Strategy buys $176M STRC in sudden pivot from bitcoin

Scott Melker analyzes major developments in cryptocurrency, including corporate treasury strategies by Strategy (MSTR), executive share dilution concerns at Metaplanet, high-profile network exploits on Liquid Network and Cronos, Harmony's planned shutdown, multi-sig security risks surrounding tether, and political meme coin launches. "The Daily Wolf with Scott Melker" airs every day at 12:00 p.m. Tune in for your daily dose of all things crypto. A hacker drained nearly the entire Bitcoin reserve backing one of crypto's biggest side chains. Then another blockchain rewrote history and a third shut down completely. We have a lot to talk about today on the Daily Wolf. Let's go. What is up, everybody? Welcome to the Daily Wolf on Yahoo Finance. I am your host, Scott Melker, also known as The Wolf of All Streets. We were off yesterday for Labor Day, which is the holiday that everybody celebrates, but nobody understands. When you don't labor. We were not laboring yesterday, so we did not have a show, which means that we have to come back today and pretend that it's Monday on a Tuesday and talk about one Michael Sailor. First story of the day right here. Strategy has repurchased 176 million of STRC and increased the size of its digital credit securities repurchase program from $1 billion to $2 billion. They still hold 845,050 Bitcoin and 6.5 billion of USD assets. So the story here, obviously, is that they spent money this week repurchasing STRC trying to push that up back to par near $100. Last I checked, it was floating between $97 and $98. So it is almost there and this is seemingly starting to work. The question being what will happen when it does return to par? Will they start using STRC once again as their Bitcoin buying machine? But perhaps the biggest story is how they did this. This week, they did not dilute micro strategy or strategy holders and shareholders. They used the second cash reserve that they've been building that we've been we've been telling you about to buy back this STRC. So they did not touch their original cash reserve, which is used for these dividend payments and expenses. They use the cash that they had raised secondarily that gave them optionality for buying back MSTR, buying back STRC, buying Bitcoins. That flexible USD cash declined from approximately 1.61 billion to 1.44 billion and once again their Bitcoin holdings remained untouched. So they bought no strategy this uh Bitcoin this week. They sold no Bitcoin this week. It seems that strategy has found something else they like at a discount, which is their own securities. Now, as I've told you many times, strategy, uniquely among the Bitcoin Treasury companies has the scale and liquidity to defend its very complex capital structure. The companies copying it uh do not necessarily have those advantages, which leads us into the second head scratcher of a story right here. Metaplanet shares fall nearly 10% after option pool review and CEO statement. Tokyo listed Bitcoin Treasury firm details option pool cap, five-year lockup and CEO share exercise after investor questions. So to break down for you what happened here, First of all, if you don't know, Metaplanet was effectively the strategy of Japan. And when Metaplanet launched as one of the first Bitcoin Treasury companies, it was very advantageous for Japanese investors to buy this instead of buying Bitcoin because of a massive tax advantage and the way that Bitcoin was treated. Much higher capital gains for buying and selling Bitcoin than for buying and selling a security. So Metaplanet performed exceptionally well. It was one of the darlings of the Treasury boom. Well, now, they got some 'splaining to do. The problem here is that they have a executive pool of shares that was pegged not at a fixed amount, but at 20% of the company's fully diluted share capital. So if you understand how Treasury companies work, they effectively dilute shareholders by creating more shares and selling those to buy Bitcoin, which works exceptionally well when MNAV is high and increases Bitcoin per share. Well, they pegged it at 20%. So what happens is every time that they made new shares to dilute shareholders to buy Bitcoin, they were also effectively diluting shareholders to pad their own pockets with the shares in that executive pool that rose with it. And now if you want to know just how crazy this is, by the way, they said in their own filing that the mechanism amplifies the dilution born by existing shareholders. If you want to know how bad this is, they froze it in August because they realized it was so bad at 319,464,000 executive shares. That pool started at 46.5 million shares. So that means that the pool of executive shares grew by approximately 273.5 million shares, which is nearly seven times its original size, an increase of roughly 595%. So, uh, obviously, shareholders had a lot of questions. And interestingly, they froze it in