A significant $15 billion is currently invested in three securities targeting Bitcoin enthusiasts, promoting themselves as a safer and smarter option for Bitcoin exposure. Identified as Strategy’s preferred stack, STRC, and SATA, these securities share a similar marketing narrative: they are tax-favored, promise 11.5% income, are backed by Bitcoin, and present a low-risk profile akin to money market funds. However, an in-depth analysis reveals that the marketing claims are fundamentally misleading and that the securities are ill-suited for the very Bitcoin environment they purport to harness.
STRC, for instance, is classified as unsecured, subordinated, perpetual preferred equity, devoid of a maturity date or lien on any of Strategy’s Bitcoin assets. The dividends on these securities are discretionary, meaning that the issuing board holds the power to cut them without prior notice, justification, or a vote. With S&P rating the issuer as B-, placing it deep into junk territory, such critical information is notably absent from marketing materials.
The claims of being “backed by Bitcoin” are particularly deceptive; these securities have no direct claim on actual Bitcoin holdings. The characterization as a “money-market-like” investment is misleading as well, given its speculative-grade standing and lack of a maturity date. Promoted as a source of “safe income,” the dividend—controlled entirely by the board—comes from the security itself, presenting an unsustainable funding mechanism.
A staggering 82.7% of the investor base for these securities consists of retail investors, which further complicates the narrative. Out of the total $10.7 billion in STRC, approximately $8.8 billion is owned by retail Bitcoin holders, resulting in a high concentration of risk among less informed investors. Phrased bluntly, this investment is viewed by experts as a “bag” that retail investors are left holding.
The fundamental risk in STRC isn’t merely due to the high dividends; rather, it lies in the fact that the dividend cannot be sustained by the company’s business activities. Strategy’s software division generates roughly $477 million annually, yet its preferred dividend obligations total over $1.2 billion, creating a staggering 3.5-to-1 ratio. This financial gap is not bridged by earned income but rather by continuously issuing new STRC shares or diluting the common shareholders of MSTR to meet the existing obligations.
This reflexive funding cycle effectively operates so long as STRC shares trade above their par value but becomes problematic when they do not. Any downward pressure on the share price—whether from credit downgrades, missed dividend payments, or a broader downturn in the cryptocurrency market—would dismantle the very framework that supports the dividend. Unfortunately, no contingency plans exist within the indenture while there are no liens on Bitcoin to seize or sufficient operational cash flow to redirect.
Further complicating the scenario is the monthly increase in the dividend rate, which has steadily risen from 9% to 11.5%, adding a permanent annual obligation of $268 million into the mix. The relentless upward revision of the coupon exacerbates the funding gap, making the structure ever more burdensome and increasing the likelihood of future dilutive share issuance.
Despite arguments suggesting that institutional investors would provide support for the Digital Credit category, this premise is fundamentally flawed. Any institution deep enough to evaluate the cryptocurrency closely enough would ultimately invest directly in Bitcoin, eliminating any associated credit risks. Thus, the notion of a savvy institutional buyer existing within this product framework dissipates.
Numerical simulations reinforce the alarm over the default probabilities regarding these investments. Various scenarios yield alarming projections, including a 12.3% chance of formal default and a staggering 50.7% probability of enforced Bitcoin sales by the issuer during an eight-year cycle. The outcomes for Bitcoin holders will hinge solely on Bitcoin’s final price, whereas STRC holders face potential principal loss due to market fluctuations and performance pressures.
The very essence of Bitcoin’s creation was to minimize counterparty risk and eliminate opacity in monetary transactions. Instruments like STRC and its counterparts reintroduce these very risks under misleading marketing claims that the underlying assets cannot uphold. Alternatives, such as holding Bitcoin in self-custody alongside investments in U.S. Treasury securities, provide comparable cash flow prospects without an intermediary involved.
In the end, the market will inevitably clarify the disparity between the perceived security that retail investors believe they have purchased and the actual risk they have taken on. Investors who overlook the intricacies of the structured products and proceed with their capital might unknowingly become part of a flawed funding plan that masquerades as a low-risk investment vehicle.
