Bitcoin's Biggest Risk, Defused

Original | Odaily News (@OdailyChina)

Author | Azuma (@azuma_eth)

After more than two months, Strategy has finally resumed buying Bitcoin.

On the evening of Aug. 31 Beijing time, Strategy announced that between Aug. 24 and Aug. 30, it purchased a total of 4,603 BTC for approximately $369.7 million, at an average price of $80,318. As of Aug. 30, Strategy holds 845,050 BTC, with a cumulative cost of approximately $63.73 billion and an average holding cost of $75,412.

At the same time, Strategy did two other things that week — it injected about $30 million into a "USD Cash" liquidity account and spent about $151.8 million to repurchase 1.557 million shares of STRC. As of Aug. 30, Strategy's "USD Reserve" was $5.1 billion, and USD Cash was $1.61 billion, totaling $6.71 billion.

• Odaily note: The difference between USD Reserve and USD Cash is that the former can only be used to pay dividends on Strategy's preferred stock and interest on outstanding debt; the latter can be used for broader treasury purposes, including purchasing Bitcoin, expanding USD Reserve, broader capital management, and other similar purposes.

Purely from a price perspective, Strategy's BTC trading over the past two months has been somewhat awkward — Lookonchain statistics show that Strategy sold a total of 6,916 BTC over the past two months at an average price of about $62,081, but when it resumed buying, the average price had risen to $80,318... Strategy appears to have made a not-so-smart "sell low, buy high."

But if we zoom out, we find that this series of transactions was by no means a failure for Strategy overall; in fact, it was quite successful. After all, the main purpose of Strategy's BTC sales over the past two months was not to escape the top, nor to predict a BTC decline. What it really wanted to solve was a crisis that was once more troublesome than the BTC price itself — the STRC depeg and the cash reserve problem it exposed.

Now, after continuously selling some BTC, replenishing USD reserves, adjusting the STRC mechanism, and launching large-scale buybacks, Strategy has finally resumed buying BTC. To some extent, this means that the landmine hanging over Strategy's head for the past two months has at least been temporarily defused.

STRC Depeg and Cash Reserve Crisis

For investors who have long followed Michael Saylor and Strategy, what happened this summer was somewhat unexpected.

Over the past few years, Strategy has built an extremely simple yet firm business narrative — raise funds, then buy BTC. Whether issuing common stock, convertible bonds, or later launching a series of preferred stock products such as STRK, STRF, STRD, and STRC, Strategy's capital operations ultimately pointed to the same goal: continuously raising funds from the capital markets and expanding its BTC holdings.

In this system, the most important thing is not how much cash flow Strategy's own software business can generate, but whether the capital markets are still willing to fuel this "fundraising machine."

And in June this year, the problem first appeared with STRC. As Strategy's most important floating-rate preferred stock product, one of STRC's original core positioning goals was to trade as stably as possible around $100. To achieve this, Strategy would maintain its attractiveness by adjusting dividends, allowing STRC to serve as a relatively stable financing tool that continuously absorbs funds from the market. But as STRC began to depeg and the deviation gradually worsened, this mechanism began to face challenges.

For Strategy, the biggest problem with the STRC depeg is — once the market price remains below the issuance price for a long time, the company's ability to continue financing through STRC issuance will be significantly affected. And this touches the very core of Strategy's capital model.

The reason Strategy has been able to continuously expand its BTC holdings over the past few years essentially relies on continuous financing. When financing channels such as common stock and preferred stock operate smoothly, the company can continuously obtain new funds and invest them in BTC; but once an important financing channel fails, and the company also faces ongoing cash expenditures such as preferred stock dividends and debt interest, liquidity pressure quickly emerges.

So on June 29, Strategy introduced a self-rescue plan called the "Digital Credit Capital Framework." One of the core changes of this plan was that Strategy officially opened the door to "selling BTC" for the first time.

According to the arrangement, the company may sell some BTC to fund preferred stock dividends, debt interest, and other expenses, or to replenish USD reserves, when management believes that selling BTC is more advantageous than issuing common stock or conducting other capital market financing.

In other words, the BTC treasury that previously "only went in, never out" was given another function for the first time — when capital market financing is under pressure, BTC itself can also become a source of liquidity for Strategy.

Subsequently, Strategy officially began large-scale BTC selling operations — before this, there had actually been a small "desensitization" test sale of only 32 BTC.

Crisis Repair Status

Looking back, since the announcement of the "Digital Credit Capital Framework" on June 29, Strategy's main operational line over the past two months has been very clear — sell some BTC for liquidity, continuously replenish cash reserves through MSTR ATM, and massively repurchase STRC to repair the depeg, until reserve pressure eased.

In terms of BTC sales, Strategy sold 3,588 BTC in the week of July 6 at an average price of about $58,603, totaling about $210 million; sold 1,638 BTC in the week of Aug. 3 at an average price of about $61,660, totaling about $101 million; and sold 1,690 BTC in the week of Aug. 10 at an average price of about $64,260, totaling about $108.6 million. In total, Strategy sold 6,916 BTC across the three transactions, cashing out about $430 million.

However, selling BTC was only part of the self-rescue plan. Over the past two months, Strategy's main source of funds remained MSTR ATM sales. By continuously selling common stock, the company increased its USD Reserve from $2.55 billion on June 29 to $5.1 billion; it also established a USD Cash account in late August, which reached $1.61 billion as of Aug. 30. The two USD assets totaled $6.71 billion, an increase of about $4.16 billion from the end of June, a rise of over 160%.

At the same time, Strategy continued to repurchase STRC. In the latest week, Strategy spent another $151.8 million to repurchase 1.557 million shares of STRC. Since the buyback began in late July, the company has cumulatively used about $635 million to repurchase STRC.

Under the triple strategy, this adjustment seems to have begun to show results.

Apart from the cash reserve situation mentioned earlier, the most obvious sign of repair is the STRC depeg. As of the U.S. stock market close on the morning of Sept. 1 Beijing time, STRC had recovered to around $97, only about 3% away from the $100 target. Strategy management had previously stated clearly on the Q2 earnings call that the goal was to push STRC back to near $100 by Sept. 8, and currently the prospects look quite promising.

The Market's Biggest Hidden Risk Has Been Temporarily Alleviated

Of course, at this stage, it is still too early to conclude that Strategy has completely "escaped danger."

Whether STRC can successfully re-peg before Sept. 8 and remain stable around $100 in the long term remains to be seen; Strategy's massive preferred stock system still implies ongoing cash expenditures, and whether its "financing—buying coins" capital machine can return to normal operation in the future also depends on whether the market is willing to continue providing funds.

But at least compared to more than two months ago, Strategy has regained some initiative — cash reserves have increased significantly, the STRC depeg has narrowed markedly, and the company has finally shifted from continuous selling back to buying.

In summary, Strategy's operations over the past two months can be described as a very wise "sell low, buy high." Although it appears to have lost money on the surface, what it gained was over $4 billion in new USD assets, hundreds of millions of dollars in STRC buybacks, and the breathing room to adjust the entire capital system when the STRC depeg and cash reserve issues once caused market concerns.

That huge hidden landmine hanging over the market may not have completely disappeared, but at least it is no longer as dangerous as before.