Stock market investors may be overlooking an interesting metric in Strategy (MSTR), the largest publicly traded bitcoin holder. : the capital market measurement known as amplification.
Amplification compares the size of the Michael Saylor-led company’s total debt and debt-like instruments, such as preferred shares, to its reserve of 766,970 BTC. As amplification increases, like leverage, it adds more risk to the company, making the common stock more sensitive to bitcoin price movements.
Investors have tended to focus on the price of bitcoin and the premium multiple to net asset value (mNAV) when evaluating the company. But if amplification, currently about 33%, increases, it may become the dominant risk factor.
At the top of Strategy’s capital structure is convertible debt, with about $8.25 billion outstanding, the highest-ranking claim. Underneath are a number of preferred stocks, including STRC, STRK, STRD and STRF, with approximately $10.3 billion in notional value, according to the MSTR panel. At the bottom is the common equity, MSTR, which absorbs all residual advantages and disadvantages.
Read more: Strategy signals another bitcoin buy as company needs just 2% annual BTC growth to cover dividends.
STRC has been designed to become the company’s primary bitcoin accumulation vehicle. Senior to equity and junior to debt, STRC pays an annual dividend of 11.5%, distributed monthly in cash.
STRC volume, once negligible and in the low single digits relative to MSTR, has increased to around 20% on a weekly basis and occasionally exceeds 25%. According to the MSTR dashboard, on Friday, MSTR traded $1.7 billion, well below its 30-day average of $2.5 billion, while STRC traded $526 million, about double its average of $259 million, nearly 50% of MSTR’s one-day volume.
Greater STRC activity makes it more difficult to manage amplification without relying on the issuance of common shares, which may impact performance against bitcoin. Over the past 30 days, the price of bitcoin has remained relatively unchanged, while MSTR has fallen 11%.
At lower amplification, MSTR behaves like leveraged BTC. At higher levels, it becomes more difficult to manage, in addition to approximately $1.12 billion in annual obligations.
