Bitcoin flywheel fails, what are the Strategy solutions for unwinding?

Author: Chloe, ChainCatcher

 

Since October, MSTR has dropped by about 50%. After once surging to a high of $457 last year, it has significantly pulled back, far underperforming the broader market. According to MarketBeat data, the 12-month low is around $155.61, with a high above $450. It has now entered a relatively undervalued low range, with extremely high volatility.

So why has MSTR's stock price remained sluggish for months, not only far underperforming the broader market but even performing worse than bitcoin itself? This has led the market to question whether the bitcoin flywheel effect has already failed.

Double the Joy in a Bull Market, Double the Pain in a Bear Market

The sharp drop in bitcoin price is the most direct trigger. Since its peak on October 6, bitcoin has fallen by about 31%. Strategy, which holds about 650,000 bitcoins (accounting for 3.1% of the total supply), naturally could not escape unscathed. MarketWatch further calculated that the correlation between BTC and MSTR is close to 0.97, meaning the two are almost moving in tandem. However, due to the leverage effect, MSTR's volatility is further amplified: while bitcoin fell 31%, MSTR dropped by more than 50%.

The market is also questioning whether the flywheel model that MSTR relies on for survival is failing. Strategy's mNAV is currently at 1.15. According to CryptoSlate, the market is only willing to pay a 15% premium over the value of MSTR's bitcoin holdings. Once mNAV falls below 1.0, further stock issuance will become highly dilutive. Bloomberg also pointed out that as Strategy's market cap is only slightly higher than its bitcoin holdings, the premium has been severely compressed, and this positive feedback loop is malfunctioning.

Additionally, Strategy only purchased 130 bitcoins between November 17 and November 30, spending $11.7 million. For a company holding about 650,000 bitcoins, this is a negligible amount. This indicates that Strategy has realized that large-scale stock issuance at the current premium level would harm rather than benefit shareholders, so they have proactively hit the brakes.

The Financial Times also noted that after MSTR's stock price fell from its peak, its performance has started to lag behind bitcoin itself, raising doubts about whether the equity vehicle can add more value than simply holding BTC. Especially now that bitcoin spot ETFs have been launched and investors can directly allocate bitcoin more conveniently, why take on MSTR's associated debt burden, management risks, and potential equity dilution?

Furthermore, this year Strategy has financed its bitcoin purchase plan by issuing a large number of convertible bonds and high-yield preferred shares, which have brought a heavy fixed payment burden. A Seeking Alpha analysis report pointed out that this has raised the annual preferred dividend burden to several hundred millions of dollars; according to CryptoSlate's estimate, this figure could be as high as $750 million to $800 million per year, not including interest on convertible bonds. The problem is that while MSTR's traditional software business still generates more than $100 million in revenue per quarter, it is still unable to independently support this growing preferred dividend burden.

This is precisely the core reason why the company announced the establishment of a $1.44 billion cash reserve.

Addressing Concerns Over Selling Bitcoin for Cash, Strategy Sets Up USD Reserve

On Monday, Strategy announced the establishment of a $1.44 billion USD reserve, dedicated to paying preferred share dividends and existing debt interest, aiming to address external doubts about whether Strategy would "sell bitcoin for cash" to pay preferred dividends.

According to Strategy's press release, the $1.44 billion comes from proceeds from the sale of Class A common stock under the company's market issuance plan. The current plan is to maintain a reserve size that covers at least 12 months of dividend payments, with the intention to gradually strengthen the reserve, ultimately aiming to build a buffer fund that can cover 24 months or more of dividend payments.

This time, Strategy has put almost all the funds raised from stock sales into USD cash reserves, rather than buying bitcoin as aggressively as before. Even Saylor, amid sharp price fluctuations, has had to find more defensive financial operations.

However, even after the reserve news was released, the market reaction remained lukewarm. On the day of the announcement, MSTR fell more than 11% intraday, marking four consecutive months of declines.

As the company's mNAV remains close to 1 for a long time, it symbolizes the official failure of the original "sell stock to buy bitcoin" flywheel strategy. CEO Phong Le previously admitted that if financing dries up, the company may eventually consider selling bitcoin.

Reserve Temporarily Eases Market Concerns, But Capital Structure Risks Remain

According to independent researcher Spreek, with mNAV declining across the board and the bitcoin strategy hitting a bottleneck, Saylor has already begun turning to debt instruments as a new financing channel this year. These are less directly linked to the stock price and are intended to avoid further depressing MSTR's price and mNAV.

Spreek stated that STRC is directly targeted at retail investors, emphasizing stability and high returns, but ignores underlying risks: "STRC is more like LUNA and UST than MSTR's previous products." However, MSTR's balance sheet is still much stronger than Luna's back then, but the reflexivity mechanism still exists: every time Strategy raises the product's interest rate, the annual cash dividend payout increases significantly, and considering selling bitcoin to raise funds may only be a matter of time.

According to research forecasts, Strategy has roughly three foreseeable trajectories. First, it could choose to converge leverage, adopt a conservative stance, stop large-scale issuance of STR series preferred shares or debt, reduce the scale and speed of bitcoin purchases, and try to maintain reserves without selling BTC. Even if this means the stock price will run below mNAV for a long time, this essentially means the default end of the bitcoin flywheel, and MSTR will trade at a discount for the long term.

The second path relies on external macro momentum, such as liquidity injections from the Federal Reserve or political factors reigniting bitcoin enthusiasm, allowing Saylor to temporarily escape the quagmire and restart the old playbook: issuing more stock and convertible bonds as the stock price recovers, and buying more bitcoin at higher prices. But this is likely only to delay the endgame, as the structural flaw in the company's cash inflow always leads to buying at the top, so even if Saylor is directionally correct, he only stays on the edge of profit and loss. From a bitcoin perspective, this is the most favorable development in the short term, as it can ease selling pressure and support the price.

The third path is to maintain operations by accelerating the expansion of preferred shares such as STRC, attracting retail funds by raising yields, and pushing the debt scale to tens of billions or even hundreds of billions of dollars. In the short term, this seems better than directly selling stock or bitcoin, as it avoids immediate market shocks and temporarily revives the flywheel. However, the aforementioned reflexivity mechanism is likely to be gradually amplified: as payment obligations swell, the current annual dividend is nearly $750 million and may multiply in the future. The company will face a heavy burden of USD debt, and selling bitcoin to raise funds for repayment may ultimately become a last resort.

According to the latest report from Bloomberg, Strategy CEO Phong Le said that Strategy is considering lending out some tokens. This means Strategy hopes to gain new revenue from lending operations, which typically have an annual interest rate of 3-5%, but this is still far from being implemented.

Now, Strategy's decision to set up a $1.4 billion reserve may be a concession to its insistence on not selling bitcoin, but in facing reality, Strategy has also revised down its full-year financial forecast and key performance indicators, setting the year-end bitcoin price between $85,000 and $110,000; the full-year book USD profit target for bitcoin has also been sharply lowered from the original $20 billion to $8.4 billion-$12.8 billion, and Strategy further estimates that full-year net profit will range from a loss of $5.5 billion to a profit of $6.3 billion, a huge range and a significant downgrade from the previously estimated full-year net profit of $24 billion.