When Strategy (MSTR), the largest publicly traded company and bitcoin holder, first floated the idea of selling its bitcoin stash to fund its dividend obligations during its recent earnings call, it raised concerns among investors and the crypto community.
However, CEO Michael Saylor sat down with CoinDesk senior analyst James Van Straten at Consensus in Miami to explain, in his view, why the announcement was “inconsequential.”
As the company transitions from a bitcoin treasury company to a full-spectrum capital markets operation, in a wide-ranging conversation with CoinDesk, Saylor discussed the company’s potential sale of bitcoin to fund dividends, the mechanics of its preferred stock (called Stretch or STRC), and what critics get wrong about its business strategy.
This interview has been edited for brevity and clarity. This is the first part of a series of stories from CoinDesk’s interview with Michael Saylor.
CoinDesk: Your earnings call revealed that Strategy could sell bitcoin to fund its dividend. That spooked some investors. How important is it really?
Michael Saylor: It’s a great burger from a financial point of view. If we were to fund all of our dividends exclusively by selling bitcoins for the next year, we would buy 20 bitcoins for every one we sold. So it’s no different than buying 20 bitcoins and not selling any bitcoins. And then from a market point of view, bitcoin has between $20 and $50 billion of liquidity today. If we had to finance all our dividends with bitcoin, we would be talking about about 3 million dollars; It is immeasurable. It’s really inconsequential.
CoinDesk: So how do you actually decide whether to buy bitcoin, retire debt, or buy back your own shares?
Taylor: We use two metrics. The first is BTC performance. What is the benefit to the common equity shareholder? If there is no performance, it is neutral in terms of equity. If there is a negative return, it is dilutive. If there is a positive return, it is cumulative. The second metric is credit: what is the impact on the balance sheet? Does it create more risk?
For example, if we used all of our dollars to buy back stock, it would be capital positive and generate returns, but it would be credit negative. The market price of bitcoin, of all our credit instruments, of all our bonds, changes every day. Day by day, we adjust our activity in the capital markets to take advantage of performance opportunities and meet our liabilities.
We prioritize operations that generate the most bitcoins per share. If we can create 10x more bitcoins per share by performing one trade versus another, we would prioritize that first.
CoinDesk: Bitcoin is currently between 36% and 37% of its all-time high. Is this a good time to sell high-cost Bitcoin and capture that tax credit?
Taylor: We have the option to capture up to $2.2 billion in tax credit. The value of that credit changes every day, every minute. We also have the option to calculate mispricing of convertible bonds – this generates a huge return. We also have the option of capturing bitcoins in one operation. We make that decision week by week, day by day.
Everything we do prevents us from doing something else. So do we always have to consider whether this is positive for equity but negative for credit? Maybe it’s very good for capital, it will generate us half a billion dollars, but it’s a little bad for credit. If credit is super strong, it would do something positive for equity and slightly negative for credit. If the credit is very weak, we wouldn’t do it.
We are not going to telegraph exactly when we will do it or if we will do it. But the optionality is there, and it is one of the most interesting operations on the table right now.
CoinDesk: Critics of X (formerly Twitter) say they always buy the weekly high in bitcoin. What is really happening?
Taylor: That is an ignorant criticism. What is happening is that when we buy bitcoin with a stock swap, it is because the stock has rallied and there is a huge stock premium. When bitcoin rises, capital increases, premium expands, and it actually becomes more profitable for us to trade. We are trading one share of MSTR for one share of BTC when the premium expands, and that’s when bitcoin recovers.
In a 168-hour week, there may be three hours during which the market has recovered, and we could raise $250 million in swaps in those three hours. So yes, we are picking the top of the bitcoin market, but we are also picking the top of the equity market and trading both, and we are making a much bigger profit. We are making money for our shareholders without risk by making these trades.
If we wanted to do those swaps when the price is low, the premium is low. It generates much less money, or we would lose money for the common good. [shares] trading stocks when the bitcoin price is low. That’s why it looks like we might be buying the top, but we’re not buying it with money that’s been lying around.
CoinDesk: STRC has been your star product. Can you explain how it is different from a typical bonus?
Taylor: We built this instrument to be extraordinarily robust. The key is that we create a perpetual preferred that never expires. When someone decides they want to sell $2 billion of STRC, we don’t redeem them. There is no right of liquidation. There is no way to fix it. It is not a bank deposit.
If I sell you $2 billion of a stablecoin on Friday, you can redeem it on Monday and I have to get $2 billion in cash. But when we sell you $2 billion of Stretch, it’s a perpetual exchange. We agree to pay you SOFR [Secured Overnight Financing Rate] plus a credit spread forever. You agree to give us the money forever. We are planning to hold bitcoin forever.
The liquidity is not provided by us. It is provided by the market. There are people at Soros, Millennium and Citadel who really want to make quick trades in minutes or hours. If I set the whole thing at 100 and absorbed all the liquidity myself, they wouldn’t stand a chance. And it would take on a $100 billion risk, which would be a problem for stocks and deprive them of the chance to earn a very healthy, almost risk-free, annualized return.
CoinDesk: Stretch has been trading at a slight discount to par recently and is taking longer to recover after dividend dates. What is happening?
Taylor: You have to see it in complete monthly cycles. We sold $3.2 billion in a couple of weeks on an instrument with a base of around $5 billion. So we expanded the offering by a huge factor. I’m not surprised it takes the market a while to digest this. In part, no doubt, people bought a billion to cut a 90-cent dividend and then sold again.
We are at a growth rate of almost 400%. Given the hypergrowth, I am not surprised that it is [STRC] digest it [the sell pressure]. In recent days, it is [STRC] been trading within five cents [of $100 per share] daily range, three cents yesterday. All of that is comfortable. We think about it the same way we design an airplane wing: you want the wings to flex. If you try to make the flex go away, they break. The instrument is designed to bend under stress, but not break.
Disclosure: The author of this story owns shares of Strategy (MSTR).
Read more: Michael Saylor’s latest tax strategy echoes Strategy’s 2022 bitcoin sell-off
