Bitcoin's 35% Tumble: Will The Dive Threaten Michael Saylor’s Strategy?

Key Concepts

• Bitcoin Price Volatility: The significant fluctuations in Bitcoin's market value.
• MicroStrategy (MSTR): A publicly traded company that has become a major corporate holder of Bitcoin.
• Digital Asset Treasuries (DATs): Publicly traded holding companies that hold digital assets, often as a primary strategy.
• Premium/Discount to NAV: The difference between a company's stock price and the net asset value (NAV) of its underlying holdings.
• Credit Rating: An assessment of a borrower's creditworthiness, with B-minus indicating "junk" territory.
• Index Inclusion/Exclusion: The process by which a stock is added to or removed from major market indices like the MSCI USA and NASDAQ 100.
• Perpetual Preferred Securities: Preferred stocks that have no maturity date.
• Return of Capital: A tax treatment where distributions reduce an investor's cost basis rather than being taxed as income.
• Cost Basis: The original value of an asset for tax purposes.
• Bare Market: A prolonged period of declining asset prices.

MicroStrategy's Bitcoin Strategy Under Pressure

Bitcoin's Recent Decline and its Impact on MicroStrategy

Last week, Bitcoin experienced a significant drop, falling to $82,000, a 35% decrease from its October peak of $126,800. While such a decline might be considered minor for most large NASDAQ-listed companies, it poses a direct challenge to Michael Saylor's strategy at MicroStrategy. For nearly two years, MicroStrategy's stock traded at a substantial premium to the value of its Bitcoin holdings, sometimes as high as 190% higher. This allowed the company's stock to act as a "turbocharged Bitcoin bet" for institutional investors.

MicroStrategy's Transformation and the Rise of Digital Asset Treasuries

Michael Saylor has successfully transformed his data mining software company, based in Tyson's, Virginia, into a prominent example of using traditional corporate finance to leverage Bitcoin's volatility. This strategy has inspired hundreds of imitators, leading to the emergence of publicly traded holding companies known as digital asset treasuries (DATs). During this period, Saylor's net worth saw a dramatic increase, climbing from $1.6 billion in 2022 to $5.4 billion.

Erosion of Premium and Financial Concerns

However, MicroStrategy's premium has recently vanished. The company's own shares have fallen by 60% over the past year, reducing its market capitalization to $49 billion. This is now lower than the $56 billion worth of Bitcoin it holds. This shift has led to significant financial scrutiny. S&P Global Ratings assigned MicroStrategy a B-minus credit rating, placing it deep into junk territory. The rating agency cited "high Bitcoin concentration, narrow business focus, weak risk-adjusted capitalization, and low US dollar liquidity" as key weaknesses.

Risk of Index Exclusion and Liquidity Drain

Furthermore, JP Morgan analysts have warned that MicroStrategy is at risk of being removed from major financial benchmarks, including the MSCI USA and the NASDAQ 100. Such a move could trigger substantial selling pressure, with as much as $2.8 billion potentially fleeing the stock if MSCI proceeds. Additional outflows could occur if other index providers follow suit. Passive funds tracking MicroStrategy account for nearly $9 billion in exposure. Removal from these indices would not only force selling but also significantly drain liquidity from a stock that has historically attracted institutional investors due to its high trading volume. Despite meeting the S&P 500 inclusion criteria for two consecutive quarters, MicroStrategy has not been added and is unlikely to be, given its heavy Bitcoin exposure.

Saylor's New Mantra: "Credit is the Product"

Despite these challenges, Michael Saylor remains an ardent evangelist for Bitcoin and is not retreating. His new mantra, "The credit is the product and the equity is the afterthought," signifies a shift in his strategy. He believes MicroStrategy's future lies not in being a Bitcoin tracking stock or a hedging tool for sophisticated traders, but in creating a new market for Bitcoin-powered income instruments. These instruments are designed to appeal to investors seeking yield rather than exposure to price volatility.

MicroStrategy's Perpetual Preferred Securities

To achieve this, MicroStrategy has spent the past year launching a series of perpetual preferred securities. These are preferred stocks with no maturity date. The company has issued new securities totaling $8.6 billion, each with unique names like Strike, Strife, Stride, Stretch, and Stream. Each of these represents a variation of the same core concept: high fixed dividends backed by MicroStrategy's Bitcoin-centric capital structure.

• Strike (STRK): Pays an 8% annual dividend on a $100 stated amount, payable quarterly.
• Strife (STRF): Pays 10% annually and is positioned at the top of the preferred stack.
• Stride (STRD): Also pays 10% on a quarterly basis.
• Stretch (STRC): Introduced in July with an initial 9% dividend, it pays monthly, with the rate adjusted each month to maintain the price near its $100 par value.

Tax Advantages and Current Performance of Preferreds

A key selling point for Saylor is that the dividends on these preferred securities are treated as "return of capital." This means investors reduce their cost basis instead of paying taxes on the distributions annually. For taxable investors, this translates into a significantly higher effective yield compared to similar corporate preferred stocks. However, the recent downturn in Bitcoin has impacted the performance of these new preferreds. STRC is currently trading below its $100 par value and yields approximately 11%. STRE, a Euro-denominated security announced earlier this month, fell below its 100 issue price within two weeks, and its yield has increased from 10% to 12.5%.

Investor Concerns and Future Obligations

Investors are understandably concerned about Saylor's ability to cover his interest costs during a prolonged Bitcoin bear market. Between preferred dividends and interest on its convertible notes, MicroStrategy faces approximately $700 million in annual payments.

For comprehensive coverage, readers are directed to Nina Bambacheva's article on Forbes.com. This report is from Kieran Meadows at Forbes.