August, but they did not restore the allocation to where it stood when Metaplanet began its Bitcoin strategy, which seems like you would probably try to roll that back. Now, interestingly, the CEO Grewal exercise rights that produce 64 million shares and now owns approximately 6.2% of Metaplanet. So yeah, he exercised rights that produced 64 million shares when the original pool, as I told you was 46.5 million shares. Now, also there's a huge shareholder in Metaplanet called MMX Ventures and it came out that the CEO, although he does not have control, has a meaningful percentage of that. And MMX sold Metaplanet shares during the company's Bitcoin driven rally when it was massively going up. And Metaplanet has not fully disclosed MMX's ultimate ownership of how much the CEO personally benefited, which creates a separate conflict of interest question alongside the expanding executive option pool. So, this is precisely why strategy's financial engineering could never be copied by another company, which I've told you for years. Strategy has a multi-year lead here, deep liquidity and different securities designed for different investors. Metaplate basically copied the visible part but not all of the sensible parts underneath. Now whether they intentionally meant to pad their pockets or not, that remains to shareholders to decide and whether they're comfortable with that dilution remains uh for shareholders once again to decide but I couldn't imagine owning a company that's purposely diluting shareholders to buy Bitcoin and then also purposely diluting shareholders to pay the executives for the right to create more shares and buy Bitcoin. Right? Like there's guys right now sitting at Bitcoin Treasury companies somewhere who have done nothing in a year and a half except for watch a chart who are getting paid millions of dollars and that's why Bitcoin Treasury companies are largely fundamentally broken. Now, what a crazy story. Metaplanet shareholders are questioning who controls their company across crypto networks, the more alarming question is who controls the ledger, which brings us to the biggest story of the weekend. Bitcoin-based liquid network says $320 million withdrawn in hack. This is going to be a Netflix movie at some point. So Liquid is a Blockstream developed Bitcoin side chain. for those of you who don't know, Blockstream was founded by Adam Back who many believed was Satoshi Nakamoto. We are talking about the OGs of OGs of Bitcoin, definitely the high priests of this asset class, those who should understand security better than anyone else. And once again, oops, you got some explaining to do. Right, what happened here? Gosh, I it's so hard to even unpack all these things because it's such nonsense. So users deposited Bitcoin into a federation controlled wallet and they receive LBTC to use on Liquid. So effectively you have LBTC that's backed by LB, that's backed by BTC one for one and then you can go use LBTC to earn yield and do other things. So what happened here is a purported white hat, white hat hacker. So luckily this person was a white hat and communicated with them, exploited a bug in elements, which is the software underlying liquid. That bug allowed approximately 4,000 LBTC to be created without depositing any actual BTC and then the attacker sent the fake 4,000 LBTC to something called side swap for the normal withdrawal process. And LBTC was burned in the Liquid Federation released nearly 4,000 genuine Bitcoin, which is approximately 95% of Liquid's reported Bitcoin reserves. So first of all, they were able to do this through a software exploit. They didn't need to hack keys. It's yet another novel way that a massive exploit has happened. But like even with all of that, is there no human being that sees, oh, 4,000 of the 4,200 Bitcoin that we have total are being withdrawn. Maybe we should check on this? How does this happen? I understand in a world of AI, how AI can find these exploits and can steal money. I don't understand how there's no human guarding the walls on some of the biggest and most famous protocols that we have. So, like I said, this was a white hat hacker. So interestingly, they communicated through uh through signatures and messages on the Bitcoin network, doing nerd things. And then these nerds uh sent back 3400 of the 4,000 Bitcoin back to the other nerds. Uh they kept 600 Bitcoin as a tip because they're the good guys. 600 Bitcoins a lot, right? And Liquid Liquid still has not announced the full restoration of normal bridge uh operations. I mean, this was effectively the blockchain version of printing counterfeit casino chips and successfully exchanging them for almost all the real money in the cashier's cage. Like, take a bunch of chips from outside, bring them in and go take 95% of all the money in the casino. That's what happened here. So the good news is that the hacker says he's a good guy. The bad news is that the good guy still has 600 Bitcoin. He doesn't