Michael Saylor: How does the Bitcoin strategy avoid liquidation?

Since launching the Bitcoin reserve strategy in 2020, Michael Saylor has been committed to maintaining a healthy balance sheet. Now, he is taking this strategy to new heights.

Written by: Steven Ehrlich

Compiled by: Saoirse, Foresight News

Michael Saylor, the chairman of Strategy (MSTR), won widespread acclaim in the investment community on Friday for his company's record high operating revenue, net profit, and earnings per share in the last quarter (see chart below).

In fact, the company's stock price increased by 166% over the past year, which is twice the increase of Bitcoin (BTC) during the same period.

(Trading View)

No matter what standard is used to measure, such performance can be regarded as outstanding. Especially against the backdrop of numerous imitators pouring in, which may divert investor funds, such performance is even more remarkable.

But this does not mean that Strategy can rest on its laurels. As a leader in the field of cryptocurrency fund management, it holds certain privileges, and it seems to be preparing to fully leverage this advantage.

Bitcoin reserves continue to increase, but the strategy has changed.

As of the writing of this article, Strategy holds 628,791 Bitcoins, worth 71.9 billion dollars. The company has accumulated this asset portfolio through various means: issuing common stock, multiple types of preferred stock (which may provide dividends or conversion rights in the coming years), and convertible bonds. The specific details of the various types of preferred stock are shown in the figure below.

But now, the company plans to make significant adjustments to its financing methods — specifically, to completely eliminate debt. Although its balance sheet shows good performance (according to the financial report, the enterprise value reaches 126 billion dollars, with debt only 8.2 billion dollars), the company still hopes to reduce debt to zero. In the investor conference call following the financial report released on July 31, the company announced its plan to redeem the issued convertible bonds and instead focus on multiple tranches of preferred stock.

This means that its $6.3 billion preferred stock issuance scale is expected to grow significantly. In fact, at the investor briefing, the company announced plans to refinance $4.2 billion through the latest preferred stock product Stretch (STRC), which has a target monthly yield of 10%.

"This decision reflects the healthy development of Strategy's financing capabilities in the capital markets. The convertible bond market is flooded with hedge funds and arbitrageurs who establish long positions in Strategy by purchasing convertible bonds, but simultaneously reduce their net risk exposure by shorting a substantial amount of stock (about 25%). In other words, for every bond they buy, they sell a significant amount of stock, which means they are only mildly bullish on Strategy," said Lance Vitanza, Managing Director at TD Cowen, in an interview with Unchained (full discussion can be viewed on X platform or YouTube). "A few years ago, convertible bonds were the best financing channel for companies. However, as Strategy has grown, they have been able to enter the preferred stock market, where the terms are better, the appreciation potential is greater, and the pricing efficiency is higher."

This move once again confirms why Saylor is regarded as a "demigod" in the Bitcoin community—he is not only revered for hoarding Bitcoin but also respected for his responsible operating methods. With few exceptions, he almost never uses leveraged financing, instead primarily relying on the equity market.

Despite its robust capital structure being able to avoid forced liquidation (unless Bitcoin prices drop by more than 80%), Saylor continues to push the limits.

Not everyone can imitate it to this day.

But don't expect the many followers in the fields of Bitcoin, ETH, SOL, BNB, etc. to follow this practice. These institutions are just getting started, as I pointed out in other related reports, they are eager to scale quickly through competition.

This means they will utilize all the tools of the capital markets: including private investments in public equity (PIPEs), credit lines, and of course, debt.

In previous reports, I wrote: "Each method has its advantages and disadvantages. Private placement financing can raise a large amount of funds in a short time, which helps to initiate reserve strategies, but it may create enormous selling pressure. The issuer can also choose to register the stock with the SEC before issuing, but the financing cycle is longer. Nowadays, more companies adopt a hybrid model: one-third of the funds come from private placement financing, while the rest is raised through convertible bonds or credit instruments. Although this method can delay selling pressure, it increases the leverage on the balance sheet, and problems may arise if prices plummet."

This means that debt is practical when financing: shareholder dilution may not become apparent for several years, and in the current bubble market, the coupon rate is nearly zero. For example, Bitcoin asset management company Twenty One raised $485 million in May through the issuance of convertible bonds to launch its strategy; Anthony Pompliano raised $235 million in June for his Bitcoin asset management company ProCap Financial through convertible bonds.

This is essentially a "buy now, pay later" model.

Unique Existence

For investors, this means they must always keep in mind: in today's crowded field of cryptocurrency fund management, Strategy remains a unicorn-like presence. Currently, it is the only company that can enter the preferred stock market. Its initial preferred stock issuance was in January this year, and future issuance scales will be significantly expanded.

For other companies, entering the preferred stock market and eliminating debt is still just a vision. "Most of these companies will start from the convertible bond market, hoping that some of them can grow and eventually qualify for entry into the preferred stock market," Vitanza said.