Original title: Deconstructing Strategy (MSTR): Premium, Leverage, and Capital Structure
By Patrick Bush and Matthew Sigel
Compiled by: TechFlow
We conduct an in-depth analysis of MicroStrategy (MSTR) as a structurally leveraged Bitcoin (BTC) investment vehicle, focusing on its net asset value (NAV) premium, regulatory positioning, and capital structure flexibility, which together drive its investment opportunities and risks.
Please note that VanEck holds positions in Bitcoin, MSTR, STRK, and STRF.
Four core viewpoints:
MSTR shares are a leveraged Bitcoin alternative: MSTR shares behave like a call option on Bitcoin. The strategy is to purchase more BTC as the price of Bitcoin rises by issuing shares and debt. This structure creates asymmetric upside potential and is highly sensitive to BTCs price fluctuations, making MSTR a popular alternative to directly holding Bitcoin.
MSTR trades at a significant premium to its net asset value (NAV): We calculate that MSTR trades at a +112% premium to the combined fair value of its Bitcoin holdings and core software business. This premium is driven by market expectations of future BTC holding growth, regulatory advantages, and speculative positions.
MSTR’s premium is a “crypto reactor”: this premium fuels MSTR’s equity value through a recursive cycle: volatility and Bitcoin exposure attract investor capital, which drives the accumulation of more BTC, further amplifying the premium.
Convertible securities add flexibility but also heighten risk: MSTR’s convertible bonds and preferred stocks (especially STRK and STRF) offer different levels of yield and BTC exposure, but also bring complexity, asymmetric downside risk, and sensitivity to volatility. Among them, the convertible bonds due on March 15, 2030 have the largest exposure to MSTR, but even these instruments are highly dependent on the performance of BTC and the persistence of the premium.
Strategy (MSTR) accounts for nearly one-third of the pure crypto equity market value and 10% of the Market Vector Global Digital Assets Equity Index (MVDAPP). Therefore, for investment managers who hope to obtain excess returns (alpha) through digital asset transformation, whether to include it in the portfolio has become a key consideration.
The debate over the merits of holding MSTR, directly holding Bitcoin (BTC) or leveraging BTC continues, and its complex capital structure further exacerbates the discussion. This complexity also includes convertible debt and equity instruments issued by Strategy, including high-yielding convertible preferred stock (STRK) and even higher-yielding non-convertible preferred stock (STRF).
In this article, we analyze Strategys capital structure and evaluate the pros and cons of holding a position in its equity or debt structure. We believe that MSTR common stock is a better investment choice than the other options for the following reasons:
Maximum exposure to Bitcoin
Simplicity of investment strategy
Optimal risk/reward ratio
What is Strategy?
Strategy (formerly MicroStrategy) is an enterprise analytics software provider and the pioneer of the concept of corporate Bitcoin reserves. In August 2020, Strategy assessed that the large amount of cash reserves on its balance sheet was vulnerable to inflation in the low interest rate environment at the time. As a result, Strategys Bitcoin reserve strategy was officially launched, using $250 million in cash to purchase 21,454 BTC.
By December 2020, Strategy further clarified its goal of purchasing BTC through financial means by issuing $650 million in convertible bonds. Since then, Strategy has transformed from a pure enterprise software company to a leveraged Bitcoin financial instrument. Through leverage and various forms of equity issuance, Strategy holds 2.7% of the total supply of Bitcoin, which corresponds to a value of approximately $61 billion as of this writing.
The core objective of the Strategy is to maximize MSTRs share price by increasing the number of Bitcoins backed by each share of common stock. By issuing debt or equity, the Strategy increases its Bitcoin holdings per share and calls this dynamic Bitcoin Yield. During periods of Bitcoin price increases, when investor demand is high, the Strategy will seize the opportunity to increase leverage or issue more equity. Therefore, the Strategys exposure and leverage to Bitcoin is recursive in that it is expected to grow over time.
As Bitcoin appreciates, the value of Strategys Bitcoin reserves also increases, allowing it to re-leverage to purchase more Bitcoin by issuing debt. On the equity side, the Bitcoin bull market drives the performance of MSTR common stock in the capital markets, allowing Strategy to raise funds to purchase more Bitcoin by issuing shares. Ultimately, MSTR shares provide accelerated exposure in sync with Bitcoin price increases, with price dynamics similar to call options on Bitcoin.
