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Since its 2020 reinvention as a bitcoin treasury company, Strategy (née MicroStrategy) has morphed from an enterprise software business into a leveraged investment vehicle with a single, volatile asset. It has been a wild ride.
The shares climbed from around $14 in August 2020 to an intraday high of $543 in November 2024, only to fall to roughly $105 earlier this year. In the past three weeks, they have bounced around 50 per cent to just under $180. The recovery has given executive chair Michael Saylor the opportunity to do what the model requires: raise more capital.
Hence the company’s renewed pushing of “Stretch” (STRC) perpetual preferred stock — marketed, apparently without irony, as an “iPhone moment” for crypto capital markets. A more fitting metaphor might be Jenga. The tower looks impressive; the question is how many more blocks can be pulled before it keels over.
Strategy’s game plan is straightforward. The company sells high-yielding, unsecured perpetual preferred stock and uses the proceeds to buy bitcoin. To keep STRC trading at par, the annual coupon has been lifted from 9 per cent at its July launch to 11.5 per cent today, even as broader rates have drifted lower. Management has even proposed changing the dividend payment schedule from monthly to twice a month. The annual dividend bill is now roughly $1.5bn, and rises with each new issuance.
Where does the cash to pay these dividends come from? Not from operations: the legacy software business is a rounding error. Not from bitcoin: the asset generates no income. Instead, dividends are effectively financed through fresh capital raising. New money pays old claims. The “yield” amounts to a transfer payment, siphoning value from common shareholders to support a more senior instrument whose appeal — as Bram Cornelisse of Farringdon Capital Management points out — rests on the appearance of stability.
To paraphrase Top Gun, Strategy is writing cheques its bitcoin treasury cannot cash.
Strategy argues STRC is massively “over-collateralised” by its bitcoin holdings. That is an expansive reading of the fine print. The preferred is in fact unsecured, with no claim on or lien over the underlying assets. In a stress scenario it sits behind $8.2bn of convertibles and $1.3bn of the “Strife” (STRF) preferred stock, relying on whatever residual value remains in a liquidation — a calculation that in turn has to account for the inevitable price impact of a distress sale by the world’s largest corporate holder of bitcoin.
Meanwhile, the cumulative dividend behaves like financial knotweed. Skip a payment and it does not disappear; it spreads. The obligation compounds, steadily subordinating the common, which begins to look less like equity than a deeply out-of-the-money option on bitcoin after everyone else has been paid.
The much-vaunted Strategy flywheel is straightforward: it issues STRC to buy bitcoin, which supports the price, which rerates the common stock, which enables Strategy to issue more common stock, which enables it to pay the preferred dividends, which enables Strategy to issue more STRC.
This supposedly avant-garde financial engineering has a familiar, arrière-garde feel. Before 2008, demand for AAA-rated, income-producing securities prompted banks to originate ever more home loans to package into mortgage-backed securities, pushing house prices higher in the process. Rising prices then validated the credit assumptions embedded in those securities, such as low default risk and ever-rising collateral values. Here, demand for high-yield preferred stock enables STRC issuance, which funds bitcoin purchases that support the price used to justify further issuance. As before, the “safe” instrument ends up inflating the asset it relies on.
At some point, the question is whether by accumulating so much bitcoin, Strategy is riding the market or increasingly making it. The company has made $3.6bn of purchases in just the last two weeks to take its total holdings to 815,000 bitcoin. An 11.5 per cent cost of capital requires bitcoin to keep rising at a similar pace. If it does not, the negative carry will hollow out the equity base.
Whenever STRC slips below par, management raises the coupon — a fix that works for a time but also raises the bill. It is the capital markets version of the Red Queen effect (“it takes all the running you can do to keep in the same place”): ever more issuance, at ever higher cost, just to stand still.
In short, Strategy is financing a non-yielding asset with a growing cash obligation, sustained by receptive capital markets and recovering asset prices. For now, both are holding. The shares have bounced, bitcoin has recovered, and the tower still stands — even if it is groaning under the weight of its own senior claims.
