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Key Points
- Strategy continues to deploy its recently announced “digital credit” plan, which manages the company’s STRC preferred stock and aims to improve its fundraising capabilities over time.
- The company continues to sell bitcoin and repurchase preferred stock, helping push the high-yielding shares closer to par, where Strategy may consider issuing more.
- By more actively managing its securities, Strategy aims to double its bitcoin per common share within seven years, with any increase in bitcoin’s price providing additional upside.
Strategy (MSTR) continues to sell bitcoins for cash, plowing the proceeds into shares of its own STRC Series A preferred stock, as part of the firm’s recently announced “digital credit” plan.
In the week ending August 9, Strategy made several key moves:
- Sold common stock worth $653.1 million, at an average price of about $99.17.
- Sold 1,690 bitcoins for $108.6 million, at an average price of $64,262.
- Repurchased 1,152,020 shares of STRC Series A preferred stock for a total price of $108.6 million, or about $94.27 per share.
Strategy’s moves effectively exchanged its 1,690 bitcoins for more than 1.15 million shares of the preferred stock. The cash proceeds from the common stock went to the company’s USD Reserve, now at $4.65 billion, which backstops the payment of dividends and other interest.
After the sale, Strategy owns 840,447 bitcoins at an average purchase price of $75,385. It is the world’s largest bitcoin treasury firm, owning about 4% of the cryptocurrency’s total issuance.
The intent of the digital credit plan is to increase the number of bitcoins per common share by closely managing Strategy’s common stock, STRC preferred stock, and its bitcoin holdings. The recent sales bolster the firm’s balance sheet, raising investors’ confidence that Strategy can meet the payments on its preferred stock and other indebtedness without needing to raise cash in a fire sale, which might occur while bitcoin prices are low or at a similarly inopportune time.
Strategy’s focus on its STRC preferreds has worked out well for holders so far. The shares have bounced back significantly from a major June downdraft, after investors’ confidence was rattled. The digital credit plan may lead to further gains in the preferreds in the short term as well.
Strategy’s Digital Credit Plan: How it Works
Strategy’s recent portfolio moves are part of what executive chair Michael Saylor calls the company’s digital credit plan. This plan refocuses the company’s fundraising around its STRC Series A preferred stock, with Strategy managing its dividend yield and price, so that it can increase the number of bitcoins it owns per share of its common stock.
Saylor says that the STRC preferreds are already the “most liquid and largest preferred stock in the world.” By carefully managing the preferred, Strategy can raise cash more cheaply.
“We expect to keep laser focus on it,” said Saylor in the second-quarter earnings call. “We’re going to do everything we can to make it the most appealing credit in the entire digital credit space.”
This approach means that Strategy will keep a tight rein on its Series A preferreds so that they stay popular with investors while also offering a reliable source of funds for buying bitcoins.
In a real sense, then, Strategy is acting like a central bank of bitcoin, using some of the same tools as an actual central bank, such as adjusting interest rates and liquidity.
As I explained in this recent piece on Strategy’s new gambit, Strategy has the following tools:
- Strategy can use dollars to repurchase preferreds if they drift too low, or it can issue them for more dollars if the price reaches a favorable range.
- Strategy can adjust the yield on this preferred to raise its price, for example, if it wants to raise cash or if bitcoin is surging and its preferred stock enjoys investors’ confidence.
- By creating a greater market for this preferred, Strategy creates more liquidity in the financial instrument itself, meaning it can more easily issue the preferred and likely lower the cost of funding over time as investors come to trust the stock.
So, Strategy will take advantage of pricing in each of its markets – bitcoins, common stock, and preferred stock – for the purpose of raising the number of bitcoins per common share. To do so, it has recently raised cash to strengthen its balance sheet, giving it a more defensive posture.
At the same time, it has the potential to go on offense when the time is right to buy bitcoins, ideally giving it more ability to accumulate bitcoins if the STRC preferred becomes highly trusted.
So, Strategy’s digital credit plan requires a longer-term approach to acquiring bitcoins rather than the short-term “squeeze” of the bitcoin market that some traders may have first envisioned.
