sell low to meet its dividend obligations. That’s a red flag at best. In a worst-case scenario, it might be a sign that Strategy’s business model is fatally flawed.
A business model built on Bitcoin, a volatile asset, needs to work in all markets, not only when prices go in one direction. Remember, it’s impossible to know where Bitcoin might trade in the future. There hasn’t even been a prolonged recession in the cryptocurrency age, as the pandemic was too short-lived. What if Bitcoin takes another five years to make new highs?
Protecting against risk is just as important as chasing upside. The company’s new need to sell BTC is a risk investors should think hard about when deciding whether to invest in Strategy.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.