Summary Strategy remains highly leveraged to Bitcoin, with recent actions including its Bitcoin sale and significant debt repayment. MSTR's Bitcoin sale triggered a sharp crypto market drop, compounding unrealized losses and undermining its S&P 500 inclusion prospects. STRC preferred shares fell below par, likely forcing dividend increases and raising annual payouts, straining MSTR's cash reserves. Over the past couple of years, no company has been more active in acquiring Bitcoin than Strategy ( MSTR ). The little-known software firm has become a household name thanks to its large cryptocurrency bet, which for a time was doing quite well. Last week, Strategy announced its first Bitcoin sale in years , a move that had been previously telegraphed. Unfortunately for strategy investors, the decision has proven to be quite costly so far. Previous coverage of the name It was a little over a month ago that I last took a look at Strategy, right after the company had reported its first quarter results . The big news out of that event was that Phong Le, the CEO, stated that Strategy may at times sell the coin to buy US dollars or the firm's debt if the move would be accretive to Bitcoin per share. Since that time, Strategy shares have lost roughly 37%, compared to the S&P being flat since. Strategy's recent Bitcoin/financial moves Over the past several quarters, I've detailed how Strategy's use of preferred stock has resulted in the company paying hundreds of millions of dollars to those shareholders. Those growing outflows caused some investor worries, forcing the company to start a cash reserve that eventually grew to over $2 billion. Last month, Strategy used some of that financial power to repay all of its $1.5 billion convertible notes due in 2029 at a decent discount. While it's never a bad thing to repay your debt when it is trading well below par, I was quite curious about the timing. Bitcoin and Strategy shares were trading quite well at that time, so I wondered if a bigger debt discount could have been had if management had waited for a pullback. Well, that drop came last week when Strategy announced it had sold 32 Bitcoin in the previous week. While that sale was a drop in the bucket considering its total holdings of the coin, it caused a tumble in the crypto space, seen in the Bitcoin chart below. It didn't help that US markets pulled back from their highs a bit at the end of the week, further pressuring prices. The arrow shows where the cryptocurrency was trading just a few minutes before Strategy's sale news dropped. Last Week's Bitcoin Drop (CNBC) When we got the weekly update from Strategy this Monday, the company announced that it had bought over 1,500 Bitcoin last week, worth over $101 million. That did steady the price of both the cryptocurrency and Strategy shares on Monday, but things turned red again on Tuesday as US markets headed lower. There is some speculation out there that some investors are rotating out of Bitcoin and other cryptos as a way to raise cash for this week's massive SpaceX ( SPCX ) IPO. Implications of the recent sale The first and most obvious implication of the recent sale was price. Bitcoin went from trading around $72,500 before the news to roughly $61,700 as of 2:30 PM Eastern on Tuesday. With Strategy holding over 845,000 Bitcoin now, that meant a large hit to its crypto portfolio value. When Bitcoin dropped under $60,000 for a time, Strategy was sitting on an unrealized loss of more than $13 billion. Ongoing losses in recent quarters have crushed Strategy's hopes to be added to the S&P 500, a key part of the bull case in recent years. The second implication is in regards to those annual preferred "dividend" payments, although for tax purposes they are treated as a return of capital. The company has recently favored its Strategy Inc 9.0% SERIES A PERPETUAL STRETCH PREF STK ( STRC ) when selling preferred stock, and that dividend is up to 11.50% per year. The company usually only sells STRC when it trades at or above par, meaning $100, and the recent Bitcoin drop has STRC down to below $96 currently, and it was even lower in recent days. When STRC trades well below $100 for a time, the company increases the dividend to get it closer to par. At the moment, it is looking like the payout will be increased by another 25 basis points, but we could see 50 total basis points over the next few months if STRC remains weak. That would put the annual yield at 12.00%, but the move would cost Strategy over $52 million more in annual dividend payments given the current number of STRC shares. Even a 25 basis point increase would put Strategy on the hook for about $1.7 billion in annual dividend payments on all of its preferreds currently. However, the cash reserve was only about $1 billion as of last week. That means that Strategy will likely sell more MSTR shares over time to fund those dividend payments, diluting investors more without any additional Bitcoin purchases. More MSTR sales also lower founder Michael Saylor's voting control closer to the 1/3rd figure, a topic I explored in more depth in my previous article. The current valuation picture When you look at the valuation of Strategy, there are two ways to think about it. The first is the normal way, looking at the market cap of the common stock, but you could also include the total trading value of the preferreds as well. Strategy had been trading at a significant premium to its Bitcoin holdings for a considerable amount of time, but that premium dropped late last year, and shares have actually traded at a discount to their holdings for a period of time. As of that 2:30 time detailed above, the total value of Strategy's two common share classes and its four preferred share classes was a little more than $54.92 billion. At that time, the value of its Bitcoin holdings was about $52.15 billion. However, if you only do the Class A and B shares outstanding, the market cap was about $41.76 billion. Thus, Strategy was still trading at a slight premium to its holdings when using the preferreds, about 5%, but still at a large discount, 20%, when excluding them. Throw in some value for the actual software business the company runs, and the discount grows for just the Class A and B shares. Final thoughts and recommendation Last week's news that Strategy had sold a small amount of Bitcoin for the first time in years proved to be a really expensive move in the short term. Not only did the sale start a drop in the entire crypto space, but it knocked down STRC shares, which likely will mean another dividend increase is coming. Shares of MSTR have also gotten whacked recently, as their dilution continues to pile up and is now coming at lower prices, with Strategy's cash reserve currently not adequate to fund dividend payments over the next three quarters. At the moment, I continue to have a neutral rating on MSTR common shares. If you are a long-term believer in Bitcoin, it seems likely that Strategy shares would rise over time, but you might be better off just buying Bitcoin directly or through one of the ETFs like the iShares Bitcoin Trust ETF ( IBIT ). I do believe that in the long run, Strategy will continue to sell a lot of Class A shares to purchase more Bitcoin as well as fund dividend payments, which could provide a headwind to the possible upside here.