Michael Saylor: How to implement a Bitcoin strategy without being liquidated?

Written by: Steven Ehrlich

Compiled by: Saoirse, Foresight News

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

In fact, the company's stock price has 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 considered outstanding. Especially against the backdrop of numerous imitators flooding in, which could divert investors' funds, such performance is even more remarkable.

But this does not mean that Strategy can remain complacent. As a leader in the field of cryptocurrency fund management, it has certain privileges, and it seems to be preparing to fully leverage this advantage.

Bitcoin reserves continue to increase, but the strategy has undergone new changes.

As of the writing of this article, Strategy holds 628,791 bitcoins, valued at 71.9 billion dollars. The company has accumulated this asset portfolio through various means: issuing common stock, different types of preferred stock (which can provide dividends or conversion rights in the coming years), and convertible bonds. The specifics of the various preferred stocks are detailed 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 is 126 billion dollars, with debt only 8.2 billion dollars), the company still hopes to reduce its debt to zero. In the investor conference call following the release of the financial report on July 31, the company announced plans to redeem the issued convertible bonds and instead focus on multiple rounds of issuing 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 its latest preferred stock product Stretch (STRC), which aims for a monthly yield of 10%.

"This decision reflects the positive development of Strategy's financing capabilities in the capital markets. The convertible bond market is filled with hedge funds and arbitrageurs who establish long positions on Strategy by purchasing convertible bonds, while simultaneously shorting a significant amount of stock (about 25%) to reduce net risk exposure. In other words, for every bond they buy, they sell a large amount of stock, indicating only a mild bullish sentiment towards Strategy," said Lance Vitanza, Managing Director at TD Cowen, in an interview with Unchained (the full discussion can be viewed on X platform or YouTube). "A few years ago, convertible bonds were the best financing channel for companies. However, with the development of Strategy, they have been able to enter the preferred stock market, where the terms are more favorable, 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 operational approach. With few exceptions, he nearly never uses leverage financing, instead primarily relying on the equity market.

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

Always imitated, never surpassed

But don't expect the many followers in the fields of Bitcoin, ETH, SOL, BNB, etc., to emulate this practice. These institutions are just getting started, and 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 investment in public equity (PIPEs), credit lines, and of course, debt.

In a previous report, I wrote: "Each method has its pros and cons. Private financing can raise a large amount of funds in a short period, which helps initiate reserve strategies, but it may create significant 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 are adopting a hybrid model: one-third of the funds come from private financing, and the rest is raised through convertible bonds or credit instruments. While this method can delay selling pressure, it increases 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 fund management company Twenty One raised $485 million in May by issuing convertible bonds to launch its strategy; Anthony Pompliano raised $235 million for his Bitcoin fund management company ProCap Financial in June through convertible bonds.

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

A unique existence

For investors, this means they must always keep in mind: in today's crowded cryptocurrency fund management field, Strategy remains a unicorn-like presence. Currently, it is the only company able to enter the preferred stock market. Its first preferred stock issuance took place this January, and future issuance scales are expected to expand significantly.

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.