Recent actions by Strategy, a leading Bitcoin digital asset treasury (DAT) corporation, should restore market confidence over its financing structure and, in our view, may help Bitcoin’s price find a more durable bottom.
On the surface there is nothing wrong with Strategy’s balance sheet. The company owns ~$52 billion worth of Bitcoin and has just ~$7 billion worth of debt.1 Its annual dividend obligations on its preferred equities are less than $2 billion. Strategy clearly has sufficient financial resources to service its debt and dividend obligations.
Nevertheless, shifting market conditions created uncertainty about how Strategy would balance competing priorities. In late May, the company let its US Dollar cash reserve fall to about $870 million, implying only about six months of dividend cover (see chart). It needed to raise more cash. Would the company sell new shares at low valuations? Sell Bitcoin, which its executives had previously eschewed? Sacrifice its preferred shareholders?
Strategy’s new framework, announced in late June, addressed those open questions. Perhaps most importantly, the company clarified that it would issue shares and sell Bitcoin as needed to maintain sufficient US Dollar reserve cover for its dividend obligations.2 On Monday, July 6, Strategy confirmed that it sold about $216 million Bitcoin the previous week. Strategy’s Dollar reserves now total $2.55 billion, or the equivalent of about 17 months of dividend cover (see chart). The rebound in the price of STRC suggests investors are now more confident about the instrument.
Key Takeaway: Strategy is selling more Bitcoin. But this will restore confidence in its financing structure and help Bitcoin find a more durable bottom, in our view.
Exhibit 1: Bitcoin sales funded Strategy’s USD Reserve and bolstered investor confidence
1 Convertible bonds with a weighted average coupon of just ~0.5%. Source for data: Strategy.
2 Strategy said it will hold at least 12 months of preferred stock dividends in USD reserves.