Extreme Challenge

Article Author: Bryan Daugherty
Article Translation: Block Unicorn

Previously, in my article on Strategy's "Capital Alchemy," I pointed out that the STRC preferred debt instrument of the Bitcoin corporate treasury giant would experience a period of "bending" before breaking. I wrote that STRC was designed with a target trading price around $100 and might fluctuate under adverse market conditions, but overall, it would likely hold its price.

Five weeks later, STRC is currently trading at $74, down 26% from its face value. I admit this is more than just a price drop, especially when I look at other indicators of the bond.

Just ten days after I wrote that article, Michael Saylor sold 32 Bitcoins, then valued at approximately $2.5 million. This was Strategy's first sale of its Bitcoin reserves in years. Although the transaction had minimal impact on its $65 billion Bitcoin reserve, the market environment Strategy operates in has changed dramatically. And these changes have brought significant shifts to Strategy.

In my previous article, I tested scenarios that could shake the theoretical foundation behind the debt instrument and the self-reinforcing loop ensuring STRC trades at face value. However, some of those scenarios failed faster and more severely than I expected.

In today's article, I will explore what actually happened and where STRC is headed.

Even after adding 3,600 Bitcoins in the past four weeks, Strategy's Bitcoin holdings have shrunk by 25%. During this period, both the cryptocurrency market and Bitcoin—the intrinsic driver of market confidence in STRC—have lost about 20% of their market capitalization.

STRC never traded below $90 since its launch, but from $99 on June 1 to $74 on June 26, it declined daily.

Its implied volatility—a forward-looking indicator reflecting market sentiment and expectations—exceeded 10% only seven times in the three months before the first Bitcoin sale. In just 19 trading days, this metric surged nearly tenfold, from 8.22% to 78%.

Putting the specific numbers aside, the market's perception of STRC has completely transformed over the past month. STRC was initially seen as being like Bitcoin, exhibiting a dull and uneventful performance. Its strategy was positioned as a credit instrument trading near $100 and paying dividends. For months, it traded that way. However, in the past 30 days, STRC has fallen every single day. This instrument, which traded steadily around $100 for months, now trades at just $74. Its 30-day historical volatility has soared from 4.3% to 34.6% over the past month.

Although Strategy has not defaulted on its outstanding STRC dividend payments, the instrument's price volatility has changed enormously, exceeding even that of the asset it was designed to hedge risk against. Despite the company's promises of predictability to potential investors, this is precisely what the instrument cannot provide now.

Impact on Strategy

The most immediate consequence is that Strategy's funding mechanism is under pressure.

When STRC traded around $100, Strategy could issue new shares through its at-the-market (ATM) offering program, raise funds, and buy more Bitcoin. This cycle drove everything. But if shares are issued with a face value of $100 while the market price is only $74, Strategy would still need to pay an 11.5% dividend on $100, yet only receive $74 in cash. No company would voluntarily do this. Therefore, the ATM program has been suspended, and the Bitcoin-buying cycle fueled by preferred equity capital has stopped.

Between March 18 and May 18 this year, the nominal value of outstanding STRC preferred shares more than doubled, from $5 billion to $10.5 billion. But since then, Strategy has not issued a single new share.

In my previous article, I described the positive cycle: issue STRC, buy Bitcoin, Bitcoin price rises, confidence strengthens, issue more STRC. I considered the reverse cycle an extreme scenario where confidence in this cycle wavers, causing it to unravel. Less than six weeks have passed since that article.

But because STRC holders have priority dividend rights, the company still needs to pay dividends from its cash reserves or, worse, by liquidating its BTC reserves.

In May, Strategy's cash reserves dropped to $871 million, down 60% from $2.25 billion at the time of my last article. The company had previously repurchased $1.5 billion of convertible bonds due in 2029 for approximately $1.38 billion in cash. Since then, its cash reserves have recovered to about $1.4 billion, including pending cash proceeds from ATM share sales not yet settled.

In contrast, the annual preferred stock dividend obligation for STRC's various instruments has exceeded $1.2 billion. This figure is even higher when including payment obligations for other instruments.

Although Strategy is far from bankruptcy (thanks to its Bitcoin reserves that can be partially liquidated), the bigger issue is not mathematical but rather the decline in investor confidence in its financial instruments.

Restoring Investor Confidence

In cryptocurrency forums, debates are increasingly heated over whether Strategy should sell a substantial portion of its Bitcoin to restore market confidence. But this double-edged sword also carries risks.

STRC was designed to trade at face value of $100, and the entire process of raising additional funds to meet dividend obligations revolves around its ability to maintain trading near that face value.

If Strategy wants to restore investor confidence in STRC and bring its face value back from $74 to $100, it must increase the dividend yield to enhance its attractiveness. But raising the dividend yield means higher dividend payments. At the current size of STRC outstanding bonds, a 50 basis point increase in dividends would add about $50 million to annual expenses.

A rate hike might still attract enough buyers for STRC. In that case, it would be forced to repeat what happened on June 1: sell more Bitcoin to pay dividends.

Payment obligations are just a simple arithmetic problem. But selling some Bitcoin could pose a greater psychological challenge for Strategy.

In 2025, dozens of companies emulated Strategy's digital asset management model. They issued stock, bought Bitcoin, traded at a premium to their net asset value, and used that premium to raise more funds. When Bitcoin prices plummeted and the premium disappeared, almost all companies stopped buying, and the premium vanished.

