THE GIST

Strategy reported its first-quarter earnings this week and it was a doozy. Beyond reporting a $12.54 billion loss, Chairman Michael Saylor said the firm plans to do something he said no Bitcoin holder should ever do: sell Bitcoin.

“We will probably sell some Bitcoin to pay a dividend,” Saylor said during their earnings call. “Just to inoculate the market and send the message that we did it.”

Saylor’s strategy to “immunize” the market to the idea of selling Bitcoin is interesting, but for Bitcoin maxis, it’s also blasphemous.

WHAT HAPPENED

Bitcoin rose on the news only to fall slightly from almost $83,000 to $81,500 Wednesday afternoon. Strategy (MSTR) fell 1%, which isn’t all that much considering Saylor went from Bitcoin’s biggest bull to heretic in less than 24 hours.

Saylor’s talk of selling Bitcoin has everything to do with Stretch (STRC) — Strategy’s perpetual preferred stock paying 11.50% annually, in cash, every month. The key to STRC is simple: buyers get a high-yield, near-stable instrument backed by the world’s largest corporate Bitcoin treasury, with the share price pinned near $100 par. Strategy, in turn, gets a continuous stream of fresh capital it deploys into more Bitcoin. Their latest raise was in April.

Now Saylor is staring down the logical endgame. They can’t keep issuing STRC without stacking up perpetual dividend obligations. At some point, one will outweigh the other. More issuance means more cash claims, forever. If STRC demand dries up, the Bitcoin buying stops, defeating the entire point of Strategy’s “strategy.” Based on March numbers, they’re already obligated to pay out just under $1 billion in cold, hard cash to STRC holders each year. They can cover it for now. But if that number keeps growing, the software business isn’t remotely big enough to carry it.

WHY IT MATTERS

Strategy holds about $2.25 billion in cash & cash equivalents and, of course, Bitcoin, valued at about $66.6 billion. The USD cash reserves are what they’ve pointed to in the past when questioned about covering dividends.

Our analysts just identified a stock with the potential to be the next Nvidia. Tell us how you invest and we’ll show you why it’s our #1 pick. Tap here.

“Our USD cash reserve has remained consistent at $2.25 billion. And while the years of coverage have shifted down with the growth of STRC this year, we believe the stable cash along with our Bitcoin reserves and ability to raise [capital] is sufficient,” CFO Andrew Kang said on the earnings call.

Saylor and Kang have some wiggle room to tap their USD cash reserves, but now, as they “inoculate the market,” they’re opening the door to the possibility of shaving some Bitcoin off in the future to keep this train running. Their hope is that if they sell some now and grit their teeth, once Bitcoin’s bull run kicks off again, they’ll be fine.