At the cost of an 11.5% annualized return, will MicroStrategy's STRC face a backlash moment?

Title: Saylor Has Created Frankenstein’s Monster. It Yields 11.50%.
Author: Cheshire Capital
Translation: Peggy, BlockBeats

Author: Rhythm BlockBeats

Source:

Repost: Mars Finance

Editor’s note: As Michael Saylor continuously amplifies the company’s Bitcoin exposure through tools like STRC, a seemingly efficient financial structure is simultaneously accumulating dividend pressure and potential risks. In the short term, it drives capital inflows and price increases; but once the market turns, this reliance on ongoing financing mechanisms could quickly backfire on the company itself. This article explores this structure, aiming to outline its operational boundaries under extreme scenarios and possible chain reactions.

Below is the original text:

Through STRC, Saylor has built a “Frankenstein’s monster.”

Victor Frankenstein created this monster out of arrogance—confident he could play God and challenge death. But after this monster repeatedly destroys his family and friends, it ultimately drags him into destruction as well.

Through STRC, Saylor designed an “idealized” BTC-linked instrument, allowing retail investors to earn excess returns on Bitcoin in a manner similar to a “risk-free rate.” It is precisely this financial engineering capability that enables him to claim unprecedented Sharpe ratios and achieve an 11.5% return with only 1% volatility—yet ultimately, this mechanism could also crush MSTR.

Note: The following analysis is based on a premise—BTC remains sideways or declines. If BTC can achieve a compound growth rate of over 20–25% as set within the Strategy, many of these assumptions will no longer hold (though not all will become invalid).

In just the past two weeks, STRC has attracted nearly $3.5 billion in capital inflows, with the total issuance reaching $8.5 billion. Coupled with other priority tools within the Strategy, the current outstanding scale is about $13.5 billion (excluding convertible bonds). These financing proceeds support corresponding BTC purchases and are likely the main driver behind last week’s price surge to $78k; but at the same time, they also entail an annual dividend obligation of about $400 million.

Previously, Saylor maintained a dividend reserve of approximately $2.25 billion. Before the April issuance round, this reserve could cover about 25 months of dividends. But just in the past two weeks of new issuance, the coverage period has been compressed to 18 months. To restore it to 25 months, he would need to raise about $500 million via ATM (at-the-market issuance at market price).

Currently, MSTR’s mNAV has fallen back to the high end of the year’s range at 1.25–1.30 times, prompting the crypto community (CT) to call for large-scale Bitcoin buy-ins again this week. But the issue is, I believe that in this week’s new issuance, about 50–70% will be used to replenish the dividend reserve rather than directly buying BTC.

What’s more worth pondering is how STRC performs under “extreme scenarios.” Currently, MSTR’s market cap is about $55–60 billion. The real question is: before the dividend burden exerts substantial pressure on mNAV, how much more can Saylor issue in STRC?

A simple estimate is: annual issuance scale can be controlled at 1–2% of MSTR’s average daily trading volume (ADV). With a current daily trading volume of about $2–3 billion and 252 trading days per year, this roughly corresponds to an issuance capacity of $50–78k—equivalent to 3–10 times the current year’s dividend/yield expenditure.

But I tend to believe this range represents an “upper limit,” not a normal level. In fact, for ordinary shareholders holding only common stock, the structural costs of this transaction are already beginning to show: the success of STRC, paradoxically, suppresses MSTR’s mNAV—and during the oscillation range since 2023, this indicator has been closer to 1.5 times (of course, one could argue that the current environment is more akin to mid-2022).

On the surface, for common shareholders, continuing to support this “yield” that does not translate into their own upside seems irrational—under continuous issuance, the amount of BTC per share has not substantially increased (of course, this is largely because the Strategy itself has grown too large).

That said, DAT shareholders are a rather “special” group. I can imagine they might still withstand this pressure, at least for the next year or so, and may not immediately adopt this view.

Additionally, the above analysis implicitly relies on a key premise: that MSTR can maintain an mNAV above 1 in the foreseeable future. If it falls below 1, then compared to directly issuing new shares, Saylor selling BTC would cause less dilution for shareholders. This could open the floodgates, leading the market into a phase dominated by “downward reflexivity led by DAT”—a scenario I discussed last year (see original post).

To briefly summarize this logical chain:

• STRC continues to expand;
• As scale grows, Saylor needs to pay more dividends;
• Buyers of MSTR gradually realize they are buying stock primarily to finance dividends, not to increase BTC holdings;
• Buyers discover this is not the initial transaction structure they expected, and start to exit;
• Once new buying interest diminishes, mNAV drops below 1;
• mNAV < 1 → Saylor is forced to sell BTC instead of issuing more shares;
• The market enters panic mode.

In my view, the correct way to judge the maximum supply of STRC is to find a “turning point”: the point at which the dividend burden from new issuance begins to exceed the marginal gains from per-share BTC growth. Based on a rough estimate, this tipping point roughly corresponds to an annual dividend expenditure of $3–4 billion, equivalent to re-issuing about $100–15B in STRC. At the current pace, this could be reached within six months.

Of course, Saylor still has room to maneuver. The dividend reserve indeed helps stabilize prices and market confidence, but if oscillations or a downtrend persist, holders are essentially playing a game of “pass the parcel.” When the dividend reserve is only 6 to 9 months’ worth, rational choices might shift toward exiting early at the $90–95 range, rather than risking the downside from Saylor halting dividends (another option he has).

Although STRC dividends are “accumulative,” in extreme cases, I believe Saylor would prefer to “completely sacrifice the credit of preferred shares” rather than be forced to sell large amounts of BTC. Essentially, he faces this arithmetic problem: “If I fulfill the preferred stock obligations and give up future issuance space, how many more BTC can I buy?” minus “BTC sold to maintain preferred stock,” equals the result.

If the result is positive, he will choose to sell BTC; otherwise, he will “sacrifice” preferred shareholders.

The main reason opposing this judgment is: once the situation reaches the point where this calculation is necessary, the market has likely already turned, and MSTR’s mNAV will probably fall below 1.

Thank you for reading, even if the opening sounds somewhat “sensational.” Any differing opinions or criticisms are welcome. (Special thanks to @TraderBot888, who first discussed this idea with me.)