Strategy, formerly known as MicroStrategy, is considering a pivot that will fundamentally change the risk profile of Bitcoin finances for the world’s largest companies.
For a decade, the company has pitched Wall Street on its unique theme: a digital vault offering unlimited exposure to Bitcoin with no custody or counterparty risk. Now, that position is changing as it seeks to enter the cryptocurrency lending market.
On December 2nd, Strategy CEO Von Leh said: bloomberg The company was in talks with banks about lending out its stock. But he cautioned that the company is still waiting for large financial institutions to enter the space before making a decision.
he said:
“We’ve had a lot of constructive discussions, mainly about the following: We’re looking at providing Bitcoin services such as storage, exchange, and lending. You’re the world’s largest Bitcoin holding company. What advice can you give us? Should we work together?”
Although the move is framed as a maturation of the business, the company is at risk of rehypothecation, which contradicts the “cold storage” ethos that built its $55 billion in reserves.
Nevertheless, this pivot signals that Strategy is moving from a passive holding company to an active credit desk.
This shift is driven by the need for spot ETFs to justify their valuation premium in a market that has commoditized access to Bitcoin.
yield trap
Strategy currently holds 650,000 BTC. Historically, this stockpile sat in company safes.
In other words, you can earn income by renting out your property. However, this presents a contradiction, as the main institutional demand for Bitcoin borrowing comes from market makers and hedge funds looking to short the asset.
To understand risk, we need to look at how trading works.
In the institutional market, there is little demand for borrowing Bitcoin for holding purposes, but mostly for selling purposes to hedge derivatives exposures.
By injecting its massive reserves into the lending market, Strategy could effectively lower borrowing costs, a key friction that inhibits short selling.
As a result, by opening a lending desk, Strategy Inc. will essentially be supplying inventory with which to bet on rising prices for its reserves.
Additionally, this move introduces counterparty risk to the balance sheet, which was previously defined by its simplicity.
Notably, the crypto credit market collapsed spectacularly in 2022 as lenders like BlockFi and Celsius mispriced the risk of lending to opaque borrowers.
Although Le claims that Strategy only works with top-tier banks, the core premise remains that Bitcoin will leave the vault.
Therefore, in the event of a bank failure or credit foreclosure, Strategy would go from being a property owner to an unsecured creditor.
protect the premium
On the other hand, Strategy’s pursuit of yield appears to be tied to compression of the company’s stock valuation.
The company’s model relies on trading at a premium to net asset value (NAV), allowing it to issue shares at an inflated price to buy more Bitcoin. This premium, once as high as 2.5 times, has now cooled. As of December 3, Strategy’s NAV multiple (mNAV) was 1.15.
In a candid confession, the company recently admitted that it would consider selling Bitcoin if mNAV falls below 1.
This creates a potential “reflexivity loop” in the market. If Strategy’s stock price declines, the company could be forced to liquidate Bitcoin, causing the spot price to fall and the stock price to fall further.
To prevent this, Michael Saylor’s company needs to offer investors something that ETFs cannot: yield.
Additionally, the company recently raised $1.44 billion in equity to cover preferred stock dividend obligations, highlighting the cash flow strain of maintaining its current capital structure.
Considering this, lending Bitcoin Stacks is one of the only ways to fund these payments without diluting common shareholders or selling the underlying assets.
crowded trading
If Strategies enters the lending space, it will face a much different market than the unsecured Wild West of 2021.
Stablecoin issuer Tether currently dominates centralized lending with $14.6 billion in funding, according to Galaxy Digital.
However, Tether lends out stablecoins (USDT), increasing leverage for buyers. The strategy would be to lend out Bitcoin and facilitate supply to borrowers.
The sheer size of Strategy’s 650,000 BTC reserves significantly dwarfs the collateral pool of competitors such as Nexo and Galaxy, which could distort the market. If even a fraction of that supply reaches lending windows, Bitcoin borrowing costs could plummet, driving down yields across the sector.
Fundamentally, Strategy is betting that it can transform from a passive wrapper to a sophisticated financial operator. But doing so risks trading the transparency of “digital gold” for the opacity of structured trust.
For investors who bought Strategy in lieu of pristine collateral, the vault door is starting to look worryingly open.
(Tag translation) Bitcoin
