Strategy's bitcoin strategy backfires, funding risks grow

Strategy (MSRT), formerly known as MicroStrategy, expects to post a $5.9 billion unrealized bitcoin loss for the first quarter, according to a new SEC filing released Monday.

The hit will be partially offset by $1.69 billion in income tax benefits.

The company, the largest corporate holder of bitcoin, disclosed in a separate 8-K filing that it purchased 80,715 BTC in Q1 at an average price of $94,922 — spending a total of $7.66 billion.

But with bitcoin ending the quarter well below that level, Strategy is sitting on steep paper losses.

As of March 31, the firm held 528,185 bitcoin at an average purchase price of $67,458. That includes 22,048 BTC bought during the final week of March for $1.9 billion.

No additional purchases were made between March 31 and April 6.

MSRT stock fell 8.7% on Monday and is now down more than 50% from its 52-week high. Bitcoin was trading around $78,842 — down 15.5% year-to-date.

Downgrade highlights liquidity concerns

Monness, Crespi, Hardt & Co. analyst Gus Gala downgraded Strategy to Sell last week, citing growing risks in its financing model. His $220 price target implies nearly 18% downside from current levels.

Gala noted that Strategy has relied heavily on issuing stock, preferred shares, and convertible bonds to fund its bitcoin buys — a strategy he now sees running out of runway.

“We have gained incremental confidence that the convertible issuance strategy is likely tapped,” he wrote.

Gala expects the company to lean more on bond sales going forward, though he warned that rising financing costs could complicate that shift.

“If fixed income securities do not become a greater portion of issuance, the BTC treasury strategy will look increasingly challenged,” he added.

FactSet consensus has Strategy posting an 11-cent loss per share for Q1, narrowing from a 31-cent loss a year ago. Revenue is projected to rise slightly to $116.8 million.

Strategy began stockpiling bitcoin in 2020, making it the centerpiece of its corporate treasury strategy.

“This investment reflects our belief that Bitcoin... is a dependable store of value and an attractive investment asset,” CEO Michael Saylor said at the time.