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 its listing. The market is worried that Strategy may sell its held Bitcoin to secure cash for dividends to STRC shareholders, which could push down Bitcoin prices.
On the 19th, STRC, the floating-rate perpetual preferred issued by Strategy, closed at $88.59. During the session, it fell to $82. This is about 11% below par ($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 ran an at-the-market (ATM) program to buy additional Bitcoin with funds raised by selling new perpetual preferred shares into the market.
When it falls below $100, it presents investors with a high dividend yield to spur buying demand and keep the price close to $100. The dividend rate is adjusted monthly, and dividends are paid twice a month. STRC's current dividend rate is 12.98% annually, and the dividends come from cash held by Strategy.
Strategy has secured dividend funding using its common stock (MSTR). It issues new common shares, sells them in the market, and raises cash. But this structure only works when Bitcoin 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.
One metric that shows this is the multiple of net asset value (mNAV). 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 the Bitcoin it holds (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 Bitcoin. If mNAV is 2.0, it means investing 20,000 won in common stock to buy 10,000 won worth of Bitcoin that Strategy holds. Through perpetual preferreds, Strategy has bought additional Bitcoin, raised the per-share Bitcoin value, and sourced dividends from common shares trading at a premium.
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 over which profits are distributed.
By contrast, buying Bitcoin by issuing perpetual preferreds does not dilute shareholder value. Perpetual preferreds have no voting rights and are not counted in the share count. If the annual dividend rate on perpetual preferreds is 10%, the company only needs to issue new common shares worth one-tenth that amount to raise the funds.
But for this structure to hold, Bitcoin's price must 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 mNAV is currently 0.88, indicating it is undervalued.
To prepare STRC dividends, Strategy now faces raising funds at a stock value below the value of the Bitcoin it holds. The market is concerned that Strategy could sell additional Bitcoin again. Virtual asset transaction firm QCP said in a recent report 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 fund dividends it sold 32 Bitcoins (about $2.5 million) between May 26 and 31 at a little over $70,000 each. The sale amounted to just 0.0038% of its Bitcoin holdings, but after news that Strategy broke its principle, Bitcoin fell into the $60,000 range.