Strategy (MSTR), the largest corporate holder of bitcoin, has described the launch of its Perpetual Stretch Preferred Stock (STRC) as the company’s “iPhone moment” and despite its support for BTC accumulation, risks remain.
Before delving into these risks, it’s worth noting that while the focus is on STRC, specifically its increased liquidity and adoption, they also apply to similar preferred offerings, including another bitcoin treasury company, Strive’s preferred offering, SATA.
These instruments “are not well understood through the lens of traditional credit or capital” and instead require a different analytical framework, NYDIG Global Head of Research Greg Cipolaro said in a note.
By design, STRC targets a constant share price of $100, using a variable monthly dividend to keep trading near that level. The approach has already supported the multi-million dollar issuance and acquisition of more than 50,000 bitcoins, according to data from STRC.live.
Basically, STRC works by adjusting performance to control price. If the stock trades above $100, the company may cut the dividend to cool demand. If the stock falls below that level, they can increase dividends to attract buyers. Keeping the price anchored allows the company to issue new shares near par, generating capital that is then used to purchase bitcoins.
The new financial instrument has been a success so far. Not only has it allowed Strategy to purchase more than $3.5 billion in bitcoin, but it has also attracted institutions that have added STRC to their balance sheets.
In practice, the product resembles a money market fund with a floating yield of 11.5%, well above US Treasuries. The attractiveness depends on the stable price of $100 along with high returns.
When conditions are favorable, NYDIG’s Cipolaro wrote, the mechanism creates a powerful feedback loop. The cycle, in which STRC trades near par, allows the company to raise capital, use the proceeds to buy more bitcoins, expand the asset base and maintain investor confidence. That confidence supports additional issuance.
“As long as preferences remain anchored near par, stocks trade above NAV, and capital markets remain open, the flywheel drives continued demand for bitcoin,” Cipolaro wrote in the note.
Still, not everything is rosy.
BitMEX Research has written in a note titled “A Bit of a Stretch” that it considers the risks associated with the product to be “substantially greater than those associated with short-duration US Treasuries.”
Where are the risks really?
Bullish investors often point out that STRC is well capitalized and could easily cover dividend payments, given Strategy’s massive war chest of 761,068 BTC and over $2.2 billion in cash reserves. That’s equivalent to about 50 years of covered dividend payments, while the company can still reduce STRC’s dividend over time to expand coverage. On top of that, there are monetization options for the company’s huge bitcoin stock, which could boost dividend payments.
The risks, however, are not based on dividend coverage at all, according to NYDIG’s Cipolaro.
“The proper way to assess risk in STRC and SATA is through the lens of governance and subordination rather than focusing solely on payment risk,” he wrote.
The mechanism used by STRC also creates a stress pathway. If bitcoin falls and confidence in Strategy’s balance sheet weakens, STRC could fall below par.
To defend the price, the company would need to increase the dividend. Higher payments increase cash obligations, which, in turn, can worry investors and drive the price down. That feedback loop is familiar in credit markets.
In a standard corporate environment, that cycle can end in forced asset sales. Companies may have to sell their core holdings to meet their growing obligations, locking in losses at the worst time. For Strategy, that would mean selling BTC in a falling market. However, Strategy’s Michael Saylor has repeatedly said that he will not sell the company’s bitcoin stack.
However, the terms of the STRC give the company another option. The price target is not a binding promise. If conditions change, the strategy may reduce the dividend rather than increase it.
According to BitMEX Research’s read of SEC filings related to STRC, Strategy can “in its absolute discretion, reduce the dividend rate by up to 25 bps per month, regardless of what is happening.”
Additionally, unpaid dividends can accumulate without triggering a default or forcing the sale of assets. As BitMEX Research put it, instruments like these were “written by the company for the company.”
Read more: Strategy’s latest massive bitcoin purchase offers insight into its evolving funding model
Built to bend, not break
That flexibility changes what would happen to STRC in cases of crisis.
Instead of a company being in trouble, the pressure is shifted to security holders. If the dividend is reduced, the yield becomes less attractive and the market price may fall to reflect the new reality.
NYDIG’s Cipolaro made clear in his note that the structure “may remain solvent while delivering suboptimal outcomes for preferred holders due to loss of confidence and access to financing.” The risk is not the non-payment of its dividend, but rather the loss of its attractiveness.
Strategy’s legacy software business doesn’t cover those payments on its own. The model depends on continuous issuance or balance management linked to your bitcoin holdings.
The binding constraint is not revenue generation, but the combination of continued access to capital markets and sufficient asset coverage,” NYDIG’s Cipolaro wrote. The setup invites comparisons with structures that rely on new inflows to support payments.
The difference here is that the payments are not fixed. If demand slows, the company can reduce the dividend rather than maintain a rate it cannot sustain. This feature helps protect the issuer but weakens the appeal of investors seeking stability and income.
“When the music stops, if things become challenging for MSTR, instead of selling bitcoin, MSTR could simply abandon the narrative that STRC aims for stability,” BitMEX Research wrote. “This is very favorable for MSTR and therefore the dividend payment is, in our opinion, quite sustainable and affordable.”
Breaking the mechanism
The impact on the market will depend on how long the $100 anchor holds.
As long as demand for yield products remains strong and bitcoin sentiment is favorable, STRC can continue to funnel funds into the company’s treasury strategy.
This, in turn, reinforces Strategy’s position as one of the largest public holders of bitcoins. NYDIG has demonstrated that bitcoin’s price stability is what enables the economic viability of issuing these products to the market.
STRC and Striv’es SATA have seen their prices fall below par during periods of sharp declines in the price of bitcoin, according to the company’s research. When that happens, “issuance becomes uneconomical, limiting the ability to raise capital and slowing the flywheel.”
Risk appears when conditions change. A prolonged BTC price drop or a change in rates could test the pricing mechanism. If the dividend is cut to preserve cash, STRC could trade well below parity. Losses would be borne by investors who treated stocks as a near substitute for cash.
“It looks like being short on bitcoin assets, earning yield in exchange for taking on downside risk if bitcoin declines and erodes the asset buffer,” NYDIG offered as a framework for institutional investors. “However, unlike a standard option, there is no fixed term or expiration, and results are path dependent and determined by management discretion.”
The broader meaning is the template itself.
STRC combines stock features with bond-like behavior and a built-in adjustment lever. It offers a new avenue for companies to raise capital tied to volatile assets without locking up fixed obligations.
For now, these instruments have done their job: attracting capital and supporting further accumulation of bitcoins. The open question is how it behaves under stress and who absorbs the cost when trading no longer seems stable.
The interpretation of that scenario is not very good, but not for MSTR, “it is the investors who may feel somewhat aggrieved when the music stops,” BitMEX concluded.
Read more: Strategy’s credit risk falls as value of preferred stock outperforms convertible debt
