Bitcoin, a currency beyond the control of any governmental body or central bank, represents a significant challenge to traditional financial systems. At the forefront of embracing this digital currency as a major asset is Strategy (formerly MicroStrategy), which describes itself as "the world’s first and largest Bitcoin Treasury Company." Declaring Bitcoin as its primary reserve asset, Strategy is intentionally accumulating Bitcoin and advocating for its potential as digital capital.
Strategy has embarked on a rather bold investment journey, utilizing equity, debt, and cash to acquire significant amounts of Bitcoin. This raises an intriguing question for investors: is it more prudent to invest directly in Bitcoin, or could purchasing Strategy’s stock yield even greater returns?
Here’s some insight to help you navigate this financial opportunity.
The Innovative Approach: A Potential Game Changer, If It Works
Strategy’s modus operandi involves raising funds through convertible debt and equity to acquire billions of dollars’ worth of Bitcoin, currently holding about $44 billion of it. The underlying concept is straightforward – as Bitcoin’s price increases, both the company’s valuation and its stock price should follow suit. In turn, this rise allows Strategy to issue more equity and debt for further Bitcoin acquisitions without upsetting shareholders by diluting their value. This could perpetuate a self-sustaining cycle where an increase in stockbuyers elevates its market price, supporting more purchases.
In a striking example of its strategies, between March 10 and March 16, Strategy purchased 130 Bitcoins with $10.7 million in cash. By March 23, it had invested an additional $584.1 million to acquire 6,911 Bitcoins. Earlier, Strategy announced plans to issue up to $21 billion in preferred stock for future Bitcoin purchases and working capital. This represents significant buying power even for Bitcoin, which boasts a market cap exceeding $1.7 trillion.
However, this approach isn’t without risks. The company’s method involves leverage, meaning its share price has often risen faster than Bitcoin’s. Over the past year, for instance, Strategy’s stock climbed 115%, surpassing Bitcoin’s 33% gain.
Taking On Significant Risk
Yet, potential investors must tread cautiously. If Bitcoin’s price drops substantially, the company’s debt-financed transactions might leave it with insufficient collateral to satisfy creditors. This could trigger a mass sell-off by investors fearing the loss of their investment should bankruptcy occur. Strategy might be forced to liquidate its Bitcoin holdings to address its debt obligations, prompting investors to offload shares as the firm’s core assets dwindle.
Such forced sales by Strategy could depress Bitcoin’s value even further, reversing the favorable cycle that once buoyed Strategy’s stock. In this downward spiral, shareholders might suffer more significant losses compared to those who simply held Bitcoin.
Simplicity Prevails
Will these risks ultimately spell Strategy’s downfall? It’s unlikely. Bitcoin’s value would need to plummet dramatically to jeopardize Strategy to the point of triggering a forced liquidation. A sudden and substantial drop in Bitcoin’s price isn’t likely to cause these issues, even if the asset were to lose over half its value.
Nonetheless, investors might prefer to capitalize on Strategy’s Bitcoin accumulation without the added risk of leveraging. Simply buying and holding Bitcoin independently allows participants to benefit from the upside potential without exposure to the extra risk linked to Strategy’s financial tactics. In the long run, this straightforward approach may prove to be the wiser choice.
