The share price of Strategy Bitcoin Yield Trust (STRC), the perpetual preferred stock of Strategy, the world's largest bitcoin-holding corporations, hit an all-time low since listing. The market is worried that Strategy will sell its bitcoin holdings to secure cash for dividends to STRC shareholders, which could push down the price of bitcoin.
On the 19th, STRC, a floating-rate perpetual preferred stock issued by Strategy, closed at $88.59. During the session, it fell to $82. This is about 11% below its par value ($100) and the lowest since its Nasdaq listing in Jul. last year.
STRC is designed to keep its share price around $100. When STRC trades above $100, Strategy operated an at-the-market (ATM) program, using proceeds from selling new perpetual preferred shares into the market to buy additional bitcoin.
When it falls below $100, the company presents investors with a high dividend yield to spur buying demand and keep the share price close to $100. The dividend rate is adjusted monthly, and dividends are paid twice a month. STRC's current annual dividend rate is 12.98%, and the dividends come from cash held by Strategy.
Strategy has typically sourced dividend funds by using its common stock (MSTR). It issues new common shares and sells them in the market to raise cash. But this strategy works only when bitcoin's price rises and a premium forms in Strategy's share price. A premium means a corporations' share price is higher than the value of its net worth held.
A gauge that shows this is the ratio of market capitalization to net asset value (mNAV, multiple of net asset value). mNAV is the multiple obtained by dividing a corporations' market capitalization by its net worth. The benchmark is set at 1.0. Strategy calculates it based on the market value of its bitcoin holdings (about 840,000 coins) after excluding liabilities and preferred stock.
An mNAV of 1.0 means Strategy's share price equals the per-share value of its bitcoin. An mNAV of 2.0 means an investor buys 20,000 won worth of common shares to gain exposure to 10,000 won worth of bitcoin held by Strategy. Through perpetual preferred stock, Strategy has bought additional bitcoin and raised the per-share bitcoin value, then used the premiumed common share price to fund dividends.
However, issuing common stock has the drawback of diluting existing shareholders' equity. The number of bitcoins the company holds increases, but so does the number of shares entitled to share in profits.
By contrast, buying bitcoin by issuing perpetual preferred stock does not dilute shareholder value. Perpetual preferred stock has no voting rights and is not counted in the share count. If the annual dividend rate on perpetual preferred stock is 10%, the company needs to issue only one-tenth as many new common shares to raise the same amount of funds.
But for this structure to hold, bitcoin's price needs to keep trending upward. From the start of the year through the 15th of this month, bitcoin fell about 30%. With bitcoin weakening day after day, Strategy's current mNAV is 0.88, indicating it is undervalued.
Strategy now has to raise funds for STRC dividends at a share value below the value of its bitcoin holdings. The market is concerned Strategy may sell additional bitcoin again. In a recent report, virtual asset transaction firm QCP analyzed that Strategy has about seven and a half months to pay dividends from internal funds.
Strategy had long touted a "permanent bitcoin holding" principle, but to secure dividend funds it sold 32 bitcoins (about $2.5 million) from May 26 to 31 at around $70,000 per coin. The sale amounted to only 0.0038% of its bitcoin holdings, but after news that Strategy broke its principle, bitcoin fell into the $60,000 range.