a lot<\/em>, and selling a lot would massively dilute the BTC per share, ruining their main KPI.<\/p>\n\n\n\nConclusions<\/h2>\n\n\n\nDigital Credit Securities are dead<\/h3>\n\n\n\n
Strategy has started buying back STRC, and yet it is still below par. Most of the preferred shares are, from an investor point of view, bonds: securities with no expectation of principal gain. A bond product where, within a few years of issuance, the lender is accepting a loss of principal just to escape the risk is a terrible bond product, and bond investors selling back to the borrower at a discount are not going to become buyers again.<\/p>\n\n\n\n
Of course, if Bitcoin doubles in value by the end of the year, Strategy will be in a much more comfortable position again. But Strategy’s strategy is not to let the leverage fall over time; they achieve BTC yield in part by using the rising value of its reserves to underpin issuing more debt and preferred shared to give it more capital to buy bitcoin. So even if the Bitcoin price increases, following the strategy will cause the leverage to catch up to current levels again, making the preferreds just as risky as they are now. The bond market has decided that it does not like this risk.<\/p>\n\n\n\n
I was wrong?<\/h3>\n\n\n\n
In my previous two posts, I argued that Strategy itself was in an okay position if it was prepared to sell Bitcoin when needed and could do so without causing Bitcoin to decline. Those conditions have been met, but the bond market has delivered a different verdict.<\/p>\n\n\n\n
This could mean that the bond market has just lost confidence in Strategy’s management (understandable, given Saylor’s crypto evangelism); or it could mean that Bitcoin is expected or perceived to be volatile enough that Strategy’s leverage is just too high now for the market to bear it.<\/p>\n\n\n\n
Or something else; my previous assessment at least seems inconsistent with the market’s current assessment.<\/p>\n\n\n\n
What happens next?<\/h2>\n\n\n\n
If Bitcoin goes up, I expect that the values of the preferred shares would recover somewhat but remain below par. Strategy would retain easy access to capital via its ATM programme issuing common stock and could start redeeming the smaller preferreds if the market remains sour on them, lowering its leverage. It would be an embarrassing failure for the management’s strategy, but probably no-one really cares: a company holding $60B+ of Bitcoin isn’t going to do badly when Bitcoin goes up.<\/p>\n\n\n\n
If Bitcoin were to fall further, then things get interesting. Strategy’s preferreds trading below par is a kind of overhang on the Bitcoin market \u2014 we know that Strategy is a seller until it can fix this mess, unless it changes strategy. Strategy likely could not fix the preferred shares if Bitcoin fell too far, and would need to just accept that it was closed off from the bond market for the duration. It has cash on hand for a lot of dividends now, but would need a recovery to happen before that reserve was running too low. It has substantial debt repayments due in late 2028 and early 2029, and the company might need to reverse its promise to use the reserve funds to pay dividends to instead meet the debt principal payments \u2014 if issuing new common stock stops being feasible or looks too diluting.<\/p>\n\n\n\n
But while Strategy can raise billions of dollars in stock per month without hurting the share price, and is sitting on $60B of liquid assets, it cannot be in any serious liquidity trouble. Can it?<\/p>\n\n\n\n
Full disclosure: I have no position in MSTR or its other stocks or bonds, or in Bitcoin.<\/p>\n","protected":false},"excerpt":{"rendered":"
Strategy’s Digital Credit Capital Framework (DCCF) does not seem to be working. As discussed previously, Strategy (MSTR) introduced the DCCF at the end of June with the stated purpose of strengthening its USD reserves for paying interest and preferred stock dividends and potentially doing buybacks of its securities. The underlying purpose was to address the […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-131","post","type-post","status-publish","format-standard","hentry","category-strategy"],"_links":{"self":[{"href":"https:\/\/blog.moria.org.uk\/index.php\/wp-json\/wp\/v2\/posts\/131","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.moria.org.uk\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.moria.org.uk\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.moria.org.uk\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.moria.org.uk\/index.php\/wp-json\/wp\/v2\/comments?post=131"}],"version-history":[{"count":4,"href":"https:\/\/blog.moria.org.uk\/index.php\/wp-json\/wp\/v2\/posts\/131\/revisions"}],"predecessor-version":[{"id":137,"href":"https:\/\/blog.moria.org.uk\/index.php\/wp-json\/wp\/v2\/posts\/131\/revisions\/137"}],"wp:attachment":[{"href":"https:\/\/blog.moria.org.uk\/index.php\/wp-json\/wp\/v2\/media?parent=131"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.moria.org.uk\/index.php\/wp-json\/wp\/v2\/categories?post=131"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.moria.org.uk\/index.php\/wp-json\/wp\/v2\/tags?post=131"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}