Is the strategic decline over? Will Bitcoin purchases restart?

Strategy's new capital management framework alleviates liquidity concerns, but needs to improve Bitcoin trading disciplines

On-chain analysis firm CryptoQuant said that the new capital management framework recently announced by Strategy (formerly MicroStrategy) has significantly alleviated the company's short-term liquidity pressure, but the company still needs to establish more stringent Bitcoin trading disciplines.

In a report released by him, Julio Moreno, research director of CryptoQuant, evaluated Strategy's new plan-the "Digital Credit Capital Framework"-as a major directional adjustment.

Moreno pointed out: "The digital credit capital framework is indeed a directional revision. However, for this transition to be truly complete, Strategy needs to clarify two issues: a systematic model for timing Bitcoin purchases and a disciplined framework for executing sales during bull markets."

Strategy announced a five-part digital credit capital management framework on June 29. As part of the plan, the company established a U.S. dollar reserve that can only be used to pay dividends and interest on preferred stock.

The company has set a coverage target for this reserve, which means meeting at least 12 months of payment obligations. In addition, the dividend yield on STRC preferred shares has been increased to 12% and is subject to monthly review. The move aims to bring STRC's share price closer to its $100 face value.

The new framework also allows the repurchase of preferred stock worth up to US$1 billion if company management believes the repurchase will increase value. Under the plan, STRC shares will be given pre-emptive rights.

Strategy will also be able to repurchase up to $1 billion worth of MSTR common stock at a time when the company believes its common stock is undervalued.

As part of the program, a separate Bitcoin redemption program was also created, authorizing companies to sell Bitcoin worth up to $1.25 billion. The money raised can be used to strengthen U.S. dollar reserves, pay dividends and interest, and fund share buybacks.

The company also announced that it will issue shares more cautiously when its mNAV indicator, or market capitalization/net asset ratio, approaches 1.

Strategy's new plans were announced just days after CryptoQuant issued recommendations for the company.

CryptoQuant has previously urged Strategy to suspend Bitcoin purchases until its cash reserves and dividend coverage ratios are strengthened. The company also recommended developing a systematic model to capture future Bitcoin buying opportunities and prepare a plan to sell some assets during a bull market.

According to Moreno, Strategy largely followed the first recommendation above.

Between June 29 and July 5, the company sold approximately 3588 bitcoins, generating approximately $216 million in revenue. The funds were used to pay preferred stock dividends and strengthen U.S. dollar reserves.

Strategy raised $466.7 million between July 6 and 12 through the sale of MSTR shares. During this period, the company did not conduct any new Bitcoin buy or sell operations.

Through these steps, Strategy's dollar reserves increased from $1.44 billion to $3 billion. The company's dividend coverage period has also been extended from approximately 14 months to 29 months.

Strategy's Bitcoin holdings remain unchanged at 843,775 BTC, and the company has not yet made any repurchase of preferred shares or common shares.

STRC shares fell to an all-time low of about $75 at the end of June. With the announcement of the new framework and an improvement in dividend yields, the stock price rebounded to about $88.

Despite this, the STRC is trading below its $100 face value.

Moreno said the discount shows investors want to see Strategy implement its new financial disciplines sustainably.

Moreno said: "The continued discount suggests that markets want to see reserves strengthened and new disciplines maintained before securities prices are fully revalued."

According to CryptoQuant, there are two key questions that remain unanswered in Strategy's Bitcoin strategy.

The first is when the company will resume buying bitcoins. [TAG

Moreno said that the suspension of bitcoin purchases provides a solution to short-term liquidity problems, but the new framework lacks model-based rules on when overweight should be resumed.

Strategy's announced equity issuance policy, which will be implemented when its mNAV ratio approaches 1, defines how the company will raise capital. However, Moreno believes that this rule does not state when money should be invested in Bitcoin.

"Without a clear and valuation-oriented model, companies risk repeating the same mistake of preferring to buy bitcoin at local highs whenever market conditions improve," Moreno said.

The second issue highlighted by CryptoQuant is whether Strategy will sell Bitcoin in the next bull market and under what rules these sales will take place.

Moreno said that the current Bitcoin redemption plan has a defensive structure. The plan allows proceeds from Bitcoin sales to be used to pay dividends, interest and share buybacks.

However, according to CryptoQuant, the plan does not provide a strategy to batch sales or hedge positions as the market cycle approaches the peak.

Moreno said such a sales framework could help the company reduce debt, create value for shareholders, and accumulate cash reserves to buy back Bitcoin if prices fall to lower levels.

Moreno said: "The disciplined approach to selling throughout the market cycle constitutes the other half of active capital management and is not yet clearly defined."

Is Strategy's decline over? Will Bitcoin purchases resume?