Bitcoin hit a fresh all-time high in October last year. Since that record, the world's top cryptocurrency has been in a bear market. It currently trades 51% off that peak (as of June 6), after a terrible start to the month.
Strategy (MSTR +4.87%), which is the world's largest Bitcoin holder with 843,706 units of the digital asset on its balance sheet (as of June 1), has also felt the pain. Its shares are down 75% from their all-time high.
When Bitcoin is booming, Strategy is celebrating. However, the exact opposite is what's happening. Does this mean that billionaire Michael Saylor's Bitcoin treasury experiment been a failure?
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The financial engine isn't broken
Bitcoin is a volatile asset. Any follower knows that it goes through wild price swings that don't come with a clear explanation. Consequently, it shouldn't be a surprise that an entity that owns a huge chunk of the cryptocurrency will also see its share price violently move.
Strategy continues to execute its playbook of raising capital in various ways to buy more Bitcoin and pay dividends. At a high level, it's that simple.
There is some concern among investors about the business selling 32 Bitcoins for $2.5 million during the week of May 26, after Saylor said Strategy would never sell its stack. The dollar amount is trivial, but the move could have been made to signal to credit ratings agencies that the company can indeed sell its collateral (Bitcoin) if it needs to. Strategy wants a higher credit rating than the "B-" it has now from S&P Global, which can be considered junk and non-investment-grade.
Perhaps nothing matters more than Strategy's ability to satisfy its obligations. It has $6.7 billion in notional convertible debt on the balance sheet, after buying back $1.5 billion worth of 2029 notes last month, that requires $35 million in annual interest. Even in the current Bitcoin bear market, however, the value of Strategy's holdings ($51.3 billion on June 6) is almost eight times the convertible debt outstanding.
The business also has almost $1.7 billion in annual dividend obligations on its preferred equities. It has not missed a payment yet. And in a hypothetical worst-case scenario that forces Strategy to sell Bitcoin to repurchase all its convertible debt, the value of the remaining cryptocurrency left on the balance sheet would be enough to fund dividend payments for more than 26 years.
The financial engine isn't broken, even in a Bitcoin downturn. In fact, there is plenty of cushion.
NASDAQ: MSTR
Key Data Points
Investors need to practice patience
Strategy, then called MicroStrategy, made its first Bitcoin purchase in August 2020, when it bought $250 million worth of the cryptocurrency. This happened at a time of unprecedented government stimulus, which helped to establish Michael Saylor's belief that it's worthwhile to own a fixed-supply asset to combat the inflation that was coming.
Since that first Bitcoin buy, Strategy shares have risen by 874%. Even accounting for the extreme bear market we're in, the stock has been a monster winner, outperforming all of the "Magnificent Seven" stocks besides artificial intelligence behemoth Nvidia. That doesn't look like a failure to me.
Of course, the naysayers will never stop criticizing what Strategy and Saylor are doing. Part of the reason might be that they aren't bullish on Bitcoin, whose prospects haven't changed, in my view. Its scarcity makes it a compelling long-term asset to own, particularly against the backdrop of higher sovereign debt and money supply.
Another reason for the market's flak is likely because they've never seen a company operate like this before. That unfamiliarity can lead to disapproval.
The treasury experiment hasn't failed. Like with all things related to successful investing, it requires patience and discipline on the part of market participants, who must be able to handle the ups and downs in order to achieve winning returns.
When Bitcoin goes through another bull market, as it has always done throughout history following a downturn, Strategy shares will follow.
