Strategy, With (Not) Much Strategy for Investors

This “Bitcoin asset trust company,” which changed its name from MicroStrategy to Strategy this February, runs a business that raises debt in various forms to buy Bitcoin. It originally developed and sold software, but one day its founder Michael Saylor suddenly became obsessed with Bitcoin’s boundless potential and turned the company into a machine for buying Bitcoin. The software division still exists, of course, but it is negligible compared with the size of the firm’s Bitcoin holdings.

Strategy’s playbook is to offer a range of investment products that provide exposure to Bitcoin. If you visit the company website, you’ll see that beyond its common stock MSTR, it has issued a variety of preferred shares such as STRD, STRK, STRE, STRC, and STRF, and markets them with the word “Credit” attached, as if they were bonds. Technically, that is completely incorrect. Preferred stock ranks ahead of common stock, but bonds rank ahead of all equity. In basic terms, the capital stack is bonds > preferred stock > common stock, and within bonds and preferreds you can further differentiate rights. The senior/subordinated/mezzanine labels you often see in financial news describe these priority relationships among creditors.

Even aside from preferred stock, Strategy has issued multiple rounds of convertible bonds, raising a total of 8.2 billion dollars. Convertible notes are bonds that give the holder the right to convert into common stock. The conversion terms and the respective rights of issuer and bondholder can be structured in many ways, but they are heavily influenced by market conditions at the time of issuance.

The “Convert 2030 B” convertible bond pays no coupon and allows conversion into common stock at a 35% premium to the share price at issuance. Let’s unpack why a bond investor would buy such a product. All of Strategy’s convertible bonds were privately placed and sold only to qualified institutional buyers. Naturally, institutions that run dedicated bond portfolios often cannot invest in highly volatile assets like equities or Bitcoin. Yet investors who still want upside exposure to Bitcoin become the natural buyers of Strategy’s convertibles. From their perspective, they are buying senior bonds, so the probability of principal loss is very low, and even if Bitcoin trades sideways and the common stock MSTR fails to rally, they can simply hold to maturity and get their principal back. If Bitcoin were to surge and MSTR quintupled, they could convert into stock and earn a far higher return than they would from a plain-vanilla corporate bond. In effect, this is an opportunity to capture upside while sidestepping most of Bitcoin’s extreme volatility.

Amid the recent sharp sell-off in Bitcoin, MSTR has fallen even faster, and you can now find many articles noting that its mNAV (net asset value multiple) has dropped below 1. mNAV is calculated as enterprise value (market cap of common stock + market cap of preferred stock + total debt − cash) divided by the value of Bitcoin held. The higher this number, the greater the “added value” investors are assigning to MSTR beyond its Bitcoin. Falling below 1 is reportedly a first since Strategy pivoted to a Bitcoin trust model in 2020, and is being interpreted as a sign of deep investor concern.