When Strategy (MSTR), the largest publicly traded bitcoin company, first floated the idea of selling its bitcoin holdings to fund its dividend obligations during its latest earnings call, it raised concerns among investors and the crypto community.
However, executive chairman Michael Saylor sat down with CoinDesk senior analyst James Van Straten at Consensus in Miami to explain, in his view, why the message was “immaterial”.
As the firm expands from a bitcoin tax company to a full-spectrum capital markets operation, Saylor, in a wide-ranging conversation with CoinDesk, discussed the company’s potential sale of bitcoin to fund dividends, the mechanics of its preferred stock (called Stretch, or STRC), and what critics mistake for its trading strategy.
This interview has been edited for brevity and clarity. This is the first part of a series of stories from CoinDesk’s interview with Michael Saylor
CoinDesk: Your earnings call revealed that Strategy could sell bitcoin to fund its dividend. That scared some investors. How important is it really?
Michael Saylor: It’s a big nothing burger from a financial standpoint. If we were to solely finance all of our dividends by selling bitcoin over the next year, we would buy 20 bitcoin for every one we sold. So it’s no different than buying 20 bitcoin and not selling bitcoin. And so from a market standpoint, bitcoin has somewhere between $20 and $50 billion in liquidity today. If we were to fund all our dividends with bitcoin, you’d be talking about maybe $3 million; it is immeasurable. It really doesn’t matter.
CoinDesk: So how do you actually choose between buying bitcoin, retiring debt or buying back your own stock?
Taylor: We use two metrics. The first is BTC dividend. What is the benefit for the shareholder? If there is no return, it is equity neutral. If there is a negative dividend, it is dilutive. If there is a positive dividend, it is increasing. The second metric is credit: what is the impact on the balance sheet? Does it create more risk?
For example, if we used all our dollars to buy back stocks, it would be equity positive, it would generate returns, but it would be credit negative. The market price of bitcoin, of all our credit instruments, of all our bonds, changes every day. Day to day, we adjust our capital market activity to take advantage of return opportunities and meet our obligations.
We prioritize trades that create more bitcoin per share. If we can create 10 times more bitcoin per share in one trade over another, we would prioritize that first.
CoinDesk: Bitcoin is currently about 36%-37% off its all-time high. Is it a good time to sell Bitcoin at high cost and get that tax deduction?
Taylor: We have the opportunity to get up to $2.2 billion in tax credits. The value of that credit changes every day, every minute. We also have the option of mispricing the convertible bonds: there is a massive return in that. We also have the option of capturing bitcoin in a trade. We make that decision week by week, day by day.
Everything we do prevents us from doing anything else. So we always have to consider if this is equity positive but credit negative? Maybe it screams good for equity, gives us $500 million, but it’s a little bit bad for credit. If the credit is super strong, I would do something equity positive and a little credit negative. If the credit is super weak, we wouldn’t.
We’re not going to telegraph exactly when or if we do. But the option is there, and it’s one of the more interesting trades on the table right now.
CoinDesk: Critics on X (formerly Twitter) say you always buy the weekly high on bitcoin. What is actually happening?
Taylor: It is an ignorant criticism. What happens is when we buy bitcoin with an equity swap, it’s because the stock went up and there’s a massive equity premium. As bitcoin increases, equity increases, the premium expands, and it actually becomes more profitable for us to trade. We exchange a share of MSTR for a share of BTC when the premium expands and that is when bitcoin rises.
In a 168-hour week, there can be three hours when the market is up, and we can raise $250 million in swaps in those three hours. So yes, we pick the top of the bitcoin market, but we also pick the top of the equity market and trade the two of them – and we generate a much bigger gain. We make money for our shareholders without risk by doing these swaps.
If we wanted to do these swaps when the price is low, the premium is low. It makes much less money, otherwise we would lose money for the common [shares] by trading the equity when the bitcoin price is low. That’s why it looks like we might be buying the top, but we’re not buying it with money that’s been sitting around.
CoinDesk: STRC has been your breakout product. Can you explain how it differs from a typical bond?
Taylor: We engineered this instrument to be extraordinarily robust. The key is that we created a perpetual preferred that never comes due. When someone decides they want to sell $2 billion of STRC, we don’t cash it. There is no liquidation right. There is no right. It is not a bank deposit.
If I sell you $2 billion of a stablecoin on Friday, you can redeem it on Monday and I’ll come up with $2 billion in cash. But when we sell you $2 billion in Stretch, it’s a perpetual swap. We agree to pay you SOFR [Secured Overnight Financing Rate] plus a line of credit forever. You agree to give us the money forever. We plan to hold bitcoin forever.
The liquidity is not made available by us. It is supplied by the market. There are people in Soros and Millennium and Citadel who actually want to make quick trades in minutes or hours. If I put it all at 100 and absorbed all the liquidity myself, they wouldn’t have the option. And I would be taking on $100 billion in risk, which would be a problem for the equity, and I would be depriving them of being able to make a very healthy annual return almost risk-free.
CoinDesk: Stretch has recently traded at a slight discount to par and is taking longer to recover from dividend dates. What is happening?
Taylor: You need to look at it on a full monthly cycle. We sold $3.2 billion in a couple of weeks on an instrument with a basis of about $5 billion. So we expanded the range by a huge factor. It doesn’t surprise me that it’s taking a while for the market to digest it. Some of it was definitely people buying a billion to get a 90 cent dividend and then selling back.
We have a growth rate of almost 400%. Given the hyper growth, it doesn’t surprise me that it is [STRC] digest it [the sell pressure]. Over the past few days it is [STRC] traded within a five-cent [of $100 per share] daily interval, three cents yesterday. All that is pleasant. We think about it the same way we designed an airplane wing: you want the wings to flex. If you try to make the flex go away, they will break. The instrument is designed to bend under stress but not break.
Disclosure: The author of this story owns shares of Strategy (MSTR).
Read more: Michael Saylor’s latest tax strategy reiterates Strategy’s 2022 bitcoin selloff