Understanding the Source of MSTR Equity “Premium”
Currently, MSTRs common stock is trading at a premium to the combined value of its Bitcoin net asset value (BTC NAV) and the value of its Strategy underlying software business, a portion of which is referred to as The Premium. As of this writing, MSTRs common stock is trading at a premium of +112% to the fair value of its underlying assets (Bitcoin holdings + core business). Mathematically, we define this as:
Source: VanEck Research (as of March 25, 2025)
There are many controversies in the market about the causes of MSTR premium, but we believe that it is mainly driven by the following four factors:
Expectations for Strategy’s future Bitcoin holdings
Limited options for investors to gain exposure to Bitcoin
Leveraged exposure to Bitcoin and the advantages of Strategy leverage
Speculative Behavior
The primary source of the MSTR premium is the markets expectations of Strategys future Bitcoin holdings. The future value of Strategys Bitcoin holdings can be estimated using the following three key factors:
The number of terminal bitcoins held
Expected future price of Bitcoin
The discount rate applied to these positions
The premium on MSTR stock largely reflects the markets recognition of the companys continued future purchases of Bitcoin. A positive premium indicates that the market expects the value of each Bitcoin to continue to grow, while also reflecting the discounted value of Bitcoins future price.
The second factor can be described as a “regulatory premium” that stems from structural limitations in the investment environment. Many institutional and individual investors are unable to purchase Bitcoin directly due to regulatory restrictions, investment regulations, distribution bottlenecks, or a lack of secure custody solutions.
Without access to capital-efficient Bitcoin investment vehicles with leveraged exposure, they choose to invest in MSTR. In addition, many jurisdictions have unfavorable tax treatment and capital holding requirements for Bitcoin, making investors prefer listed stocks like MSTR as an alternative vehicle. As a common stock, MSTR also has the financial advantage of being a collateral asset. These investor restrictions make MSTR an attractive proxy for Bitcoin exposure, especially for investors who do not have direct access to the asset class.
The third factor behind MSTRs premium is the markets recognition of Michael Saylors (Strategy founder) ability to use financial leverage. Saylor has demonstrated the ability to raise huge amounts of capital at low interest rates, while his corporate structure has shown resilience during Bitcoin market declines. Unlike typical margin traders, Saylor is able to withstand losses and maintain long-term positions. During 2022 and part of 2023, MSTRs market capitalization remained in the billions of dollars despite Strategys equity deficit reaching hundreds of millions of dollars, reflecting investors confidence in Strategys long-term leverage structure.
MSTRs unique dynamics have caused its 30-day historical volatility to soar to ~113%, far higher than Bitcoins ~55%. Overall, MSTR stock provides investors with a convenient way to gain leveraged Bitcoin exposure through publicly traded stock markets. The premium is the main contributor to MSTR stocks volatility and performance. By decomposing the weights, correlations, and volatility of the MSTR portfolio (Bitcoin + core business + premium), we find that the premium contributes 96.5% to total returns and about 87.5% to volatility.
We use QQQ (Invescos Nasdaq 100 ETF) as a proxy for technology sector exposure, specifically targeting large software and cloud computing companies to reflect the characteristics of MSTRs core business.
Source: VanEck Research (as of March 26, 2025). Past performance is no guarantee of future results. The information, valuation scenarios and price targets in this article are not financial advice and do not constitute any call to action, recommendation to buy or sell, or prediction of Bitcoin’s future performance. Bitcoin’s actual future performance is unknown and may differ significantly from the hypothetical results presented in this article. In addition, the scenarios presented in this article may not cover all risks or other factors that could hinder its performance. These are simulated results based on our research and are provided for illustrative purposes only. Please conduct your own research and draw your own conclusions.
The fourth component of MSTR’s premium stems from speculative trading dynamics related to its volatility and capital structure. Because the premium contributes so much to MSTR’s earnings and volatility, any disruption to the core drivers will have a very negative impact on MSTR’s stock price. This is because Saylor uses MSTR’s volatility to fund the purchase of Bitcoin (BTC). As we will explain in detail below, Saylor’s preferred financing methods for purchasing BTC are, in order: preferred stock, convertible preferred stock, convertible debt, and common stock. This order is based on the “BTC benefits” that common shareholders can receive, which are driven by the number of BTC corresponding to each common share. For example, the sale of preferred stock will result in equity dilution, but the proceeds will directly translate into BTC benefits for common shareholders.
