Can the Major Bitcoin Bull Strategy Recover From Here, or Are There Warning Signs?

Galaxy Research Director Alex Thorn said that Strategy’s capital management adjustments, announced on Monday, represent a significant milestone for the company but do not mean that structural problems have been completely eliminated.

According to Thorn, Strategy’s “digital credit” system, based on preferred stock, has come under significant pressure in recent weeks. The company’s preferred stock, ticker symbol STRC, fell below its nominal value of $100, reaching a record low of $71.25 on June 26. This decline has raised questions in the markets about how Strategy will pay its increasingly large preferred stock dividends.

Following these developments, Strategy announced a new “digital credit capital framework.” The plan includes a dollar reserve policy approved by the board, an updated STRC dividend policy, a $1 billion preferred securities repurchase authorization, a $1 billion MSTR common share repurchase authorization, and a Bitcoin monetization plan.

The company also increased STRC’s annualized dividend yield from 11.5% to 12%. The new rate will apply to semi-annual dividend payments on or after July 1.

Following the announcements, MSTR shares rose 12.6% on Monday to approximately $92.70, while STRC increased 12.2% to around $83.70.

Thorn stated that while Strategy’s actions were logical, they might not permanently resolve the company’s structural problems. According to the analyst, Strategy still holds a large portfolio of preferred stock and has ongoing payment obligations. Furthermore, the company has a total of $6.7 billion in convertible bonds maturing in 2027 and 2028.

Thorn stated that the market’s main concern was not Strategy’s asset shortage, but whether the company had sufficient dollar liquidity to meet dividend payments without harming Bitcoin holders, MSTR common shareholders, or preferred shareholders.

According to Thorn, Strategy’s raising over $1 billion in cash through the sale of common stock, establishing a 12-month minimum cash reserve policy, and increasing its current cash coverage ratio to approximately 17 months, bought the company time.

However, Thorn argued that the most controversial part of the plan was the monetization of Bitcoin. He stated that these statements clearly indicated that Strategy might sell Bitcoin from time to time, and such a move could weaken the company’s long-term Bitcoin investment narrative.

Thorn stated that Strategy’s identity and the premium on MSTR stock are largely based on the company’s narrative of a long-term Bitcoin position, and therefore he is not keen on the idea of selling Bitcoin. However, he noted that selling a small amount of Bitcoin could be defensible if it prevents a disordered spiral in the capital structure, preserves preferred shares, and allows for waiting for better market conditions.

According to Thorn, Strategy should explore ways to generate returns from Bitcoin assets instead of directly selling spot Bitcoin. This could include lending small, isolated amounts of Bitcoin under conservative terms or considering profiting from volatility through options strategies.

*This is not investment advice.