Michael Saylor's Strategy recently formalized its bitcoin sale policy, introducing "avoidable two-way risk" into crypto markets, according to JPMorgan analysts, as the company could now become both a buyer and seller of bitcoin.

"The possibility that Strategy would be selling bitcoins introduces two-way risk into crypto markets, inducing more uncertainty and volatility for bitcoin prices that could have been avoided if it instead issued equity to rebuild reserves for future dividend payments," JPMorgan analysts led by managing director Nikolaos Panigirtzoglou said in a report.

Strategy's bitcoin sale policy, called the BTC Monetization Program, allows the company to sell bitcoin to generate up to $1.25 billion for its cash reserves, fund preferred stock dividends and interest expenses, or conduct preferred stock repurchases and share buybacks as part of capital structure optimization.

The company also announced a minimum cash reserve target covering 12 months of preferred dividends and interest expenses, with its current $2.55 billion cash reserve covering around 17 months of dividends. The JPMorgan analysts said Strategy should instead target enough reserves to cover 24 to 36 months of those obligations.

"We believe a higher coverage of 24-36 months would be needed (by issuing common equity to further increase dollar reserves even if this leads to the common equity trading at a discount to NAV) to make investors more comfortable with the idea that MicroStrategy would not need to sell bitcoins in the foreseeable future," the analysts said.

Strategy's impact on bitcoin

Although the flexibility to sell bitcoin to meet dividend obligations or optimize the balance sheet would normally be viewed as positive for a typical company, the analysts said Strategy is different because of its size in the bitcoin market.

Strategy is the largest bitcoin holder with about 4% of the total BTC supply, and remains a major purchaser, having acquired about $13.7 billion worth this year, accounting for around 70% of JPMorgan's estimated overall digital asset flow. Because of that, even the possibility of future bitcoin sales could create more uncertainty and volatility in crypto markets, the analysts said.

"With the company’s valuation inextricably linked to the price of bitcoin, more uncertainty and volatility in crypto markets could have a negative impact on the company’s valuation, thus raising the cost of issuing equity and debt to fund additional bitcoin purchases," the analysts wrote.

Crypto markets are currently incorporating the two-way flow risk created by Strategy's new policy, according to the analysts. Bitcoin prices have come under significant pressure in recent weeks after Strategy sold 32 BTC in late May to fund dividend obligations and amid pressure on the broader debasement trade in both bitcoin and gold following changing expectations for U.S. Federal Reserve policy, the analysts noted.

The analysts said a stronger second half for crypto markets will depend on Strategy rebuilding its cash reserves to cover 24 to 36 months of dividend obligations and on Congress approving the U.S. market structure bill, or the Clarity Act.

If that happens, the current weak crypto market sentiment could ultimately prove to be a "bullish contrarian signal" during the second half of the year, the analysts reiterated.