As Strategy faces market turmoil, its CEO Phong Le has floated the idea that the company could lend Bitcoin (BTC). What could this entail?
Will Strategy lend Bitcoin (BTC) in the near future?
While Strategy is currently in turmoil, the company is making a series of announcements in an attempt to reassure the market about its Bitcoin Treasury Company model.
This week, Strategy announced a dollar reserve, financed by the sale of new shares, to build a safety net to pay dividends on its preferred shares. Earlier, Phong Le, its CEO, had raised the possibility that the company might be forced to sell some of its assets if difficulties mounted and its market capitalization fell below the value of its reserves. Currently, Strategy is capitalized at $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 its bitcoins:
When traditional financial companies enter this sector and we have a different counterparty, it’s an option we will consider and one that I think we will be excited about.
In addition, he also reiterated Strategy’s desire not to part with its assets:
We have absolutely no desire to use these bitcoins when the value of our shares falls below that of our bitcoin holdings. Our goal is to pay dividends indefinitely.
Several questions arise regarding BTC lending. The first risk is obviously that of counterparty risk, in the event that a debtor defaults, which we saw during the previous bear market, sometimes causing chain reactions.
In addition, the financial products that could be offered in this scenario still need to be clarified. The first case in which it is advantageous to borrow bitcoin is for shorting. If the debt is denominated in BTC, the borrowed bitcoins are sold and then repurchased at a lower price when prices fall, in order to repay the debt and retain a profit.
During market downturns, this maneuver is riskier, but the opposite effect can be sought if Strategy denominates its loans in dollars, which seems unlikely given that this would be counterproductive for it during periods of growth.
In the event that Strategy were to deposit BTC as collateral in order to borrow dollars to finance its expenses, the leverage effect could also worsen its situation in the event of a decline, thereby multiplying its difficulties.
While some uncertainties remain to be clarified, MSTR shares are nevertheless enjoying a slight respite, having risen 5.78% on the stock market on Tuesday. Nevertheless, this does not detract from the fact that the stock is still down more than 66% from its all-time high last year:
At the same time, BTC is trading at $92,900 at the time of writing, up 7.2% over the last 24 hours.
