Strategy May Sell Bitcoin? AI Chips Supercycle. Gold Is Back.

MicroStrategy has reported its first quarterly earnings under new fair value accounting rules, resulting in a $12.5 billion net loss. This accounting change requires the company to account for fluctuations in Bitcoin's value, impacting its reported net income. A significant development, however, is CEO Michael Saylor's statement that MicroStrategy might sell Bitcoin to fund preferred stock dividends for its "Stretch" product. This statement is a major shift from MicroStrategy's long-standing thesis of never selling Bitcoin. The "Stretch" product, a preferred stock designed to buy Bitcoin, has raised $5.58 billion in four months. It offers an 11.5% annualized yield paid monthly, derived from Bitcoin's appreciation. The significant dividend payout obligation, estimated at $950 million over the next 12 months and potentially $1.5 billion over 18 months, is a primary driver behind Saylor's potential shift in strategy. While MicroStrategy has a cash buffer of $2.25 billion to cover dividends until roughly 2028, the rapid growth of Stretch and its associated dividend commitments are compressing this timeline. This necessitates a more defensive approach to manage future obligations. Saylor's announcement about potentially selling Bitcoin is interpreted as a defensive play rather than a purely optimistic one. He stated that selling Bitcoin to fund dividends would "inoculate the market" and "rip the wings off" short-sellers who bet on MicroStrategy being forced to sell equity. However, the speaker argues that a stronger message would have been to never sell in the first place, suggesting this is not just for optics. The core of Saylor's revised strategy, as explained around the one-hour mark of the earnings call, is to shift from a model reliant on diluting MicroStrategy's common stock (MSTR) through its price appreciation relative to its Bitcoin holdings (MNAV) to a model where Bitcoin itself is sold to pay dividends. The new model is described as: "buy Bitcoin with credit, let it appreciate, then you sell Bitcoin to pay the dividend." This approach is particularly relevant now because Bitcoin's price has appreciated significantly since Stretch was launched, making it more expensive to acquire. Selling appreciated Bitcoin to cover dividends ensures the product's sustainability, especially if Bitcoin experiences a downturn. This move is seen as a proactive measure to avoid further dilutive pressure on the common stock and to manage risk in a potentially volatile market. MicroStrategy has not yet sold any Bitcoin, and its existing cash reserves are sufficient to cover dividends for approximately one and a half years, compressing their timeline to the end of 2027. Saylor also noted that, on average, Bitcoin only needs to grow 2.3% per year to cover dividends long-term due to their substantial Bitcoin reserves. The primary concern is managing the bear market, especially when the MNAV is close to one, which tightens their options. The concept of MNAV (MicroStrategy's market cap relative to its Bitcoin reserves) is crucial. When MNAV is above 1.22x, it is more accretive for MicroStrategy to sell its stock and buy Bitcoin. However, below this 1.22x threshold, it becomes more accretive to sell Bitcoin to pay dividends rather than dilute shareholders by selling MSTR stock. In a bull market, MNAV is typically high, allowing MicroStrategy to issue stock at a premium to acquire more Bitcoin, thus increasing its "Bitcoin per share" (BPS) metric. However, in a bear market, MicroStrategy's stock tends to fall faster than Bitcoin, compressing the MNAV. If the MNAV falls below 1.22x, selling MSTR stock becomes less advantageous, and selling Bitcoin becomes the preferred option to meet obligations. This strategy aims to avoid the painful dilution experienced in the previous bear market when MNAV was at or below one. The decision to announce the potential to sell Bitcoin indicates that MicroStrategy's leadership is not convinced the bear market is over and anticipates further Bitcoin price volatility, which could negatively impact the MNAV. The AI chip super cycle continues to be a dominant theme in the stock market. Companies like AMD, Super Micro, ARM, and Broadcom have seen significant rallies following their earnings reports. These AI chip companies are largely unaffected by supply chain issues or inflation. The speaker highlights that the best-performing stocks over the past two months have been chip companies, which even remained resilient during the Iran crisis. NVIDIA is still considered the primary bet in this sector, despite its large market cap, due to its dominant position in AI chips. NVIDIA's earnings are scheduled for May 20th. The Semiconductor Index (SOX) has also experienced a strong rally. While other AI-related areas like data centers and AI model IPOs are hot, chip stocks are seen as a clearer and more fundamentally sound investment due to their more favorable market cap to sales ratios compared to companies like OpenAI. The speaker suggests this AI chip super cycle could last for another six to seven months, with a potential bubble forming after the major AI IPOs, possibly leading to a correction early next year. In geopolitics, the situation surrounding Trump and Iran has been contradictory, with conflicting statements regarding potential peace deals and military actions. The speaker advises ignoring the news and focusing on the oil price, which has fallen from $115 to $100 per barrel of Brent crude. This decrease in oil prices has not negatively impacted the stock market, with the VIX remaining below 20, indicating a risk-on environment. However, the falling oil price has a positive impact on gold. The speaker reiterates a previous thesis that oil spikes can lead to liquidation events and margin calls, causing short-term sell-offs in gold as traders cover positions. Conversely, when oil prices calm down, gold tends to recover. Gold is considered undervalued, and further oil price stabilization should support its rally, especially with the backdrop of potential inflation. In cryptocurrency news, Canada has officially issued regulated stablecoins, with Tetra Digital launching a Canadian dollar-backed stablecoin (CADD). Additionally, Visa and Wealthsimple are piloting a stablecoin program using USDC, which is significant for the Canadian crypto retail market, offering a more integrated experience for trading. On the altcoin front, Zcash has seen a rally following Multicoin Capital's announcement of accumulating the token since February. However, the speaker is not recommending Zcash. A more significant development is the TON (Telegram Open Network) token. Pavel Durov, founder of Telegram, announced that Telegram itself will take over the development of the TON blockchain, replacing the Ton Foundation. This move aims to hyperscale the chain, with fees expected to drop by 6x. Telegram will become the largest validator and driving force behind the TON layer 1 blockchain. A new website, thong.org, has been launched, featuring new dev tools and performance upgrades. Intriguingly, the website mentions being controlled by "Amtonga," which appears to be linked to a meme coin and a slogan "Make Thong Great Again." The speaker expresses curiosity about this connection, acknowledging that Telegram's full commitment to TON could potentially lead to a significant recovery, similar to Solana's trajectory.