MSTR’s Bitcoin Holding Strategy Is Broken and Starting to Unravel

Michael Saylor’s hoarding strategy is a leveraged valuation metric that ignores market realities.

Broken Bitcoin Math

The Wall Street Journal reports Michael Saylor’s Strategy Is Trapped by Its Own Broken Bitcoin Math

Saylor has trained investors to believe Strategy’s model for acquiring bitcoins would work so long as the market valued the company at a premium to the value of its bitcoin holdings. Effectively, the company’s overvalued stock became a currency to buy bitcoin.

Strategy even created a bespoke metric called mNAV to track the premium. It did so while building a bitcoin stash worth more than $50 billion financed with sales of equity and debt securities.

The problem that came to a head recently is the metric began showing the market was valuing Strategy at a discount to the value of its bitcoins. The roll-up strategy was starting to come undone, and roll-ups typically don’t work well in reverse.

Adding to the strain: The metric is artificially inflated because it ignores sharp declines in the value of some of the company’s securities. Although the metric is essentially a made-up measure, it matters for Strategy investors and the crypto market.

By Strategy’s own logic, if the metric is at a discount instead of a premium, the company should be selling some bitcoin to buy back its own securities. Investors are watching warily for any sign that Strategy might start doing so in large numbers.

The stakes are high. Strategy’s holdings represent 4% of the total bitcoins that will ever exist. Selling some could drag bitcoin’s already battered price down further, along with Strategy’s stock. A small sale by Strategy in May had that effect, even though it sold just 32 bitcoins for $2.5 million. On Monday before the market opened, Strategy disclosed it sold 3,588 bitcoins last week for $216 million. That is still a tiny fraction of the bitcoin it owns.

That is why Strategy investors watch mNAV. So what is it?

Strategy says mNAV shows its enterprise value as a multiple of its bitcoin holdings, and it used to regularly show a steep premium to its bitcoin. In its heyday, this allowed Strategy to regularly sell stock to buy more bitcoin. It acted like a traditional roll-up company using inflated shares as currency to fund an acquisition spree.

For now, that game is over. Strategy’s stock is down 75% over the past year. And the mNAV has dropped precipitously, falling below 1 last month.

That set the stage for Strategy’s announcement on June 29 that it would abandon its hold-on-for-dear-life philosophy. It said its board had authorized selling up to $1.25 billion of its bitcoin to buy back shares and cover interest payments and preferred-stock dividends.

But Strategy’s predicament is worse than it appears. The mNAV metric has a flaw that has grown acute as the prices of Strategy’s bonds and preferred shares have tanked along with its stock.

To calculate enterprise value, Strategy adds the market value of its common stock to the principal amount of its debt and the par value of its preferred stock, then subtracts cash. Normally, that formula works fine, if the debt and preferred shares are trading at or near par.

The problem now is that mNAV overstates Strategy’s enterprise value—the ratio’s numerator—by using the face value of its debt and preferred stock rather than their market value. That makes the metric artificially high. It also defeats the purpose of showing the extent to which the market is valuing Strategy at a premium or discount.

On June 26, when Strategy said the mNAV was just under 0.99, it would have been 0.89 using the market value for its debt and preferred stock.

For enterprise value, Strategy included $6.75 billion of debt and $15.46 billion of preferred stock. Those were par values, not market values. At the time, Strategy’s debt was trading at a 7% discount, and its various series of preferred shares, combined, were trading for a 28% discount.

Since then, mNAV has rebounded along with Strategy’s share price. As of 4 p.m. Thursday, Strategy’s website showed mNAV as 1.09. But it would have been 1.04 using market values for its debt and preferred stock, only a slight premium.

To stanch the bleeding, Strategy on June 29 raised the dividend on its biggest preferred series, called STRC or “Stretch,” to 12%. It hoped to lure buyers and lift the price closer to par value.

The move revealed that Strategy cares deeply about its preferred shares’ market prices, despite not using them in the mNAV metric that it spotlights for investors.

Last week, the company estimated its $2.55 billion cash buffer would buy it about a 17-month cushion to pay interest and preferred dividends without selling its crypto. But if the market starts valuing Strategy at a discount again, and it sticks, Strategy faces the prospect of running out of cash and having no choice but to tap its bitcoin stash in much greater numbers.

Strategy might have bought itself some time. There’s no telling how much it has left.

Dwindling Premium and Not Marked to Market

Bitcoin Bottom Calling

In the past few weeks numerous pundits on X have announced Bitcoin’s bottom.

The calls have been wrong but I am willing to use a fat crayon on my charts. By that metric, Bitcoin is hovering right at support that has not yet broken.

I am willing, for now to use a fat crayon on the first and last box calling it possible.

But technically, it looks like a poor setup. The blast from 60K to 82K looked promising but the immediate collapse looks draining.

Bitcoin Weekly Chart

Bitcoin bounced feebly off strong support about six times.

This is not a good sign. The more times support or resistance is tested, the more likely it will fail.

However, there is a lot of support at 50,000 and 40,000. Beneath that, there is support 35,000 and strong double-bottom support at 25,000.

Saylor Sells More Bitcoin

What Can Go Wrong?

For Saylor, plenty, but he denies it.

Today, he sold more bitcoin to fund dividends.

Liquidation

Saylor a Threat to Bitcoin

I agree with that view. Potential forced selling of Bitcoin by Saylor dampens rebound potential.

A Bit of Reality

Strategy is a leveraged capital markets wrapper built on top of Bitcoin. Once you add preferred stock, convertibles, buybacks, reserves, dividend targets, and a BTC monetization plan, you are no longer just holding pristine collateral. You are running a dollar liability machine backed by a volatile, non cash flowing asset.

That becomes a major problem in a global recession because liquidity does not automatically flow to the asset with the best long term narrative. It flows first to what settles obligations like dollars, T bills, bank reserves, money market funds, high quality collateral, and sometimes gold. That is why M2 can rise while Bitcoin falls. New liquidity can be defensive, trapped in the banking system, or parked in collateral instead of chasing crypto risk. Strategy needs Bitcoin to hold up, MSTR to keep a premium, preferred buyers to keep funding it, and capital markets to stay open. If those break together, STRC trades lower, required yields rise, dividends get lifted, cash burn accelerates, reserves shrink, Bitcoin sales become more likely, and the never sell narrative breaks. Selling Bitcoin for business continuity does not prove Bitcoin is money. It proves dollar liabilities still rule the structure.

Another Bottom Call

I suspect wishful thinking.

Bitcoin Weak Despite This

Saylor may indeed mark the bottom, but I suspect that will be when MSTR blows up entirely. But who knows?