JPMorgan warns that Strategy's bitcoin sales policy may increase market volatility and suggests stronger cash reserves are needed.
JPMorgan cautions that Strategy's bitcoin sales policy may exacerbate market instability and recommends a shift to stock issuance for better cash management.
JPMorgan has voiced apprehensions regarding Strategy's recent policy allowing selective sales of bitcoin to facilitate preferred stock dividends, labeling it a source of "two-way risk" that could amplify market volatility.
Under this new policy, Strategy has the option to sell bitcoin as needed to support dividend payments, alongside other measures like preferred stock buybacks. Currently, the company maintains cash reserves that can cover approximately 17 months of its dividend obligations, with a target reserve equal to 12 months of liabilities.
However, JPMorgan analysts contend that a more robust reserve of 24 to 36 months is essential to reassure investors and avoid the need to liquidate bitcoin assets. They suggest that issuing common equity could be a viable method to enhance reserves, even if it means trading at a discount to net asset value.
As one of the largest corporate holders of bitcoin, with 847,363 BTC, Strategy's buying and selling activities significantly influence market dynamics. Any decision to sell could introduce new supply into the market, impacting liquidity and overall sentiment.
In recent weeks, interest in U.S. spot bitcoin exchange-traded funds (ETFs) has declined sharply, with $4 billion in net outflows recorded in June alone. This drop follows a series of redemptions that have put year-to-date flows into negative territory.
JPMorgan noted that bitcoin prices faced downward pressure earlier this year, particularly after Strategy disclosed the sale of 32 BTC to fund dividends, coinciding with broader shifts in Federal Reserve interest rate expectations.
Despite the current bearish market sentiment, analysts suggest that a recovery could hinge on Strategy bolstering its cash reserves and potential legislative changes regarding crypto market structure in the U.S.
