Strategy's stock is down 15% in a month. Investors disappointed in bitcoin strategy?

Shares of Strategy (formerly known as MicroStrategy), the largest publicly traded bitcoin holder, have fallen 15% since the beginning of the month, effectively wiping out the premium that had attracted investors. The company-an indicator of sentiment toward the cryptocurrency-is now increasingly skeptical of analysts, Bloomberg writes. The market doesn't like that Strategy regularly dilutes shareholders' stakes by issuing shares to buy new bitcoins. At the same time, the value of the securities strongly depends on the price of the token, which is getting cheaper amid the overflow of capital into Ethereum.

Bitcoin is down nearly 9% since its high of $123.7k reached on August 12, and shares of Michael Saylor Strategy, the largest public holder of the cryptocurrency, have lost 14% of their value in the same time frame.

Saylor's model is to issue debt bonds and stocks, buy bitcoin with the proceeds, wait for the market to assign a premium for it, and repeat the cycle, Bloomberg explains. Since 2020, when the company switched from issuing enterprise software to accumulating cryptocurrency, its shares are no longer valued on future earnings. Fair value is now calculated using the mNAV (market-adjusted Net Asset Value) multiple, which shows at what ratio to the book value of Strategy's bitcoin reserve its shares are trading at. When bitcoin becomes cheaper, mNAV decreases.

As a result, when Strategy issues new shares, diluting the share of shareholders, and the premium does not meet market expectations, investors are dissatisfied, explains Bloomberg the fall in the company's capitalization.

In late July, the company promised not to issue shares at mNAV below 2.5, with rare exceptions. Two weeks later the conditions were relaxed, and on August 25 the company sold almost 900 thousand new securities. Some investors regarded it as a betrayal, Bloomberg believes.

The mNAV has now fallen to 1.57. Issuing shares at an mNAV below 1 risks triggering a negative spiral, the agency predicts: a drop in their value weakens Strategy's ability to buy bitcoins, undermines investor confidence and squeezes the premium even further.

"The premium reduction is a natural reaction to increased competition and new ways to gain exposure to digital assets," said Jake Ostrovskis, lead analyst at Wintermute's OTC Desk. - In addition, the market has reassessed how it views Strategy in the short term due to the fact that it has broken its promise."

Saylor's model has inspired a generation of companies that have bet on accumulating cryptocurrency reserves. Collectively, such cryptocurrency treasuries now hold more than $108 billion worth of bitcoins, 4.7% of the total supply, according to BitcoinTreasuries. If the Strategy premium finally disappears, the logic of the entire strategy will be under attack, Bloomberg writes. Strategy is not just a stock, it has become a proof of concept that the company's balance sheet can be turned into an instrument of speculative growth, a constant source of demand for bitcoin, the agency notes.

The pressure from the declining mNAV is being felt by all market participants. According to Capriole Investments, nearly a third of the shares of public companies that hold bitcoin on their balance sheets are now trading below the value of their crypto assets. Smaller players are particularly vulnerable: limited liquidity makes issuing new shares more painful, and the rate of convertible bonds leads to higher debt loads and refinancing risks.

Strategy has previously said it plans to redeem all of its convertible bonds over the next four years and switch entirely to preferred stock, an instrument that does not mature. Most competitors don't have the scale or credit history to implement a similar financial architecture, Bloomberg writes.

"What happens if bitcoin drops 50%? - asks Charles Edwards, founder of Capriole, a specialized hedge fund. - Interest in corporate crypto reserves would wane, mNAV multiples would shrink, and hundreds of companies would begin to reassess their treasury strategies."

"Is this market overheated? I think so," Twenty One Capital co-founder and CEO Jack Mallers told Bloomberg. - We realized that creating a bitcoin treasury is not at all uncommon. Anyone can incorporate a company, try to go public and raise money to buy bitcoin."

At the same time, investors' attention is beginning to shift towards other digital assets - such as Ethereum and Solana, which, according to some analysts, are more in line with the objectives of decentralized finance. Ethereum-oriented treasuries have already invested over $19 billion in this token.

This article was AI-translated and verified by a human editor