Last week, bitcoin fell to $82,000, down 35% from its high of $126,080 in October. For most large companies listed on the Nasdaq, that drop is just background noise. For Michael Saylor’s Strategy, the stock market’s biggest bullish investor and largest corporate holder of bitcoin, this immediately raises the question of what comes next.
For almost two years, Strategy traded well above the value of its bitcoin holdings, even exceeding 190%, making its shares an outsize bet on bitcoin for most institutional investors. Saylor’s transformation of his Tysons, Virginia-based data mining software company into a masterpiece of using traditional corporate finance to take advantage of bitcoin’s volatility has already attracted hundreds of imitators — publicly traded holding companies known as digital asset treasuries (DATs) — while his net worth rose from $1.6 billion in 2022 to $5.4 billion.
But Strategy’s premium has disappeared and its own shares have fallen 60% in a year, taking its market capitalization to $49 billion, less than the value of the $56 billion in bitcoin it owns.
Last month, S&P Global Ratings assigned Strategy a B- credit rating, moving into junk territory, citing “high bitcoin concentration, limited business focus, weak risk-adjusted capitalization, and low US dollar liquidity as weaknesses.” JPMorgan analysts also warned in a recent note that Strategy is at risk of being delisted from major benchmark indices, including MSCI USA and Nasdaq 100. If MSCI advances, up to $2.8 billion could drop out of the stock, with more risk if other index providers follow suit. Passive funds linked to Strategy represent almost $9 billion of exposure. A delisting would not only force selling, it would drain liquidity from a stock whose high trading volume has long been one of its main draws for institutional investors. And although Strategy has met the S&P 500 inclusion criteria for two consecutive quarters, it has not been added and is not likely to present its problems with bitcoin.
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Saylor, ever the evangelist, is not retiring. Forget equities, he says. His latest mantra—“credit is the product and equities is the ultimate”—reflects his belief that Strategy’s future no longer lies in being a bitcoin-tracking stock or offering sophisticated investors a place to hedge, but in building a new market: bitcoin-based equity instruments attractive to investors seeking yield rather than price fluctuations.
To achieve this, Strategy has spent the last year developing an unusual range of perpetual preferred securities. These are preferred shares without maturity. Its new issues, totaling $8.6 billion, are reminiscent of comic book characters (Strike, Strife, Stride, Stretch and Stream), but each is a different variant of the same idea: high, fixed dividends backed by Strategy’s bitcoin-focused capital structure. Strike, which trades under the symbol STRK, pays an annual dividend of 8% on a declared amount of $100, payable quarterly. Strife, or STRF, pays 10% annually and sits at the top of the preferred stock pile. Stride, or STRD, also pays 10% quarterly. Stretch (STRC), introduced in July with an initial dividend of 9%, pays monthly, with the rate adjusted each month to keep the price near its $100 pair.
Saylor’s key argument is that Strategy’s preferred stock dividends are considered “return of capital,” meaning investors reduce their cost basis rather than paying taxes on the distributions each year. For taxable investors, this translates into a significantly higher effective return than similar corporate preferred stocks.
But the latest decline in bitcoin has affected Strategy’s new preferred options. STRC now trades below its $100 peg and offers a yield of approximately 11%. The euro-denominated STRE, announced earlier this month, fell below its €100 issue price in less than two weeks. Its performance has gone from 10% to 12.5%.
Investors are undoubtedly concerned about Saylor’s ability to cover its interest costs in a prolonged bitcoin bear market. Between preferred dividends and interest on its convertible bonds, Strategy now faces payments of approximately $700 million annually. The company also has about $8 billion in convertible debt outstanding, of which $7.4 billion is out of the money, meaning the shares trade below the bonds’ conversion prices, making holders unlikely to purchase shares at maturity. With the once reliable equity premium disappearing, issuing more shares—the way Strategy financed its bitcoin purchases for years—is no longer a profitable option.
Benchmark analyst Mark Palmer noted that during the company’s third-quarter earnings call, Strategy CEO Phong Le outlined contingency plans, including generating revenue through the use of bitcoin derivatives (such as selling covered options or structured return strategies), using equity derivatives to improve cash flow, or even selling high-basis bitcoin holdings at a loss to generate tax-advantaged liquidity. Le and Saylor also indicated that they would be willing to follow in the footsteps of Japan’s Metaplanet, another bitcoin treasury company, which recently announced a major share buyback after its market value plummeted to parity with its bitcoin holdings.
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The obvious question — whether Strategy would ever sell bitcoin directly — is more complex. The company’s average acquisition price per bitcoin is around $74,400. But even a drop below that level would not mean the company would face forced liquidations. The first structural pressure point is September 2028, when holders of $1 billion in convertible bonds can demand repayment.
Meanwhile, Saylor continues to consider finance a creative discipline. At a Cantor Fitzgerald conference this month in Miami, he stated that he “talks and argues with AI” to help design new values; Stretch, one of the latest preferred investments, emerged from one of those sessions.
In its story, Strategy aims to eliminate leverage while increasing “amplification,” which it defined as the incremental purchasing power the company generates through the issuance of non-derivative debt instruments, such as perpetual preferreds and equity-linked securities. Saylor has stated that he would like to achieve a “broadening” of 30% annually, which he believes would allow Strategy to increase its bitcoin holdings at a steady pace while gradually reducing leverage from the current 11% to zero in 2029 by capitalizing its convertible bonds.
Saylor has finally found “the ultimate application for bitcoin,” says fan Kevin Li, a former research analyst at ParaFi Capital. Li argues that bitcoin is entering a phase similar to the initial development of gold-backed credit markets. In his opinion, the evolution of Strategy is divided into three chapters: the first years, when the absence of a bitcoin ETF made Strategy the only clean way for equity investors to gain exposure; the period when the company’s liquid stock and options chain became the preferred hedging platform for large institutions before bitcoin ETF options existed; and the current era, in which Saylor is trying to turn bitcoin into an income-generating asset for investors who cannot own it directly. Mandated fixed income managers can’t buy bitcoin or many ETFs, Li notes, but they can buy Strategy preferred shares. This, he argues, could be transformative if the model catches on.
Despite Strategy’s troubles, the company’s stock is still up 1,160% since the day Saylor started buying bitcoin in August 2020. The credit markets may be its next frontier, but yield investors, by nature more cautious and insightful, are totally different from their volatility-loving stock and options followers. Stay tuned.
This article was originally published by Forbes US
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