Is Strategy's Bitcoin Bet Brilliant, or Reckless?
The mechanism driving the company's purchases is relentless dilution of its shareholders' interests. Strategy sells newly issued shares, both common and preferred, and issues new convertible debt into the open market to raise cash, then uses that cash to buy more Bitcoin. If Bitcoin rises enough, the per-share value of the company's holdings can still grow despite the larger share count, and shareholders get a nice return.
But if it doesn't, shareholders are left with a smaller slice of an underwater position. And then, if Bitcoin's price falls dramatically, the company might eventually be forced to liquidate its holdings to ensure it can still pay back its creditors, which would almost certainly punish its stock further. The possibility of this death spiral does make Strategy's playbook a bit reckless, even if it's unlikely to actually occur without a major Bitcoin collapse from its current price level.
Most investors can probably do well enough with a diversified portfolio that doesn't include that risk. In other words, if you want exposure to Bitcoin, you should probably just buy the coin directly or through a Bitcoin exchange-traded fund (ETF), without layering on the risks implied by Strategy's debt obligations and its ongoing dilution of shareholders.
To put it bluntly, buying Strategy stock means you're financing someone else's Bitcoin accumulation at your own expense, which isn't a good proposition for the long term even if it has tended to pay off so far.
Nonetheless, Strategy's conviction about Bitcoin's long-term trajectory is probably correct, and its constant supply absorption is a genuine catalyst for the asset that holders should be grateful for. But that doesn't mean you need to buy the stock; just buy the coin, and let the company work to make it more valuable for you.
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Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
Is Strategy's Bitcoin Bet Brilliant, or Reckless? was originally published by The Motley Fool
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