Strategy has spent $21.2 billion since Nov. 10 to buy bitcoin whose value has fallen to around $17.3 billion as of Monday afternoon, an Investor's Business Daily analysis of company filings indicate. MSTR stock dived Monday as the bitcoin price tumbled to its lowest level of the year and Strategy announced plans to reload its arsenal for buying the cryptocurrency, albeit on less favorable terms.
Strategy, formerly known as MicroStrategy, said Monday that it hasn't bought any bitcoin since Feb. 23. The pause by the company that's been called a bitcoin market "whale" is contributing to the sell-off after the White House crypto summit came and went without any commitment by the Trump administration to add to the government's existing holdings of bitcoin or other cryptocurrencies.
The bitcoin price is currently around $78,750.
Strategic Bitcoin Reserve
The bitcoin price could retreat further without the hoped-for rocket fuel of government purchases, though such buys could still happen. President Donald Trump's order will pave the way for a Strategic Bitcoin Reserve comprising current cryptocurrency holdings due to law enforcement activity. He also tasked the secretaries of treasury and commerce with developing "budget-neutral strategies" to acquire additional bitcoin, as long as they impose no costs on taxpayers. There's speculation that Trump could exchange some of the nation's gold reserves for bitcoin.
However, any government buying of bitcoin, even if it's just a shift from one financial asset to another, might be politically problematic at a time that Trump and the Republicans are trying to slash federal spending and Medicaid cuts are on the table.
Strategy's Bitcoin Arsenal
Strategy spent $23.2 billion on bitcoin purchases from Oct. 30 to Feb. 23, funded by $16.8 billion worth of stock offerings and $6.4 billion in debt proceeds.
Strategy has blown through 80% of $21 billion in planned common stock sales. Now that MSTR stock and the bitcoin price are in retreat, a key question is whether creditors will continue to offer Strategy the exceedingly generous 0% interest terms it received last month, while borrowing $2 billion via notes that are convertible into stock.
As Strategy's 10-K warned, if market conditions change, "we may not be able to obtain equity or debt financing in a timely manner, on favorable terms, or at all."
On Monday, Strategy said it would offer $21 billion worth of preferred stock with an 8% interest rate. That follows a similar $584 million offering in February that established the preferred stock which trades under the ticker STRK. Monday's announcement suggests this will be the main financing mechanism going forward, assuming there is demand. The preferred stock tumbled 8.2% to 84.80 on Monday. As a result, the effective interest rate on newly issued preferred shares would be 9.4%. That could continue to rise if the preferred stock falls further.
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Saylor Strategy Hits Rough Waters
Both Strategy and its creditors had acted as though bitcoin was virtually guaranteed a one-way ticket to much higher highs under Trump. Strategy spent $21.2 billion buying bitcoin at an average price of $96,458 per bitcoin from Nov. 10 to Feb. 23. At the moment, Strategy Chairman Michael Saylor's investment approach looks questionable.
Before the recent spending binge, Strategy held 279,420 bitcoin purchased at an average price of $42,692. The recent purchases of 219,676 bitcoin raised the average purchase price to $66,357.
MSTR Stock
Strategy stock faces two big risks: that the price of bitcoin will continue to decline and that the premium investors have given Strategy over the value of its bitcoin holdings will contract.
Strategy tumbled 16.7% to 239.27 in Monday stock market action, finishing at its lowest closing price since Election Day. Strategy has a current market value of $70.4 billion, based on 294 million shares, which includes shares after conversion of all its convertible notes. That valuation approach makes sense, given that Strategy intends to hold all its bitcoin, rather than pay cash when the notes mature.
That means investors are giving Strategy a 79% premium to the $39.3 billion value of its bitcoin holdings. The premium has already shrunk from 164% on Nov. 10, before the latest buying binge. Still, that premium allows Strategy to buy $1.79 worth of bitcoin for each $1 of stock it issues.
If investors decide that Strategy doesn't merit the premium and financing grows more expensive, there would be no rationale for investing in MSTR, as opposed to bitcoin or a bitcoin-related ETF..
