Is the strategy (MSTR) in difficulty?
Directed by executive president Michael Saylor, the company formerly known as Microstrategy increased 506,137 Bitcoin (BTC), worth around $ 44 billion at the current BTC price nearly $ 87,000, in the space of about five years. For the occasional observer, the company seems to have a magic and unlimited basin of funds from which to rely to buy more bitcoin. But the strategy has acquired a large part of its hiding place by issuing billions of dollars of equity and convertible tickets (debt securities which can be converted into equity under special conditions), and more recently via the issue of privileged shares, a type of equity that provides dividends to investors.
However, the price of Bitcoin has been pushed to around 20% since it culminated above $ 109,000 two months ago. And although such price oscillations are far from unusual, particularly aggressive recent purchases of Saylor and Team Mean of the acquisition price strategy reached $ 66,000. The company is really only a moderate swing more downward the price of being in the red on its purchases.
What raises the question: could all the financial magic of the strategy end up turning on the company that Bitcoin should continue to go below?
“It is very unlikely that this translates into a scenario where [Strategy] must liquidate a pile of Bitcoin because he calls for the margin, “said Coindesk Quinn Thompson, founder of Crypto Hedge Fund Lekker Capital. And then [the firm] Has started to issue this perpetual privileged stock, which should never be reimbursed. »»
In other words, not only is very unlikely that the strategy could undergo the type of blowing that shook companies and cryptographic projects in 2022 (such as Genesis or Three Arrows Capital), but the company even refrained from publishing its Bitcoin operations as guaranteed for loans – with the exception of a loan from Silvergate, which was reimbursed in 2023.
Despite this, this does not necessarily mean that it is a blue sky to come for MSTR investors, because in various scenarios, Saylor could be forced to issue more equity than the market cannot manage in order to maintain the course.
“If he does not pay dividends with the cash flows of Strategy, he will issue more actions and destroy the course of action. But it is no different from what it already does. Whenever the retail trade in the dose, it breaks down the course of the action by issuing more actions. In the future, he will have to do it, and the flows may not hurt the course. ”
Saylor balance
The strategy currently uses three different methods for capital collection: it can issue equity, convertible tickets or privileged actions.
The emission of equity means that the strategy creates new MSTR actions, sells them on the market and uses the product to buy Bitcoin. Naturally, this creates a sale pressure on MSTR and can potentially push the stock down.
Convertible tickets have enabled the strategy to quickly collect funds without diluting the MSTR stock. As a general rule, investors like these tickets because they offer a solid return, they benefit if the shares increase, and they can generally be exchanged in cash for an amount equal to the original investment in addition to payments of interest. The enormous volatility of the convertible tickets for the strategy, however, has enabled the company to issue them mainly at an interest rate of zero percent and always responds to a high demand from the sophisticated market actors, who have made the banking trade in this volatility.
Finally, the strategy began to deploy privileged actions. These are instruments that tend to use investors seeking lower volatility and more predictable yields through dividends. There are currently two offers: Strk, which gives an annual return of 8%; and Strf, which pays 10% annualized.
But why does the strategy emit all these different types of investment vehicles? The idea is to create a request for a strategy for all kinds of investors who may have different tolerances to risk, told Coindesk, Jeffrey Park, responsible for Alpha strategies at Crypto Asset Management, told Coindesk in an interview.
“Convertible bond investors and common equity investors were generally aligned with that they were both volatility research structures,” said Park. “The privileged actions are different. They are in fact favored by investors who wish to minimize volatility at all costs for a stable, reliable and high coupon which, according to them, is worth the risk of credit. ”
“The strategy’s capital structure is almost like a switch to a playground,” added Park. “Shareholders and common converts are on the one hand, favorite equity holders are on the other side. As the feeling changes, the weights move, and it inclines the value between these titles.
Risks
Even thus, the strategy is now in a situation where it must pay 8% of dividends over Strk, 10% dividends on STRF and a mixture of interest rate of 0.4% on its convertible obligations.
Strategy software activities offering very little cash flow, finding funds to pay for all these dividends could be difficult.
The company will probably have to continue to issue MSTR shares to pay the interests it owes, said Thompson. “It will harm during the action. In the most extreme scenario, the action could be negotiated at a discount [from its bitcoin holdings]Because he will have to issue actions to pay interest and cover cash flows. »»
“The truly draconian scenario would be that the discount becomes so wide, like 20% or 30%, like the GBTC de Graycale [prior to its conversion into an ETF]Let the shareholders move and tell him to buy actions and close the discount, “added Thompson.” At the moment, it adds the value of shareholders by selling the stock at a high price and by buying Bitcoin, but in the future, the reverse could be true, where the best way to add the value of the shareholders would be to sell bitcoin and buy the stock. But it’s quite far.
Saylor lost control of voting on the company in 2024 due to the continuing program of MSTR shares, which means that the above scenario could theoretically occur, especially if militant investors decided to get involved.
Another potential risk for MSTR holders is that the 2 long funds negotiated in exchange (ETF) issued by T-Rex and Defiance, MSTX and MSTU have experienced a strangely persistent demand despite the withdrawal of the stock. Whenever investors want to win or increase their exposure to these FNBs, transmitters must buy twice as many MSTR shares. The popularity of these ETFs has contributed to creating a constant purchase pressure for the MSTR – so far, they have accumulated more than $ 3 billion in MSTR.
The problem is that the music could stop one day. And if these ETFs start to sell their MSTR shares, the reaction on the course of the action could be violent.
“I don’t know where the endless capital comes from to buy the decline. These FNBs have become erased. They are huge,” said Thompson. “I mean, this is not a structural movement in the request curve you should count on. This is not something that you should really cook in your Bitcoin forecasts at 10 years old, but as long as it existed, it is important for Bitcoin. So, I am continuously surprised by that.”
