As Strategy faces market backlash, its CEO Phong Le has floated the idea that the company might lend out Bitcoin (BTC). What might that entail?
Will Strategy lend Bitcoin (BTC) in the near future?
While Strategy is currently in turmoil, the company is making a series of announcements to try to reassure the market about its Bitcoin Treasury Company model.
This week, Strategy announced a dollar reserve, funded by the sale of new shares, to build a safety cushion intended to pay dividends on its preferred shares. Earlier, Phong Le, its CEO, had raised the possibility that the company might be forced to sell part of its assets if difficulties mounted and its market capitalization fell below the value of its reserves. Currently, it is worth noting that Strategy has a market capitalization of $68.2 billion, while its 650,000 BTC are valued at $60.47 billion.
In this context, Phong Le told Bloomberg on Tuesday that Strategy was considering lending out its bitcoins:
When traditional financial firms enter this sector and we have a different counterparty, that’s an option we’ll consider and one that I think will excite us.
In addition, he also reiterated Strategy’s commitment to not parting with its holdings:
We absolutely do not want to have to use these bitcoins when the value of our shares falls below that of our bitcoin holdings. Our goal is to pay the dividend indefinitely.
Regarding BTC lending, several questions arise. The first risk is obviously counterparty risk, in the event that a borrower defaults—something we observed during the previous bear market, which sometimes caused chain reactions.
Furthermore, the financial products that could be offered in this scenario still need to be clarified. Indeed, the primary scenario where it makes sense to borrow Bitcoin is for shorting. If the debt is denominated in BTC, the strategy involves selling the borrowed Bitcoins and repurchasing them at a lower cost when prices fall, in order to repay the debt and retain a profit.
During market downturns, this strategy is riskier, but the opposite effect could be sought if Strategy denominates its loans in dollars—which seems unlikely, given that this would be counterproductive for the firm during bull markets.
In the event that the loans involve Strategy depositing BTC as collateral to borrow dollars to finance its expenses, leverage could also worsen its situation in the event of a downturn, thereby compounding its difficulties.
While some uncertainties still need to be clarified, MSTR stock is nonetheless enjoying a brief respite, having risen 5.78% on the stock market during Tuesday’s session. Nevertheless, this does not change the fact that the stock is still down more than 66% from its all-time high last year:
MSTR stock price (weekly data)
Meanwhile, BTC is trading at $92,900 at the time of writing, up 7.2% over the past 24 hours.