These securities launched by Strategy are popular with investors because MSTRs high volatility provides a lot of opportunities for various layers in its capital structure and options trading on MSTR. In fact, Strategy is able to maintain a low interest rate on its convertible debt precisely because MSTRs volatility makes the option portion of the convertible debt extremely valuable. It can be said that Strategy prices these option values at a low price to attract relative value trading entities. These sophisticated arbitrageurs conduct relative value trading through the volatility between Strategys various securities.
Ultimately, there is a circular relationship between Strategy’s premium and its ability to finance the purchase of more BTC. The premium is the primary source of MSTR’s volatility, and the premium is largely dependent on Strategy’s ability to finance BTC purchases. The market is willing to buy Strategy’s shares precisely because of the volatility in its capital structure, and Strategy can arguably sell that volatility at a low price. In the Q1 2025 earnings call, Saylor referred to this reinforcing dynamic as a “crypto reactor that can last a long time.”
MSTRs premium exhibits a clear positive correlation with the price of Bitcoin. Over the past year, its correlation coefficient with BTC is 0.52 (T-Stat = 9), and its approximate Beta coefficient with BTC is 1.77. This suggests that as the price of Bitcoin rises, the premium tends to widen, further enhancing MSTRs stock performance. The connection between BTC prices, speculation, financing capabilities, and MSTR valuations forms a self-reinforcing cycle that is core to the companys strategy.
Correlation between premium and Bitcoin price
Source: VanEck Research (as of March 26, 2025). Past performance is no guarantee of future results. This article is not a recommendation to buy or sell any security mentioned.
Funding a Bitcoin Reserve Strategy
In October 2024, Strategy announced an ambitious 21/21 capital plan to raise $42 billion by 2027 to purchase Bitcoin (BTC) by selling $21 billion in MSTR shares and $21 billion in fixed-income securities. According to the original plan, Strategy will sell $5 billion, $7 billion, and $9 billion worth of shares in 2025, 2026, and 2027, respectively. At the same time, the issuance of fixed-income securities will be at the same pace, at $5 billion, $7 billion, and $9 billion, respectively. These debt issuances target a leverage ratio of 20%-30%. Michael Saylor, the leader of Strategy, calls it Intelligent Leverage and emphasizes that it is not for speculation, but for strategic acquisition of dominant digital assets.
Thanks to the unprecedented crypto bull run following the launch of the 21/21 program, Strategy has sold all $21 billion of MSTR shares through its At-the-Market (ATM) program as of May 2025. In the fixed income segment, Saylor has sold $5 billion in convertible bonds, $875 million in STRK convertible preferred stock, and $850 million in non-convertible preferred stock. During the May 1, 2025 earnings call, the company announced an expansion of its funding program to $84 billion, including an additional $21 billion in MSTR ATM program, an existing $21 billion in STRK ATM, and an additional $14 billion in convertible debt issuance.
42/42 Financing plan completed 32%
Source: Strategy, as of May 7, 2025. Past performance is no guarantee of future results. This article is not a recommendation to buy or sell any security mentioned.
With the current Bitcoin price around $95,000, Strategy holds 555,450 BTC. According to calculations, Saylors leverage ratio ((Debt + Preferred Stock) / Market Value) is 9%, which is the lowest leverage ratio Strategy has undertaken since 2020. Given Saylors current below-average leverage ratio and its preference for convertible, unsecured and non-recourse debt, it is reasonable to expect that more funds will be raised through convertible debt in the future.
Buy with Volatility Funding BTC
Source: Strategy, as of March 25, 2025. Past performance is no guarantee of future results. This article is not a recommendation to buy or sell any security mentioned.
Since MSTR shares are pegged to Bitcoin, they are extremely volatile and their leverage could increase further as Strategy finances the purchase of more BTC. Most investors are unfavorable to leveraged purchases of highly volatile assets such as BTC and therefore typically demand higher interest rates. Strategy addresses this issue by issuing convertible bonds and convertible preferred stocks, which have embedded option features that provide most of their value.
Sophisticated investors favor these offerings because they allow for activities such as convertible stock arbitrage. In this high-risk and complex trading strategy, experienced investors profit from realized volatility, implied volatility, and other components of option pricing models by purchasing convertible bonds and shorting MSTR stock and/or MSTR options.