Strategy survived that crisis precisely because it did not sell. The "never sell" commitment underpinned investor confidence across the entire capital structure.

But that commitment has now done a 180-degree turn. Although Strategy remains a net buyer of Bitcoin, Michael Saylor explicitly acknowledged during Strategy's Q1 earnings call that the company would consider selling its Bitcoin holdings to pay dividends.

That statement did not raise investor concerns for over a month. But the sale of just 32 Bitcoins on June 1—less than 0.004% of its Bitcoin holdings—dealt a considerable blow to investor confidence.

Since Strategy sold 32 Bitcoins, STRC's price has dropped 25%, while common stock MSTR has plummeted 45%. In fact, MSTR's price has fallen below $100 for the first time in over two years.

This is the psychological dilemma facing potential investors.

Strategy can solve short-term payment issues by selling Bitcoin. From an accounting perspective, this is feasible. The company holds a massive amount of Bitcoin, and selling a small portion to pay preferred dividends would not threaten its solvency. However, the valuation of any publicly traded company cannot rely solely on accounting logic. The story the company tells the outside world plays a crucial role in determining how the public perceives its value. Strategy's story is that of a company that buys through market cycles, refuses to sell during market weakness, and uses capital markets to accumulate more Bitcoin.

Once this selling line is breached on a large scale, every decline in Strategy's cash reserves and every drop in STRC's price will raise the same question: "Will they sell again?"

This question itself is a dilemma. If Strategy does not sell, investors might worry about how it will pay dividends. If it sells, investors fear that the previous narrative about BTC reserves being untouchable no longer holds. The former highlights cash flow fundamentals, while the latter tests the company story that investors originally believed.

This is the kind of circular thinking I mentioned in my previous article. Even if fundamentals appear healthy, the beliefs sustaining a model like STRC can lead to its collapse. Even now, Strategy's reserves and BTC holdings are sufficient to prevent bankruptcy, but the weakening of investor confidence itself could lead to decreased interest in buying more STRC and ultimately cause STRC's price to crash.

We have already seen this pattern kill companies that tried to imitate the DAT model. Once a finance company starts selling stock when its share price is weak, the premium disappears, the issuance window closes, and the stock price trades at a discount again. If STRC follows suit, Strategy will repeat the 2025 scenario, but this time its own capital structure will be at risk.

Implications Beyond Strategy

When you step back from the company itself, this situation tells us what it might mean for the entire industry besides this instrument.

Over the past month, the entire cryptocurrency market capitalization shrank by about 20%. Bitcoin ETFs have seen net outflows for seven consecutive weeks, the longest since their launch. The Federal Reserve has taken a hawkish stance, and the PCE inflation rate for May was 4.1%. While these events are not directly related to Strategy, the unraveling of STRC occurred in this context. Undeniably, the two influence each other.

As exchanges make Bitcoin exposure easier for retail investors, this could also be a case of capital shifting from high-cost or less stable Bitcoin instruments (such as ETFs, DATs, and proxy holdings like Strategy) to Bitcoin itself.

The rise of perpetual contracts and the ease with which retail investors can leverage these contracts with minimal margin risk have enabled them to achieve what was previously only possible through MSTR. The correlation between MSTR/STRC and BTC price fluctuations is far less reliable than the nearly perfect correlation between BTC perpetuals and spot BTC prices. Therefore, for investors, choosing perpetuals over other BTC exposure proxies is clearly a sensible move.

But STRC's failure is self-inflicted. Due to its deteriorating credit profile, the bond struggles to find demand. Investors lost confidence in Strategy's ability to maintain the cycle around the bond, where dividend payments must be raised by issuing the same bond. When this cycle collapsed, it dragged down MSTR's stock price as well. MSTR's premium to net asset value has narrowed to near parity, meaning the market is not giving the company a valuation higher than its underlying assets.

This completely reverses the model on which Strategy relied. For years, Bitcoin price drove Strategy's stock price, which in turn influenced its financing ability. These funds were used to buy Bitcoin. Now, Bitcoin's credibility is driving the stock price in reverse, which in turn affects how people perceive Bitcoin investments. It is entirely backwards.

This raises a question I did not anticipate when writing my previous article. If STRC's fate increasingly depends on Strategy's creditworthiness rather than Bitcoin's price, what does this mean for the dozens of other Bitcoin treasury bonds launched subsequently?

Strive's SATA preferred stock, the closest structural replica of STRC, hit a record low of $79 in the same week. SATA holders receive a 13% annualized dividend paid daily. Strive holds approximately 19,800 Bitcoins with a cost basis of $96,000, 60% above the current price. Strive has no debt, no convertible bond maturities, and no maturity risk. Yet its price fell below face value.

Tokyo-based Metaplanet holds over 40,000 Bitcoins and has issued its own preferred instrument, MARS.

Even a debt-free, structurally clearer instrument like SATA could not maintain its face value. This suggests it is not an issue with Strategy alone. It may indicate that the market is re-evaluating the entire asset class: they are not substitutes for Bitcoin or crypto bets, but credit instruments with the inherent vulnerabilities of credit instruments.

If everything depends on fundamentals, Strategy might rebound from here. If Bitcoin price recovers to $80k, theoretically the collateral strategy will recover, and the ATM window will reopen. But only if things were that simple.

In the coming days, if the company strategically sells more Bitcoin, from a technical perspective, the sale size may be far smaller than what daily market volume can absorb. But just the shake in investor confidence could trigger panic and lead to a market-wide sell-off.