Is Strategy (MSTR) in trouble?

Led by Executive Chairman Michael Saylor, the firm formerly known as MicroStrategy has vacuumed up 506,137 bitcoin (BTC), currently worth roughly $44 billion at BTC’s current price near $87,000, in the span of about five years. To the casual observer, the company seems to have a magic, unlimited pool of funds from which to draw on to buy more bitcoin. But Strategy acquired a sizable chunk of its stash by issuing billions of dollars in equity and convertible notes (debt securities which can be converted into equity under special conditions), and more recently via the issuance of preferred stock, a type of equity that provides dividends to investors.

However, the price of bitcoin has been pushed down about 20% since peaking above $109,000 two months ago. And though such swings in prices are far from unusual, the particularly aggressive recent purchases by Saylor and team mean Strategy’s average acquisition price has risen to $66,000. The company is really only one more moderate swing down in price from being in the red on its buys.

Which begs the question: Could all of Strategy’s financial wizardry end up backfiring on the company should bitcoin keep heading lower?

“It’s highly unlikely that it results in a scenario where [Strategy] has to liquidate a bunch of bitcoin because it gets margin called,” Quinn Thompson, founder of crypto hedge fund Lekker Capital, told in an interview. “For the most part, the debt is very likely to be able to be refinanced for the convertible notes. And then [the firm] started issuing this perpetual preferred stock, which never has to be repaid.”

In other words, not only is there very little chance that Strategy could suffer the kind of blowup that shook over crypto firms and projects in 2022 (like Genesis or Three Arrows Capital), but the firm has even refrained from posting its bitcoin holdings as collateral for loans — with the exception of a loan taken from Silvergate, which was repaid in 2023.

Even so, that does not necessarily mean that it’s blue skies ahead for MSTR investors, because under various scenarios, Saylor could be forced to issue more equity than the market can handle in order to maintain course.

“If he’s not paying dividends with Strategy’s cash flow, he’s going to issue more shares and wreck the stock price. But it’s no different than what he’s doing already. Every time the retail bids it up, he wrecks the stock price by issuing more shares. In the future, he will have to do that, and the flows might not go into bitcoin. They might go to repay these debtors, and it will hurt the share price,” Thompson said.

Saylor’s balancing act

Strategy currently employs three different methods for raising 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. Naturally, that creates selling pressure on MSTR and can potentially push the stock downward.

Convertible notes have allowed Strategy to raise funds quickly without diluting MSTR stock. Typically, investors like these notes because they offer a solid yield, they benefit if the stock surges, and they can usually be redeemed in cash for an amount equal to the original investment in addition to interest payments. The tremendous volatility of Strategy’s convertible notes, however, has allowed the company to mostly issue them at a zero percent interest rate and still meet high demand from sophisticated market participants, who have made bank trading that volatility.

Finally, Strategy has begun deploying preferred stocks. These are instruments that tend to appeal to investors seeking lower volatility and more predictable returns through dividends. There are currently two offerings: STRK, which gives an 8% annual return; and STRF, which pays 10% annualized.

But why is Strategy issuing all of 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 in an interview.

“The convertible bond investors and the common equity investors were generally aligned in that they were both volatility seeking structures,” Park said. “Preferred equities are different. They actually are favored by investors who want to minimize volatility at all costs for a steady, reliable and high coupon that they feel is worth the credit risk.”

“Strategy’s capital structure is almost like a seesaw in a playground,” Park added. “The common shareholders and converts are on one side, the preferred equity holders are on the other side. As sentiment shifts, the weights move around, and it tilts the value between these securities. But no matter how the seesaw moves, its total weight — which is Strategy’s enterprise value — remains the same. It’s just a redistribution of people’s perceived value across the liabilities that exist on the company’s balance sheet.”

Risks

Even so, Strategy now finds itself in a situation where it must pay 8% dividends on STRK, 10% dividends on STRF, and a blend of 0.4% interest rate on its convertible bonds.

With Strategy’s software business providing very little cash flow, finding the funds to pay for all of these dividends might be tricky.

The company will likely need to keep issuing MSTR stock to pay the interest it owes, Thompson said. “It will hurt the share price. In the most extreme scenario, the stock could trade at a discount [from its bitcoin holdings], because he would be having to issue shares to pay interest and cover cash flow.”

“The really draconian scenario would be for the discount to get so wide, like 20% or 30%, like Grayscale’s GBTC [prior to its conversion into an ETF], that the shareholders riot and tell him to buy back shares and close the discount,” Thompson added. “Right now, he’s adding shareholder value by selling the stock at an elevated price and buying bitcoin, but in the future the reverse might be true, where the best way to add shareholder value would be to sell the bitcoin and buy the stock. But that’s quite far away.”

Saylor lost controlling voting power over the company in 2024 due to the continuous issuance of MSTR stock, meaning that the scenario above could theoretically happen, especially if activist investors decided to get involved.

Another potential risk for MSTR holders is that the 2x long Strategy exchange-traded funds (ETFs) issued by T-Rex and Defiance, MSTX and MSTU, have seen weirdly persistent demand despite the stock’s drawdown. Every time investors want to gain or increase their exposure to these ETFs, the issuers have to buy twice as many MSTR shares. The popularity of these ETFs has helped create constant buying pressure for MSTR — so far, they’ve accumulated over $3 billion in MSTR exposure.

The problem is that the music might stop someday. And if these ETFs begin to sell off their MSTR shares, the reaction on the stock price could be violent.

“I don’t know where the endless capital comes from to buy the dip. These ETFs have gotten obliterated. They’re down huge,” Thompson said. “I mean, this is not a structural move up in the demand curve that you should count on. It’s not something you should really bake into your 10-year predictions of bitcoin price, but as long as it’s existing, it’s important for bitcoin. So I’m continually amazed by it.”