Strategy Just Unveiled a Brand-New Approach to Bitcoin. Is the World's Biggest Bitcoin Treasury Company in Trouble?
Key Points
Strategy recently sold $216 million worth of Bitcoin as part of a new financial initiative.
The decision to sell Bitcoin raises serious questions about Strategy's Bitcoin treasury company business model.
Over the long haul, investors might be better off simply investing in Bitcoin directly.
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The company that famously told investors "Never sell your Bitcoin (CRYPTO: BTC)" is now selling its Bitcoin. After announcing a brand-new approach to Bitcoin on June 29, Michael Saylor's Strategy (NASDAQ: MSTR), formerly known as MicroStrategy, announced the massive sale of 3,558 BTC at a total price of $216 million.
Strategy has done its very best to convince investors that all this is being done to bolster long-term shareholder value and to put the company on a much stronger financial footing. But it's hard not to see that the wheels are coming off the Bitcoin treasury company wagon.
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The Bitcoin treasury company model
Strategy famously created the notion of the Bitcoin treasury company, and that's why its decision to sell some of its Bitcoin has been so highly debated. If a company set up solely to accumulate Bitcoin is now selling some of it, is the Bitcoin treasury company business model broken?
Image source: Getty Images.
The problem, quite frankly, is that the economic flywheel put in place to purchase Bitcoin is now showing signs of slowing. Instead of funding its Bitcoin purchases with cash, Strategy has been funding them with proceeds from its various preferred stock offerings.
However, to get investors to bite on these securities, they must offer a sizable dividend. For example, Strategy Variable Rate Perpetual Stretch Preferred Shares Series A ("Stretch") (NASDAQ: STRC) currently pays out an annualized dividend that yields 12%.
And that's where the Bitcoin sales come into play -- Strategy obviously needs more cash than originally anticipated to keep paying these dividends in the future. The whole point of the company's new Bitcoin monetization program is to sell Bitcoin and raise cash to keep all the pieces of the flywheel working in unison.
Just buy Bitcoin
It's time to forgo all the pretense that investors can generate superior long-term returns by investing in a company that will buy Bitcoin for them. At the end of the day, investors should probably just buy Bitcoin directly.
Admittedly, there was a brief period of time when Strategy outperformed Bitcoin. But that time has come to an end. Year to date, Bitcoin is down 28%, while Strategy is down 36%.
Just look at the price of Strategy stock over the past 12 months. It has completely collapsed in value.
For now, I'm avoiding Strategy and all other Bitcoin treasury companies. The risk is simply too great. If I'm buying Bitcoin, I'm buying it directly.
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Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
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