Key Points
Strategy is the type of investment that looks brilliant during a Bitcoin bull run but exposes itself to significant downside when Bitcoin enters a bear market.
The company sold some Bitcoin, breaking CEO Michael Saylor's advice of never selling Bitcoin.
Strategy pays $1.79 billion per year between dividends and interest before addressing the principal of its corporate bonds.
Strategy(NASDAQ: MSTR) and Bitcoin(CRYPTO: BTC) have both performed poorly this year. They have year-to-date losses of 38% and 29%, respectively. However, if you had to choose between these assets, Bitcoin is the better buying opportunity.
Strategy functions as a leveraged bet on Bitcoin that doesn't make much sense in the long run, especially during a bearish crypto cycle. Here's why investors should opt for the cryptocurrency itself rather than the stock that centers on Bitcoin.
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Equity and debt financing create a house of cards
Strategy seemed like a must-own stock in 2023 and 2024. The stock more than tripled from early September 2024 to late November of that year, showing the gains possible when Bitcoin rallied.
However, the stock is down 80% from its all-time high. That's because going into debt and diluting investors to accumulate Bitcoin only works in a bullish market. Dilution doesn't yield as much Bitcoin when Strategy's price is dropping faster than Bitcoin. That's why Strategy's Bitcoin yield dropped from 9.4% in the first quarter to 4.5%.
Strategy will gradually bear less fruit from equity and dilution. When debt becomes due, the company may have to sell Bitcoin to cover it. Strategy also had to sell 3,588 Bitcoins to fund dividends for its digital credit securities. These aren't dividends for retail investors, but it's an extra expense for a company that makes almost all of its revenue through its Bitcoin treasury model.
Bitcoin investors can withstand a prolonged downturn much better than Strategy
Bitcoin gives investors more time to withstand a correction than Strategy. Since Strategy relies heavily on dilution, it will have to issue more shares and sell more Bitcoin to meet its financial obligations if the asset continues to decline.
Furthermore, Strategy's Bitcoin selling can put more downward pressure on the price and cause some people to leave Bitcoin. It's similar to the AI stock margin unwind that caught Situational Awareness hedge fund owner Leopold Aschenbrenner by surprise.