seem to want to give them back. I too would like to be a good guy. Oh, man. So Liquid halted its network to stop the damage, but uh Cronos went a bit further. They they changed the past. That's our next story here. Cronos rewrites history as Harmony abandoned its blockchain. So we have two stories. Cronos executes controversial blockchain rollback to recover crypto worth 111 million. I told you about this last week. This was yet another uh exploit where they manipulated a thinly traded collateral and then they borrowed against that collateral. So once again, wasn't really a hack, just another way that people found to to exploit. But what happens here is that Cronos validators decided to halt the chain and roll it back to a block before the attack, reversing 111.2 million of the exploit. So 9.2 million escaped before the intervention. Is that like the white hat guy who gets to keep 9.2 million? Little tip. Uh, so they discarded 10,961 blocks, which is an hour and 54 minutes of blockchain history. Nothing says decentralization like rolling it back two hours and pretending it didn't happen, right? So that means that unrelated transactions by ordinary people were also rolled back. The network did resume approximately 11 hours after the attack. So Cronos, okay, that's one. Here's the other story I was going to tell you. Once hyped Ethereum rival Harmony wants to shut its blockchain over AI threats. So I told you about the hack on Harmony just a few weeks ago. I think it was one of our amazing how not to invest segments. Uh well, they're going to completely sunset their layer one now. They're going to, you know, basically take a snapshot and give people ERC 20 tokens and put it all on Ethereum. They've basically just decided they're going to totally shut it down because it's not worth it. But they did point at the fact that they think that they can't outpace AI hackers, which is what I said, these old uh, these old, you know, chains that don't really have security budgets or anybody watching the walls once again are easy targets for exploit. I think the best part of this story is though that the remaining organization for Harmony plans to pivot into an AI video remix economy. They're going to go remix AI videos with the money that's left uh as their new business plan. So, listen, this is two endings to the same problem, which is one had to roll it back, one's sunsetting completely because in the AI world, you cannot keep up with the hackers. I mean, Harmony's plan to recover from its blockchain collapsing is remarkably simple. Stop being a blockchain, right? So Cronos required validators to rewrite the ledger. Tether's largest pool of USDT reportedly requires only two keys to control its uh contracts. So this is a pretty scary one. A two- key breach could hand control of 91 billion USDT to hackers reports finds. So there's a new rating agency framework for blockchains and Tether got a really bad rating because it came out basically and listen, I'm sure they'll respond to this. But they have a two of three multi multi-sig uh setup where basically somebody could take control of all of the tether on Tron if they could hack two people or get access to two people's wallets and sign the signatures. This would allow them to mint new Tether and to transfer Tether and to do all the bad things you could possibly imagine. So Tether obviously is one of the, you would view as one of the most secure and stable companies in all of crypto. So even seeing that they might have a potential security uh issue when it has not been reported that this has been exploited by the way, uh should make you scratch your head as to once again, how secure we are with all of this. And now we have our final segment that you all love. It's how not to invest. Hit it. How not to invest. How not to invest. Here's the story, Hunter Biden and his laptop enter the cryptosphere with new memecoin called laptop. The good news, America has finally achieved bipartisan agreement. Every political family deserves its own exit liquidity in the form of you. Yes, Hunter Biden is launching his own memecoin with a team. It's called laptop. Everybody knows about Hunter Biden's laptop. It's politically driven. If certain things happen like Democrats winning elections and Bitcoin going to new all- time highs, people will get incentives and tokens. Interestingly, a huge part of the pool will be airdropped to people who have lost money on the Trump token. All I can say when I say how not to invest this might go to the moon. I have no idea but I ain't touching it and non-financial advice, do you really want to own Hunter Biden's laptop coin? Come on, we saw what happened with Trump coin, we saw what happened with Melania, even after they went up, almost everybody lost money. Uh the grift never ends when it comes to politics and crypto and we need it to. That is all that I have for you today. I will be back tomorrow, Wednesday for the next Daily Wolf. Peace. More News