Strategy (MSTR), the leading Bitcoin holding company, has described the launch of its Expandable Perpetual Preferred Stock (STRC) as the company’s “iPhone moment,” and despite its support for BTC accumulation, risks remain.
Before examining these risks, it is worth noting that while the focus is on STRC, particularly its greater liquidity and adoption, they also apply to similar preferred offerings, including another Bitcoin cash company, Strive’s preferred offering, SATA.
These instruments “are not well understood through the lens of traditional credit or equities” and instead require a different analytical framework, Greg Cipolaro, global head of research at NYDIG, said in a note.
By design, STRC targets a stable stock price of $100, using a variable monthly dividend to keep trading near that level. This approach has already enabled billions of dollars in issuance and the acquisition of more than 50,000 bitcoins, according to data from STRC.live.
At its core, STRC works by adjusting yield to steer price. If the stock trades above $100, the company may cut the dividend to curb demand. If shares fall below this level, dividends can be increased to attract buyers. Keeping the price anchored allows the company to issue new shares near par, thereby bringing in capital that is then deployed to purchase Bitcoin.
This new financial instrument has been a success so far. Not only did this allow Strategy to purchase over $3.5 billion worth of bitcoin, but it also attracted institutions that added STRC to their balance sheets.
In practice, the product is similar to a money market fund with a variable return of 11.5%, much higher than US Treasury bonds. The appeal depends on the stable price of $100 coupled with high yields.
When conditions are favorable, writes NYDIG’s Cipolaro, the mechanism creates a powerful feedback loop. The loop, in which STRC trades near par, allows the company to raise capital, deploy profits to buy more bitcoin, expand the asset base, and maintain investor confidence. This confidence supports additional emissions.
“As long as preferences remain anchored near par, stocks trade above NAV, and capital markets remain open, the flywheel drives continued demand for Bitcoin,” Cipolaro wrote in the note.
However, all is not rosy.
BitMEX Research wrote in a note titled “A Little Stretch” that it views the risks of the product as “considerably higher than those of short-duration U.S. Treasuries.”
Where the risks really lie
Bullish investors often point out that STRC is well capitalized and could easily cover dividend payments, given the massive war chest of 761,068 BTC and over $2.2 billion in cash reserves. That’s about 50 years of covered dividend payments, while the company can still reduce STRC’s dividend over time to extend the coverage. On top of that, there are monetization options for the company’s massive bitcoin stash, which could help pay out more dividends.
The risks, however, don’t lie in dividend coverage at all, according to NYDIG’s Cipolaro.
“The appropriate way to assess risk in STRC and SATA is through the lens of governance and subordination rather than focusing solely on payment risk,” he wrote.
The mechanism used by STRC also creates a constraint path. If bitcoin falls and confidence in Strategy’s balance sheet weakens, STRC could fall below par.
To defend the price, the company should increase the dividend. Higher payments increase cash flow obligations, which can, in turn, worry investors and lower prices. This feedback loop is common in credit markets.
In a standard business context, this cycle may end in forced sales of assets. Companies may have to sell major holdings to meet growing obligations, locking in losses at the worst possible time. For Strategy, this would mean selling BTC in a falling market. However, Strategy’s Michael Saylor has repeatedly stated that he will not sell the company’s Bitcoin stack.
The terms of the STRC, however, give the company another option. The indicative price does not constitute a binding promise. If conditions change, the strategy may reduce the dividend rather than increase it.
According to BitMEX Research’s reading of SEC filings relating to STRC, Strategy may “in its absolute discretion, reduce the dividend rate by up to 25 basis points per month, no matter what.”
Unpaid dividends can, furthermore, accumulate without triggering a default or forcing the sale of assets. As BitMEX Research puts it, instruments like these were “written by the business for the business.”
Read more: Strategy’s latest massive Bitcoin purchase offers insight into its evolving funding model
Designed to bend, not break
This flexibility changes what would happen to the STRC in a crisis.
Instead of a company stuck in a difficult situation, the pressure shifts to the security holders. If the dividend is reduced, the yield becomes less attractive and the market price may fall to reflect the new reality.
NYDIG’s Cipolaro made clear in his note that the structure “may remain solvent while producing suboptimal results for preferred holders due to loss of confidence and access to financing.” The risk is not a default on its dividend, but rather a loss of its attractiveness.
Strategy’s existing software business alone does not cover these payments. The model depends on continued issuance or balance sheet management related to its bitcoin holdings.
The major constraint is not revenue generation, but the combination of continued access to capital markets and sufficient asset coverage,” wrote NYDIG’s Cipolaro. The setup invites comparisons with structures that rely on new capital flows to support payments.
The difference here is that the payments are not fixed. If demand slows, the company can cut the dividend instead of maintaining a rate it cannot maintain. This feature helps protect the issuer but weakens the claim of investors seeking stability and income.
“When the music stops, if things get tough for MSTR, instead of selling bitcoin, MSTR might simply abandon the narrative that STRC is aiming for stability,” BitMEX Research wrote. “This looks very favorable for MSTR and therefore the dividend payments are quite sustainable and affordable, in our opinion.”
Break the mechanism
The impact on the market will depend on how long the $100 anchor is maintained.
As long as demand for yield products remains strong and Bitcoin sentiment is favorable, STRC can continue to channel funds into the company’s treasury strategy.
This in turn strengthens Strategy’s position as the largest public holder of Bitcoin. NYDIG has shown that the price stability of bitcoin is what enables the economic viability of issuing these products to the market.
According to the company’s research, STRC and Striv’es SATA saw their prices fall below average during periods of sharp Bitcoin price declines. When this happens, “the issue becomes unprofitable, limiting the ability to raise capital and slowing the flywheel.”
Risk arises when conditions change. A prolonged decline in the price of BTC or a change in rates could test the price mechanism. If the dividend is cut to preserve liquidity, STRC could trade well below par. Losses would be borne by investors who viewed stocks as a quasi-cash substitute.
“This looks like shorting the Bitcoin asset hedge, earning a yield in exchange for downside risk if Bitcoin declines and erodes the asset cushion,” NYDIG proposed as a framework for institutional investors. “However, unlike a standard option, there is no exercise or fixed deadline, and outcomes are path-dependent and shaped by management discretion.”
The broader meaning lies in the model itself.
STRC combines the characteristics of stocks with bond-like behavior and built-in adjustment leverage. It provides a new avenue for businesses to raise capital tied to volatile assets without committing to fixed obligations.
For now, these instruments have done their job: attracting capital and supporting further bitcoin accumulation. The open question is how it behaves under stress and who absorbs the cost when trade no longer appears stable.
The interpretation of this scenario isn’t great, but not for MSTR, “it’s the investors who may feel somewhat aggrieved when the music stops,” BitMEX concluded.
Read more: Strategy credit risk declines as preferred stock value exceeds convertible debt
