Though I feel reluctant to spend more time thinking about Strategy and its ever-shifting series of objectives, products, and messaging, the company and its treasury strategy have become a dominant determinant of bitcoin’s near-term future and therefore warrant consideration. This week, on Strategy’s earnings call, Executive Chairman Michael Saylor did a complete 180, now stating that the company would, potentially, consider selling bitcoin from its balance sheet under certain conditions. The question is: What is driving this thinking now (and who the hell still trusts this guy)?
Well, some people apparently do. The characteristics of cult leaders typically include grandiosity, perceived infallibility, loyalty tests, control of the narrative, a single key leader, selective accountability, and charismatic personality. With another change in plans and messaging, and Strategy supporters scrambling to rationalize the move, one must really consider this to be a cult of the faithful.
It’s easy to see the Strategy balance sheet, with over 800,000 BTC and near-weekly purchases of billions of dollars more, and think the company has endless options and room to run. The company’s value proposition has consistently been its exposure to bitcoin, with additional levers for outsized returns. There’s a litany of quotes from Saylor on the dire importance of retaining bitcoin. Meanwhile, over the past year, Strategy’s stock has been down 53% while bitcoin itself has fallen only 17%.
Strategy Stock has fallen over 53% over the pasty 12 months
Yahoo Finance
Despite its stock falling, Strategy points to growth in their invented metric, Bitcoin Per Share, as proof that something is working. However, this metric has at best an implied relationship to the stock price. Does anyone care about their BPS if they are down 3X more than the underlying asset they aim to outperform?
The perceived value of the whole Strategy complex stems from conflating the hard money characteristics of bitcoin with $MSTR stock. So why would Strategy risk the faith of their rabid investor base by reversing policy on the single most sacred element of the Strategy value proposition: Never Sell Bitcoin? The reality is that Strategy has to continually stay ahead of the market and, increasingly, its own investor base, to source larger and larger buckets of demand to keep growing.
They have done this through a combination of equity momentum and hype on their underlying stock, allowing them to sell into the market and buy more bitcoin, or, at times, dollars, as well as by offering new debt and quasi-debt products.
Most recently, their drug of choice, I mean, product of choice, has been $STRC. This perpetual preferred equity sits at the bottom of the company’s debt stack, offers no direct claim on any BTC, is subject to closure by the company at any time, and has offered rate that can change on a monthly basis. To date, $STRC has accumulated a lot of bitcoin.
I will save you from the tedium of how the various debt and equity products work, but the fundamental facts are this:
- No Strategy investment products have any direct claim on BTC
- The performance of these products is not directly correlated to BTC, but only to the supply and demand of the product itself
- The products are fundamentally misaligned with each other, needing to service USD debt at the same time they state a goal of efficiently accumulating bitcoin
It is, at best, a tightwire act with little precedent and burgeoning complexity. To stay atop that tightwire and grow the perceived creditworthiness of $STRC and $MSTR for institutional buyers, Saylor has to be willing to sell, or at least say he would sell, BTC if needed. These institutional buyers do not care about BTC, do not believe in what it represents, and just want their dollars back later. This is Saylor’s primary constituency for scale.
Amidst the online AI ads of people drinking Mai Tais at the beach, safe in the knowledge that they retired by buying $STRC to earn 11.5% “yield”, is the reality – this product offers almost every possible risk available:
- Key Person Risk
- No Guarantee of Principal Return
- Secondary Market Dynamics
- Variable Dividend Being Offered
- Company Cannot Support the Growing Debt Service with the Existing, Dwindling Cashflows of Its Software Business
- Near Bottom of Capital Stack
- Reflexive Downside
- Interest Rate Risk
I could go on.
Suffice it to say, this is not a retirement account. And that is fine! The issue is that it’s being sold by Saylor and his parrots as something with the safety of Fort Knox that just magically pays a higher yield than a junk bond. Much like the three-body problem, the second and third-order effects of Strategy’s interrelated products and public market investors are near-infinitely complex. Even Saylor, who is no doubt highly intelligent, can not predict how it will all play out.
It may all work for a while.
However, there are very smart people on Wall Street, this very second, thinking about how to break this apart, short the stock, short bitcoin, and make a fortune. This ultimately comes down to breaking down belief in Saylor and Strategy itself. The products don’t have to fail for technical reasons, but can break due to a loss of faith. Constant pivots and reversals in the offering’s core tenets eat away at that faith each day. Investor flight out of the stock can result in a cascade in $MSTR stock, which can reverberate down to $STRC and into $BTC itself. With so many moving parts and the constraints of public markets, it’s not possible for Saylor and Strategy to foresee every risk permutation. But Saylor’s incentives are not your incentives. His wealth, equity ownership in $MSTR, and personal ego and status may lead him to make decisions that are not aligned with your interests.
Bitcoin was invented to combat the caprice of self-interested financial policymakers and the Cantillon effect on those around them. Strategy has replicated the same fiat dynamic within bitcoin itself. Ultimately, bitcoin will be fine. But many of the Strategy faithful may get hurt, only exiting the cult after all of their worldly possessions have been given to the cause. Michael Saylor, Supreme Leader, will remain a billionaire either way.