TLDR
- Strategy’s total Bitcoin holdings now surpass 700k BTC, worth over $64 billion.
- The company funds Bitcoin purchases using proceeds from preferred stock sales.
- The funding method risks creating a circular loop dependent on continuous capital raising.
- Institutional investors like BlackRock are buying into Strategy’s Bitcoin-linked securities.
Strategy, formerly known as MicroStrategy, has crossed a significant milestone by accumulating over 709,000 BTC, valued at approximately $64 billion. This latest purchase of 22,305 BTC for $2.13 billion adds to its growing treasury. The company, under the leadership of Michael Saylor, has made Bitcoin a key part of its financial strategy, with an average cost of $75,979 per BTC.
The company’s Bitcoin accumulation strategy is not just about buying the cryptocurrency directly. It has taken a unique approach by linking its Bitcoin purchases to a series of preferred securities.
These securities, which trade on the Nasdaq, are structured to offer high yields to investors, attracting institutional interest from firms like BlackRock. The strategy has piqued the interest of “income tourists” who seek exposure to high-yield investments, rather than directly investing in Bitcoin.
Funding Bitcoin Purchases Through Stock Sales
To fund its Bitcoin purchases, Strategy has been raising capital through various stock offerings. This includes sales of its common stock, as well as preferred stocks such as STRC, STRK, and STRF. The company recently sold millions of shares in its Class A common stock and perpetual preferred stock, bringing in billions of dollars to finance its Bitcoin acquisitions.
In a recent filing, Strategy disclosed the sale of 10.4 million MSTR shares for around $1.8 billion and additional shares of its preferred stock, totaling nearly $300 million. This funding method highlights how the company is shifting from traditional operational revenue to capital markets for its financing needs.
Despite its continued Bitcoin buying spree, the company is relying heavily on these capital markets for dividend payments. The high yields offered on these preferred securities, like the 11% annual dividend of the STRC stock, require ongoing funds to maintain. Experts have raised concerns about this reliance on the continuous capital raising process, noting that it creates a circular dependency.
Circular Funding Loop and Its Risks
The circular funding loop created by Strategy’s financial model is a cause for concern. According to experts, the company is essentially selling securities to buy Bitcoin, and then using new capital raised from these securities to pay dividends to investors. This process depends heavily on ongoing capital inflows to sustain the high-yield payouts.
The risks associated with this model are amplified by the volatility of Bitcoin’s price. If the value of Bitcoin were to drop significantly, Strategy could face difficulty maintaining its funding structure. The lack of maturity dates on these preferred stocks means that investors have no guaranteed return timeline, adding to the uncertainty of the model.
Additionally, experts warn that this funding mechanism has not been tested during a market recession, which could exacerbate the challenges of sustaining dividends. The reliance on ongoing stock sales and the volatility of Bitcoin price create a situation where a downturn in either could lead to a “high-yield credit disaster.”
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