Is strategy (Mstr) in trouble?

Led by performing chairman Michael Saylor, the company, previously known as Microstratey, has vacuumed 506.137 Bitcoin (BTC), which is currently worth approx. $ 44 billion for BTC’s current price near $ 87,000 over about five years. For the relaxed observer, the company seems to have a magical, unlimited pool of funds from which you can pull on to buy more Bitcoin. But strategy acquired a significant part of its stash by issuing billions of dollars in equity and convertible notes (debt values ​​that can be converted to equity under special conditions), and recently through the issuance of preferred share, a type of equity that yields investors.

However, the price of Bitcoin has been pushed down approx. 20%since he peaked over $ 109,000 two months ago. And although such swings in prices are far from unusual, they are particularly aggressive recent purchases from Saylor and Team Mean Strategy’s average acquisition award increased to $ 66,000. The company is really just a more moderate swing down in price from being in the red on its buyer.

Which is raising the question: Could the entire strategy’s financial guide end up beating back on the company, should Bitcoin continue to go down?

“It is very unlikely that it results in a scenario where [Strategy] has to run a lot of bitcoin because it gets margin called, ”Quinn Thompson, founder of Crypto Hedge Fund Lekker Capital, told Coindesk in an interview.” For the most part, the debt is very likely to be refinanced to the convertible notes. And then [the firm] Began to issue this eternal preferred stock that never needs to be repaid. “

In other words, not only is there very little chance that strategy liked the kind of blow -up that shook crypto companies and projects in 2022 (such as Genesis or three arrow capital), but the company has even refrained from placing its Bitcoin holdings as a security for loans -with the exception of a loan taken from Silvergate, which was recovered in 2023.

Still, it does not necessarily mean that it is blue sky in front of MSTR -Investors, because Saylor under different scenarios could be forced to issue more equity than the market can handle to maintain the course.

“If he does not pay dividends with the strategy’s cash flow, he will issue more shares and destroy the stock price. But it is no different from what he already does. Every time the retailer offers it, he will ruin the share price by issuing more shares. In the future he will do,” it says and that the power does not enter Bitcoin. They may be able to repay these debtors, and it will hurt in the future that the stock is, ”Thompson said.

Saylor’s Balancing Act

Strategy currently uses three different methods to raise capital: it can issue equity, convertible notes or preferred stock.

Issuing equity means that strategy creates new Mstr shares, sells them on the market and uses the proceeds to buy Bitcoin. Of course, it creates sales pressure on Mstr and can potentially push the stock down.

Convertible notes have enabled strategy to raise money quickly without diluting the Mstr stock. Typically, investors like these notes can because they offer a solid yield they benefit from if the stock waves and they can usually be redeemed in cash for an amount equal to the original investment in addition to interest payments. However, the enormous volatility of the strategy’s convertible notes has enabled the company mostly to issue them at an interest rate for zero percent and still meet high demand from sophisticated market participants who have done banking this volatility.

Finally, the strategy has begun to implement preferred shares. These are instruments that tend to appeal to investors seeking lower volatility and more predictable return through yield. There are currently two offers: Strk that gives an 8% annual return; and strf that pays 10% annually.

But why does strategy emit all these different types of investment vehicles? The idea is to create demand for strategy for all kinds of investors that may have different tolerances to risk, Jeffrey Park, head of Alpha Strategies at Crypto Asset Management Bitwise, told Coindesk in an interview.

“The convertible bond investors and the common equity investors were generally adapted, both of which were volatility that was looking for structures,” Park said. “Preferred shares are different. They are actually preferred by investors who want to minimize volatility at all costs for a stable, reliable and high coupon that they feel is worth the credit risk.”

“Strategy’s capital structure is almost like a Setaw in a playground,” Park added. “The ordinary shareholders and converts are, on the one hand, the preferred equity holders are on the other. When the mood changes, the weights move around and it tilts the value between these securities. But no matter how the penetration moves, its total weight – which is the value of the strategy – remains the same. It is just a reduction of people’s perceptions of people’s perceptions of the addition.”

Risks

Nevertheless, the strategy is now in a situation where it has to pay 8% dividends on STRK, 10% dividends on STRF and a mix of 0.4% interest on its convertible bonds.

With strategy’s software store that delivers very little cash flow, it can be difficult to find the means to pay for all these dividends.

The company will probably have to continue issuing the Mstr stock to pay the interest it owes, Thompson said. “It will hurt the stock price. In the most extreme scenario, the stock could trade with a discount [from its bitcoin holdings]Because he had to issue shares to pay interest and cover cash flow. “

“The really drakonic scenario would be for the discount to get as wide, just like 20% or 30% as Grayscales GBTC [prior to its conversion into an ETF]That the shareholders are riots and asks him to buy back shares and close the discount, “added Thompson.” Right now he is adding the shareholder value by selling the stock at an increased price and buying Bitcoin, but in the future it may be true where the best way to add shareholder value would be to sell Bitcoin and buy the stock. But it’s pretty far away. “

Saylor lost control of voting rights over the company in 2024 due to the continuous issue of the Mstr share, which means that the scenario above could theoretically happen, especially if activist investors decided to get involved.

Another potential risk of MSTR owners is that the 2x long strategy exchange traded funds (ETFs) issued by T-Rex and Defiance, MSTX and MSTU, have seen strangely sustained demand despite the share’s draw. Each time investors want to get or increase their exposure to these ETFs, issuers must buy twice as many Mstr shares. The popularity of these ETFs has helped to create constant purchase pressure for MSTR – so far they have accumulated over $ 3 billion in Mstr exposure.

The problem is that the music may stop one day. And if these ETFs start selling their Mstr shares, the reaction to the stock price may be violent.

“I don’t know where the endless capital comes from to buy dip. These ETFs have been wiped out. They’re down,” Thompson said. “I mean, this is not a structural movement up in the demand curve that you have to trust. It’s not something you really have to bake in your 10-year predictions of Bitcoin Price, but as long as it is existing, it’s important to Bitcoin. So I’m constantly amazed at it.”