Key Points
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.
A month earlier, its founder, Michael Saylor, called a prior sale of just 32 Bitcoins an “inoculation” for the market. This was more than 100 times larger. So, does this mean that it’s time for you to consider selling your coins as well?
Why Strategy is now a seller
Strategy has a handful of different share types, each of which offers a different financial product based on its holdings of Bitcoin.
Four of those instruments (STRF, STRK, STRD, and STRC) pay dividends in cash; the annual outlay is around $1.5 billion. 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. The June 29 publication of its new Digital Credit Capital Framework replaces that fundraising route, authorizing up to $1.25 billion in Bitcoin sales instead.
Should Bitcoin holders be worried?
Strategy’s financial engineering problems and its Bitcoin sales aren’t anything Bitcoin holders should worry about in the long run, for a couple of reasons.
First, the scale. The most recent sale, while far larger than the prior sale, is just a blip against Bitcoin’s daily trading volume, which was $33.2 billion on July 7; Strategy still owns roughly 4% of all the mined Bitcoins in circulation. A quarterly bill of a few thousand coins is not the same as a full treasury liquidation.
Second, the actual threat is the formation of a vicious cycle where weak Bitcoin would crush the MSTR premium, forcing more mass coin sales that push Bitcoin lower. That can occur only if the coin remains below the company’s cost basis for an extended period. And even if it does, Strategy selling 100% of its coins wouldn’t affect any of the fundamental attributes that give it value, like its constantly increasing scarcity.
Strategy’s actions appear to be just short-term noise, and they can’t depress the asset’s price forever, assuming they are at all.
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Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
