When your entire corporate game plan and the investor base you’ve cultivated revolves around the rising price of bitcoin, a 35% tumble in a month is cause for alarm.
Last week bitcoin fell to $82,000, down 35% from its $126,080 October peak. For most big Nasdaq-listed companies, that drop is background noise. For Michael Saylor’s Strategy, the stock market’s biggest bull and largest corporate holder of bitcoin, it immediately raises the question of what comes next.
For almost two years, Strategy traded far above the value of its bitcoin holdings—at times 190% higher—turning its stock into a turbo-charged bitcoin bet for most institutional investors. Saylor’s transformation of his Tysons, Virginia-based data mining software company into a masterwork in using traditional corporate finance to harness bitcoin’s volatility has already attracted hundreds of copycats – publicly traded holding companies known as digital asset treasuries (DATs).
But Strategy’s premium has disappeared and its own shares have fallen 60% in a year, bringing its market capitalization down to $49 billion, lower than the value of the $56 billion in bitcoin it holds.
Last month, S&P Global Ratings assigned Strategy a B- credit rating, deep into junk territory, citing “high bitcoin concentration, narrow business focus, weak risk-adjusted capitalization, and low U.S. dollar liquidity as weaknesses.” JPMorgan analysts also warned in a recent note that Strategy is at risk of being removed from major benchmarks, including MSCI USA and the Nasdaq 100. If MSCI moves ahead, as much as $2.8 billion could flee the stock, with more at risk if other index providers follow. Passive funds tied to Strategy account for nearly $9 billion of exposure. A removal would not only force selling but drain liquidity from a stock whose high trading volume has long been one of its main attractions for institutional investors. And while Strategy has met S&P 500 inclusion criteria for two straight quarters, it has not been added, and isn’t likely to give its bitcoin woes.
Saylor, ever the evangelist, is not retreating. Never mind equity, he says. His latest mantra—“the credit is the product and the equity is the afterthought”—captures his belief that Strategy’s future now lies not in being a bitcoin-tracking stock, nor in providing sophisticated traders with a place to hedge, but in building a new market: bitcoin-powered income instruments attractive to investors who want yield rather than price swings.
To do that, Strategy has spent the past year rolling out an unusual menu of perpetual preferred securities. These are preferred stocks that have no maturity. His new issues, totaling $8.6 billion, read like a set of characters from a comic book—Strike, Strife, Stride, Stretch and Stream—but each is a different variation of the same idea: high, fixed dividends backed by Strategy’s bitcoin-centered capital structure. Strike, trading under ticker STRK, pays an 8% annual dividend on a $100 stated amount, payable quarterly. Strife, or STRF, pays 10% annually and sits at the top of the preferred stack. Stride, or STRD, also pays 10% on a quarterly basis. Stretch (STRC), introduced in July with an initial 9% dividend, pays monthly, with the rate adjusted each month to keep the price near its $100 par.
Saylor’s key selling point is that the dividends on Strategy’s preferreds are being treated as “return of capital”, which means investors reduce their cost basis instead of paying taxes on the distributions each year. For taxable investors, that translates into a significantly higher effective yield than similar corporate preferreds.
But the latest downturn in bitcoin has hit Strategy’s new preferreds. STRC now trades below its $100 par and yields roughly 11%. The euro-denominated STRE, announced earlier this month, fell below its €100 issue price in under two weeks. Its yield has gone from 10% to 12.5%.
Investors are no doubt concerned about Saylor’s ability to cover his interest costs in a prolonged bitcoin bear market. Between preferred dividends and interest on its convertibles, Strategy now faces roughly $700 million a year in payments. The company also has some $8 billion in convertible debt outstanding, $7.4 billion of which sits out of the money, meaning the stock now trades below the bonds’ conversion prices, so holders are unlikely to take equity at maturity. With the stock’s once-reliable premium now gone, issuing more equity—the way Strategy funded its bitcoin buying for years—is no longer an accretive option.
Mark Palmer, analyst at Benchmark, pointed out that during the company’s Q3 earnings call, Strategy CEO Phong Le outlined contingency plans “including the generation of income by deploying bitcoin derivatives (such as selling covered calls or structured yield strategies), using equity derivatives to enhance cash flow, or even selling high-basis bitcoin holdings at a loss to generate tax-advantaged liquidity.” Le and Saylor also signaled they would be open to following Japan’s Metaplanet, another bitcoin treasury company, which recently announced a large share buyback after its market value collapsed to parity with its bitcoin holdings.
The obvious question—whether Strategy would ever sell bitcoin outright—is more complicated. The company’s average acquisition price per bitcoin sits around $74,400. But even a decline below that level wouldn’t mean the company would face forced liquidations. The earliest structural pressure point is September 2027, when holders of $1 billion in convertible notes can demand repayment.
Saylor, meanwhile, continues to treat finance as a creative discipline. At a Cantor Fitzgerald conference in Miami this month, he said he “talks and argues with AI” to help design new securities—Stretch, the latest preferred, emerged from one of those sessions. In his telling, Strategy is no longer trying to maximize leverage but “amplification.” In practice, that means issuing perpetual preferreds and equity-linked securities to boost the company’s purchasing power faster than its debt load grows. Saylor has said he would like to achieve 30% “amplification” each year, which he argues would allow Strategy to grow its bitcoin holdings at a steady clip while gradually reducing leverage. By his math, the company’s ratio of debt to bitcoin value could fall from about 11% today to zero by 2029 as its $8.2 billion of bonds and notes are slowly converted into equity.
Some see the beginnings of a new credit market emerging. “Saylor has finally found the killer app for bitcoin,” says fanboy Kevin Li, formerly of ParaFi Capital. Li argues that bitcoin is entering a phase similar to the early development of the gold-backed credit markets. In his view, Strategy’s evolution falls into three chapters: the early years when the absence of a bitcoin ETF made Strategy the only clean way for equity investors to get exposure; the period when the company’s liquid stock and option chain became the preferred hedging venue for large institutions before bitcoin ETF options existed; and the current era, where Saylor is trying to turn bitcoin into an income-generating asset for investors who cannot hold it directly. Fixed-income managers bound by mandate cannot buy bitcoin or even many ETFs, Li notes, but they can buy Strategy’s preferred stock. That, he argues, could be transformative if the model catches on.
Despite Strategy’s stock woes, his company’s shares are still up 1,160% from the day he began buying bitcoin in August 2020. Saylor says credit markets are his next frontier, but yield investors, inherently more cautious and discerning, couldn’t be more different than his volatility loving stock and options fans. Stay tuned.