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

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

Editor’s Note: As Michael Saylor continuously amplifies the company’s exposure to Bitcoin through tools such as STRC, a seemingly efficient financial structure is also, at the same time, accumulating dividend pressure and potential risks. In the short term, it drives capital inflows and pushes prices higher; but once the market turns, this mechanism that depends on continued financing may quickly backfire on the company itself. This article focuses on this structure, attempting to sort out its operating boundaries under extreme scenarios and the possible chain reactions.

The following is the original text:

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

Note: Saylor refers to Michael Saylor, founder of MicroStrategy. “Frankenstein” comes from the image of the scientist in Mary Shelley’s novel; by creating a runaway “artificial life,” he is eventually turned against, and it is often used to metaphorically describe systems or products that are built by humans themselves and ultimately become difficult to control.

Victor Frankenstein, out of arrogance, created this monster—confident that he could play God and challenge death. But after this monster repeatedly destroyed his family and friends, it ultimately dragged him himself into destruction.

Please forgive my level of Grok-generated images.

Through STRC, Saylor has designed an “idealized” BTC-linked instrument, allowing retail investors to obtain excess returns on Bitcoin in a way similar to a “risk-free rate.” And it is precisely this capability in financial engineering that enables him to claim unprecedented Sharpe ratios and achieve 11.5% returns with only 1% volatility—yet in the end, this mechanism may also reverse and crush MSTR.

Note: The following analysis is based on one premise—BTC trades sideways or moves downward. If BTC is able to achieve a compound growth rate of more than 20–25% as set within the Strategy, then many of these assumptions will no longer hold (though not all of them fail).

In just the past two weeks alone, STRC has attracted nearly $3.5 billion in capital inflows, and the total issuance size has already reached $8.5 billion. Combined with other priority-tier tools within the Strategy, the current outstanding scale is about $13.5 billion (this excludes convertible bonds). On the one hand, the financing proceeds support corresponding BTC purchases, and they very likely are the main driver behind last week’s price surge to $78,000; but at the same time, they also bring an annual dividend obligation of roughly $400 million.

Previously, Saylor maintained a dividend reserve of about $2.25 billion. Before this round of issuance in April, this reserve could cover approximately 25 months of dividends. But just the new issuances added in the most recent two weeks have already compressed the coverage period to 18 months. To restore it to 25 months, he needs to refinance about $500 million through ATM (issuing at-the-market prices).

Currently, MSTR’s mNAV has fallen back to the high range of 1.25–1.30 times for the year. This has also prompted the crypto community (CT) to once again call for large-scale BTC buying this week. The problem is that I believe that among this week’s new issuances, about 50–70% will be used to replenish the dividend reserve rather than to directly buy BTC.

What’s even more worth thinking about is how STRC performs under “extreme scenarios.” Currently, MSTR’s market cap is about $55–60 billion. So the real question is: before the dividend burden creates material pressure on mNAV, how much more STRC can Saylor still issue?

A simple way to estimate it is: annual issuance can be kept within 1–2% of MSTR’s average daily trading volume (ADV). With today’s daily trading volume of about $2–3 billion and 252 trading days per year, this roughly corresponds to an issuance capacity of about $5–15 billion—equivalent to 3–10 times the current year’s dividend/interest-outflow expenses.

But I’m more inclined to think that this range represents an “upper limit,” not a normal level. In fact, for shareholders who hold only common stock, the structural costs of this transaction are already starting to show: STRC’s success, paradoxically, is suppressing MSTR’s mNAV—while in the choppy range since 2023, this metric has been closer to 1.5 times (of course, one can rebut that the current environment is closer to the first half of mid-2022).

On the surface, for common shareholders, continuing to support these “yield” instruments that do not translate into their own upside seems irrational—under ongoing issuance, the amount of BTC held per share has not increased meaningfully (of course, this is largely because the Strategy’s own scale has become too large).

That said, DAT’s shareholders themselves are a rather “special” group. I can imagine they can still absorb this kind of pressure—at least for the next year or so—so they may not necessarily shift their view.

In addition, the analysis above also implicitly relies on a key premise: that MSTR will be able to maintain an mNAV of above 1 in the foreseeable future. If it falls below 1, then compared with directly issuing more shares, Saylor’s selling BTC would result in less dilution for shareholders. This would open the supply floodgates and bring the market into a phase dominated by “downward DAT reflexivity”—something I discussed last year (see the original post).

Let me briefly summarize this chain of logic:

STRC continues to expand;

As the scale grows, Saylor needs to pay increasingly more dividends;

Buyers of MSTR gradually realize that what they are buying is stock that is actually financing dividends, not being used to increase BTC holdings;

Buyers discover that this is not the transaction structure they initially expected, and begin to exit;

Once there is no lack of incremental buying demand, mNAV falls below 1;

mNAV < 1 → Saylor is forced to sell BTC rather than continue issuing stock;

The market enters a state of panic.

In my view, the correct way to judge the maximum supply size of STRC is to find a “turning point”—that is, when the dividend burden brought by new issuance starts to exceed the marginal benefit of per-share BTC growth. From a relatively rough estimate, this turning point corresponds to annual dividend expenses of about $3–4 billion, equivalent to re-issuing about $10–20 billion in STRC. At the current pace, it could be reached within 6 months.

Of course, Saylor still has room to maneuver. The dividend reserve indeed helps stabilize prices and market confidence, but if the sideways or downward trend continues, holders are essentially playing a game of “hot potato.” When the dividend reserve is left with only 6 to 9 months, a rational choice might become exiting early in the $90–95 range, rather than taking on the downside risk caused by Saylor pausing dividends (which is his other option).

Although STRC dividends are “accumulative,” in extreme cases, I believe Saylor is more likely to choose to “completely sacrifice preferred stock credit” rather than be forced into large-scale dumping of BTC. In essence, he faces an arithmetic problem like this: “If I fulfill the preferred stock obligations and give up future issuance capacity, how many more BTC can I buy?” minus “the number of BTC that I must sell to maintain preferred stock” = the result

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

The main reason to oppose this judgment is: once you really reach the stage where this calculation is needed, the market is likely already turned, and MSTR’s mNAV is also very likely to fall below 1.

Thank you for reading, even if the opening is somewhat “sensational.” Any different views or criticisms are welcome. (Thanks to @TraderBot888—the person who discussed this idea with me first years ago.)

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