Michael Saylor's Strategy's Bitcoin accumulation strategy approaches problematic concentration levels

The company's goal of acquiring 5% raises concerns about undermining Bitcoin's safe haven properties. Large concentrated holdings create risks for any asset class.

In the rapidly evolving landscape of cryptocurrency, the implications of a single company’s actions can carry significant weight, especially when it comes to accumulating a substantial portion of a cryptocurrency’s total supply.

This is the case with Strategy’s (NASDAQ:STRG) Bitcoin accumulation strategy, which has now reached problematic levels of concentration with nearly 3% of total Bitcoin supply concentrated in a single private corporation.

The company’s goal of acquiring 5% of the cryptocurrency’s total supply is also raising concerns about undermining Bitcoin’s safe haven properties and rendering it unsuitable for central bank reserve holdings.

Large concentrated holdings create systemic risks for any asset class, but they are particularly problematic for Bitcoin, which was designed to be used as a decentralized store of value and payment method.

Moreover, private corporations holding such a large portion of a global cryptocurrency’s supply also renders it inappropriate for central bank reserve assets.

Michael Saylor’s company is currently holding close to 3% of the total Bitcoin ever issued, according to a report from Sygnum.

This figure becomes more concerning when considering that Strategy has set a goal of acquiring 5% of the entire Bitcoin supply, a level of corporate control that contradicts the cryptocurrency’s foundational principles of decentralization and distributed ownership.

The company’s corporate holdings are also relative to the liquid Bitcoin supply, which is substantially smaller than the total issued amount.

At the end of 2022, liquid Bitcoin supply was around $250 billion, while the company’s adjusted preferred equity value is $10.43 billion.

This means that Michael Saylor’s company controls a much higher percentage of actively traded Bitcoin, setting the stage for potential market manipulation risks and broader cryptocurrency price volatility concerns.

Another crucial aspect highlighted by Sygnum is the potential implications of bitcoin acquisition vehicles like Strategy during cryptocurrency bear markets.

Due to the potential for significant forced selling pressure. When demand for such investment instruments becomes saturated and Bitcoin prices drop, companies may be forced to liquidate their cryptocurrency holdings to retire debt or pay for operational costs.

Michael Saylor’s company used leveraged capital through convertible bonds and preferred stock, setting up a situation where decreasing bitcoin prices would lead to increased redemption calls.

When Strategy cannot issue new securities on good terms during periods of market decline, it must sell bitcoin in order to service debt.

The high weighting of Strategy’s holdings guarantees that involuntary selling would have a disproportionate market effect. If Michael Saylor were to dispose of bitcoin, it would damage market mood and would tend to cause additional selling pressure in already challenging market circumstances.

Strategy has just launched STRD, its third Nasdaq-listed series of bitcoin-backed preferred stocks, aimed at fixed-income investors and collateralized by BTC.

These instruments involve additional obligations that might compel the forced sale of bitcoin in adverse market conditions.

Strategy’s methodology also unjustifiably misdescribes bitcoin treasury investment as normal corporate practice, replicating leveraged investment strategies that overwhelm the underlying business operations.

The firm’s bitcoin reserves overshadow the size and cashflow capacity of its underlying software business, leading to a misalignment with conventional treasury management principles.

Corporate treasury operations typically target adequate working capital and investment on the basis of liquidity needs.

Michael Saylor’s leveraged bitcoin purchases are an investment strategy and not prudent treasury management because the position in bitcoin is gigantic in terms of the needs of the business.

This disinformation has led large companies to reject bitcoin treasury resolutions, with Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Meta (NASDAQ:META) and McDonald’s (NYSE:MCD) all rejecting shareholder proposals for bitcoin reserves, with only 0.55% support for Microsoft.

Finally, the leveraged buyout strategy employed by Strategy’s founders to take over the company in 2020 and the subsequent issuance of convertible preferred stock to fund bitcoin purchases might be viewed as an opportunistic move during a period of low interest rates and high equity valuations.

This strategy has enabled the company to quickly accumulate a large bitcoin position, but it also carries the risk of becoming unwound rapidly if interest rates rise significantly from their current levels.

Companies can benefit from modest bitcoin positions as fiscal and monetary catastrophe insurance, particularly with current monetary system stresses and government obligations.