Magic can't work, even in the Bitcoin world
Crypto alchemy is turning troubles into market Cap
The latest bag of tricks from the financial wizards is what they’re calling crypto treasuries.
For those who’ve spent the last 60 days on the moon: these are publicly listed companies, often defunct or distressed, that have discovered a novel mechanism for regaining value.
But there’s a fundamental problem: Apple exists because it sells phones and computers, your favorite baker because they sell bread, your lawyer because they provide legal services, and your doctor because they treat people.
Crypto treasury companies offer nothing but crypto, at twice the price.
In the beginning was Saylor, and Saylor was with God, and Saylor was God.
Only a madman would question Michael Saylor. He kept our bags afloat, buying when the market was comatose.
His secret? Financial wizardry.
He issued convertible debt and sold it
When the appetite for convertible debt dried up, he issued common stock
Then a preferred share
Then another preferred share
And then another one after that
You could ask how Bitcoiners ended up idolizing the guy behind this avalanche of paper, but let’s save the discussion on trust, verification, and the Bitcoin ethos for another day.
We’ve got bigger problems to deal with.
Not our problem: the money he spends. That’s on the lenders, the preferred shareholders, and whoever’s buying the promissory notes. They trust him, and who knows, maybe they’ll even come out ahead.
Our problem: interest needs to be paid. Dividends to preferred shareholders need to be paid. But Strategy doesn’t generate revenue. They either sell Bitcoin, or they issue more debt. Or more stock.
Indeed, the problem is already here.
On July 8th, Strategy filed the required notice with the SEC: it plans to issue $4.2 billion in preferred shares to buy more Bitcoin and to pay dividends on existing preferred shares.
To many, it sounds uncannily close to a Ponzi scheme. Again, not our problem. Not yet.
The trend is your friend until it is not
The trouble with trends? They tend to run out.
Right now, we’re in the “magic does exist” phase of the trend.
Strategy is trading at more than twice the value of its Bitcoin holdings. Saylor has little trouble conjuring up a new financial instrument whenever funding is needed. Dividends get paid. Interest too.
And shareholders don’t (yet) feel meaningfully diluted.
Trouble may be brewing, though.
This week, Strategy had troubles raising capital and had to pull the new $4.2B trick. Still, the trend hasn’t turned, not yet. At least, not for Michael Saylor.
But what happens when:
The premium shrinks, and eventually turns negative
The market enthusiasm that lets Saylor raise capital dries up
Interest and dividends still need to be paid
And everyone realizes Strategy has no revenue to cover them?
If you recall, we have three options:
Print new shares
Raise new debt
Sell Bitcoin
Option 2 is unfeasible: if capital raising (in our scenario) has become impossible, then raising debt is off the table too.
Option 1 can still work, until investors get tired of it and start selling MSTR to avoid further dilution.
That leaves us with Option 3: selling Bitcoin.
I’m sure Saylor would rather drink a can of poison than go down that road.
But when the obligations pile up and the options run dry…
That’s when the trend stops being your friend.
Most likely scenario? Saylor gives up, and starts selling, leveraging, or borrowing against the company’s Bitcoin.
Which, in turn, could only worsen an eventual bear market, because Saylor is both the fuel and the destination of the bull run.
It’s one of those self-reinforcing cycles that works beautifully on the way up, and much less so on the way down.
How can we avoid this?
There’s little we can do to stop it, mostly because we’re fighting an unfair war against Saylor’s billions.
We could resort to magic ourselves and conjure up an eternal bull market.
Or we could buy as much Bitcoin as possible… just to leave less for Saylor.
Neither will work, and when the music stops, there won’t be a chair left for anyone.
There will be signs
The good news? There will be signs. Strategy’s strategy (pun fully intended) will start to wobble well before it blows us up.
And there’s an entire zoo of publicly traded companies, resurrected from the dead by some Wall Street sorcerer, resting on even shakier fundamentals.
Chances are, we’ll first see the ones fully exposed to altcoins go under, the kind of strategies that tend to thrive in bull markets and die even faster in bear ones.
Then comes the long list of improvisers, the ones who tried to save themselves by stringing along investors with the occasional press release.
All of this, of course, assuming the bull market isn’t eternal.
Some believe in miracles, fair enough.
But why put your money in systems that need divine intervention just to stay afloat?