Why Strategy (Formerly MicroStrategy) Stock Collapsed This Week
Key Points
Strategy has sold a small amount of Bitcoin from its balance sheet to fund preferred share payments.
The stock is collapsing along with the price of Bitcoin.
Shares look very risky at the moment.
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Shares of Strategy (NASDAQ: MSTR) have fallen 28% this week, according to data from S&P Global Market Intelligence. The controversial Bitcoin treasury company broke its own rules and sold some Bitcoin off its balance sheet to finance dividend payments, while also trading in line with lower Bitcoin prices. As of this writing at 3:00 PM EST on Friday, June 5th, Bitcoin has fallen to $59,000.
Here's why Strategy stock fell this week, and whether you should consider buying the dip.
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Falling Bitcoin and a perplexing sale
Strategy (formerly MicroStrategy) has used various financial engineering techniques to raise capital to buy Bitcoin. It has been famously said that the plan is to buy Bitcoin and never sell it, with the theory that it will help through a time of hyperinflation (it should be noted that hyperinflation has never occurred in the United States).
However, this week Strategy actually sold some Bitcoin in order to fund the 11.5% dividend payments on its outstanding preferred stock. This rang the alarm bells for investors, who started to sell Strategy stock because of it.
It still has around 4% of the Bitcoin outstanding in the world on its balance sheet, valued at approximately $51.3 billion. On this Bitcoin strategy, it has unrealized losses of around $10 billion, meaning it has, on average, purchased Bitcoin at higher prices than where it trades today. Again, shareholders are likely not happy about this.
Image source: Getty Images.
Time to buy the dip?
Strategy is a strange business model that is solely reliant on where the price of Bitcoin trades in the years ahead. If the price of Bitcoin collapses -- which could easily happen in a bear market -- then Strategy could potentially go bankrupt.
This is not a risk worth taking with your hard-earned savings. Avoid buying the dip on Strategy stock for your portfolio.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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