On-chain analytics firm CryptoQuant said Strategy’s recently announced new capital management framework significantly alleviates the company’s immediate liquidity concerns, but a more disciplined model for buying and selling Bitcoin is needed.
In a report he released, CryptoQuant research director Julio Moreno assessed Strategy’s new plan, called the “Digital Credit Capital Framework,” as a significant change in direction.
Moreno said: “The digital credit capital framework is a true course correction. However, for this change to be complete, the strategy must clarify two other issues: a systematic model for timing Bitcoin purchases and a disciplined framework for selling during bullish periods.”
Strategy announced its five-part digital credit capital management framework on June 29. As part of this plan, the company has created a US dollar reserve that can only be used for preferred stock dividends and interest payments.
The company has set a coverage target to meet at least 12 months of payment obligations for this reserve. Additionally, the dividend rate of STRC preferred shares has been increased to 12%, subject to monthly review. This step aims to bring the price of STRC closer to its face value of $100.
The new framework also allows for the repurchase of preferred stock worth up to $1 billion if company management considers the repurchase to be an enhancement activity. STRC actions should receive first priority under this program.
Strategy will also be able to repurchase up to $1 billion of MSTR common stock during periods when it believes the company’s stock is undervalued.
A separate Bitcoin redemption program created as part of the plan allows the company to sell up to $1.25 billion worth of Bitcoin. The funds raised can be used to strengthen dollar reserves, finance dividends and interest, and fund share buybacks.
The company also said it would issue shares more cautiously when its mNAV metric, known as market value to net asset value ratio, approaches level 1.
Strategy’s new plan was announced just days after CryptoQuant released its recommendations for the company.
CryptoQuant previously advocated a strategy to suspend Bitcoin purchases until its cash reserves and dividend coverage ratio are strengthened. The company also suggested developing a systematic model for planning future Bitcoin purchases and preparing a plan to sell part of its assets during a bull market.
According to Moreno, Strategy has largely followed the first of these recommendations.
Between June 29 and July 5, the company sold approximately 3,588 Bitcoins, generating approximately $216 million in revenue. These funds were used to pay preferred stock dividends and bolster the dollar reserve.
Strategy raised $466.7 million through the sale of MSTR shares between July 6 and 12. The company made no new purchases or sales of Bitcoin during this period.
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As a result of these steps, Strategy’s dollar reserves increased from $1.44 billion to $3 billion. The company’s dividend coverage period has also expanded from approximately 14 months to 29 months.
Strategy’s Bitcoin holdings remained unchanged at 843,775 BTC, and the company has not yet made any preferred or common stock repurchases.
STRC shares had fallen to an all-time low of around $75 in late June. Following the announcement of the new framework and the increase in the dividend rate, the stock price rose to around $88.
Despite this, STRC continues to trade below its par value of $100.
Moreno said the discount indicated that investors wanted to see the strategy sustainably implement its new financial discipline.
Moreno said: “The sustained discount indicates that the market wants to see the reserve strengthened and the new discipline maintained before completely rerating the stock. »
According to CryptoQuant, two key questions remain unanswered in Strategy’s Bitcoin strategy.
The first is when the company will resume Bitcoin purchases.
Moreno said suspending Bitcoin purchases offered a solution to the short-term liquidity problem, but the new framework lacked a model-based rule for when accumulation should resume.
Strategy’s announced share issuance policy, which it will implement when its mNAV ratio approaches 1, defines how the company will raise capital. However, according to Moreno, this rule does not explain when capital should be invested in Bitcoin.
Moreno said: “Without a clear, valuation-driven model, the company risks repeating its trend of buying Bitcoin at consistently local highs whenever market conditions improve. »
The second point highlighted by CryptoQuant is whether Strategy will sell Bitcoin during the next bull market and under what rules these sales will be made.
Moreno said the current Bitcoin withdrawal program has a defensive structure. The program allows Bitcoin sales to be used to fund dividends, interest, and stock buybacks.
However, according to CryptoQuant, this plan does not offer a staggered selling or hedging strategy as the market cycle approaches its peak.
Moreno said such a sales framework could help the company reduce debt, create shareholder value, and build cash reserves to repurchase Bitcoin during periods when the price falls to lower levels.
Moreno said: “The disciplined sales approach throughout the market cycle, which constitutes the other half of active capital management, is still undefined. »
*This does not constitute investment advice.