Saylor’s Dump

Disclaimer: Your capital is at risk. This is not investment advice.

ByteFolio Issue 186;

Bitcoin’s ByteTrend Score remains at a score of 0 since 16 November. This is bearish.

Bitcoin

There are several reasons for Bitcoin’s recent weakness:

Tech stocks are under pressure.
ETFs see outflows as the basis trade closes.
Treasury companies turn BTC sellers.
The threat of quantum computing.
The drop in the number of core developers.

The first point has been well covered at ByteTree, as we have often made the connection between Bitcoin and tech stocks. With the tech sector coming off extreme levels, there can be no doubt that Bitcoin is feeling some weakness. The timing seems to overlap, but the extent seems harsh.

Bitcoin, Non-Profitable Tech, and Magnificent 7

The selloff in Bitcoin has gone deeper, and Bitcoin has barely bounced at all in comparison to tech, which is 30% ahead over the past year. It suggests there is something else, that is Bitcoin-specific, causing recent price weakness.

The ETFs have seen 50k BTC sold in recent weeks. Similar outflows occurred earlier in the year but led to a 25% pullback. This time, the pullback is 33% and has happened quickly. It’s not just the selling, but the fear of continued selling.

Bitcoin Held by ETFs

Some blame the bitcoin basis trade, where TradFi investors buy Bitcoin through the ETFs, and short the futures, profiting from the spread. Open interest has retreated this year, as the Bitcoin futures are no longer overpriced. That has killed the basis trade and led to ETF outflows. It’s a negative, but it’s not that big.

Talking of big, there’s Strategy, formerly MicroStrategy (MSTR), which is the largest Bitcoin treasury company of them all. According to Bitcoin Treasuries, these companies own 1,061,223 BTC between them, and MSTR owns 649,870 BTC or 61% of the total. They have been hoovering up BTC each week, until this week, as their reserves are running low. That has knocked sentiment as the business model is to grow BTC per share by utilising the balance sheet.

For that to work, the MSTR share price must trade at a premium to the value of its Bitcoin holdings, so that they can issue highly priced shares to buy more BTC. The company started doing this in 2020 and has since tripled its outstanding B shares, which have funded BTC purchases.

Strategy Shares Outstanding

The company also has to make payments on its bonds at a time when cash is light, which means MSTR might have to sell some Bitcoin. All of this would go away if MSTR shares could maintain their premium because that would be a source of cheap funding. Unfortunately, the premium is imploding and, on a per-share basis, MSTR has added little value beyond holding Bitcoin itself since it became a treasury company in late 2020.

Strategy vs Bitcoin

To be clear, MSTR doesn’t face a credit crunch, as it holds a huge amount of BTC in reserves, and it can sell those reserves to meet claims. Moreover, as its premium approaches zero from 200%, it becomes less risky for new investors than it was. At a 200% premium, it was a massively risky investment, as we have pointed out many times. Still, while less risky today as the premium has eroded, it’s still a complex situation with poor governance and high volatility. Better to buy BTC directly or an ETF.

The MSTR issue relates to Bitcoin itself. While accumulating 649,870 BTC was all good fun for the market, the threat of the coins being sold has not only impacted MSTR shares, but BTC as well. The chart overlaying MSTR in BTC with Bitcoin shows high correlation and high beta. The evaporation of the MSTR premium is very likely a negative force for Bitcoin.

The Strategy Premium vs Bitcoin

A MSTR discount is entirely possible and remains a risk. In the long run, MSTR will have less influence on the Bitcoin price as this destruction of the premium is a one-off event. Long-term, we remain Bitcoin bulls.

In the coming weeks, we will address the threat of quantum computing and the drop in the number of core developers. These pose risks to the price of Bitcoin but are immaterial over the long term, as we will demonstrate. Handing over to Ali for the portfolio changes.

Saylor’s Dump