This trading dynamic helped Strategy solve its cash flow problem while ensuring low interest payments on its debt. Due to the strong market demand for high-volatility convertible securities, Strategy could promise investors very low future interest payments. A complex balancing dance was formed between Strategys capital markets strategy and the market needs of potential investors.
Source: Strategy, as of May 5, 2025. Past performance is no guarantee of future results. This article is not a recommendation to buy or sell any security mentioned.
Net proceeds are the amount after sales commissions are deducted.
The 2024 common stock ATM (at-the-market issuance) program has been substantially exhausted and its sales agreement has been terminated in accordance with its terms.
This involves the Strategy pricing implied volatility, setting strike prices, and adding call prices to maximize the tradability of each issue. For example, setting a call price close to the market allows the Strategy to put a cap on the option portion of its bond. The result is a derivative that behaves more like a capped call with potentially lower delta than a vanilla call. Choosing a strike price away from the money can also reduce the value of the option portion, thereby reducing delta. Lowering delta means reducing the amount of MSTR shares (or options) needed to hedge the options in the convertible. Many convertible arbitrage players prefer low-delta issues because these have lower capital requirements on the trading balance sheet.
Assessing the financing sustainability of Strategy
While Strategys core business generates some operating income, its financed BTC purchases will create significant cash requirements. Based on Strategys filings and statements, we expect total debt to reach $13 billion by the end of 2025 (up from approximately $8 billion in April 2025) and $19 billion by the end of 2026. We also expect preferred equity to grow to $7.5 billion in 2025 and $15.5 billion in 2026.
By the end of 2025, we expect annual interest payments to reach $48 million, increasing to $87 million in 2026. Meanwhile, preferred stock (STRK) dividend payments are expected to increase from $217 million in 2025 to $904 million in 2026. We estimate these numbers based on the markets expected demand for MSTR bond coupons and preferred dividends. While Strategy retains the option to pay STRK preferred dividends in common stock, doing so would dilute existing MSTR holders by reducing BTC per share.
With projected revenues of $475 million in 2025, Strategy relies on financing to cover its fixed-income obligations. Of course, the ability to raise new capital depends on the price of Bitcoin. If the price of Bitcoin continues to rise, obtaining new capital will become easier. From August 2024 to May 2025, Strategy increased its holdings from 226,000 BTC to 555,450 BTC through financing. However, during the cryptocurrency downturn from June to December 2022, Strategy was only able to raise $49 million and $11 million through equity and debt sales, respectively. Bear markets could pose a challenge to Strategy due to increased cash outlays due to new fixed-income securities issuance.
MSTR is a convex bet on BTC price
Investing in MSTR is somewhat similar to investing in call options on BTC, as MSTR has leverage sensitivity (or torque) to BTC price fluctuations. However, it is actually more similar to attempting to dynamically replicate a call option on BTC by increasing leverage exposure as prices rise. The strategy is to increase its BTC position as financing becomes available, which typically occurs when BTC prices rise. The risk of this strategy is not only in falling prices, but also in the shrinking premium due to the collapse of financing for buying BTC. In addition, this strategy deploys capital when BTC is reaching its highs, which may be considered poorly timed.
The net benefit of a “naive” purchase exceeds that of a strategic purchase
Source: VanEck Research, Strategy, as of March 26, 2025. Past performance is no guarantee of future results. This article is not a recommendation to buy or sell any security mentioned.
Strategy buys Bitcoin (BTC) at local highs and loses compared to other strategies because it causes its average purchase price of BTC to be higher than if it were purchased randomly. Whether Strategys purchases are the cause of these local highs and lows is another question. In any case, this strategy of buying at local highs is a loss for shareholders compared to a naive and randomly implemented BTC purchase strategy. But on the other hand, due to the positive convexity of MSTR, changes in the price of Bitcoin will cause the US dollar value of each BTC share to increase significantly, and new financing will also increase the number of BTC held per share. Therefore, investors will gain greater BTC exposure as the price of BTC rises.
As an individual investor, it is almost impossible to replicate Saylors strategy without a corporate shell. Although investors can see their margin balance grow when BTC rises by purchasing BTC futures, allowing them to buy more BTC, they cannot patiently hold such a leveraged position during price declines. Futures contracts are settled daily at market prices, which means that profits and losses are settled regularly, and margin calls must be met immediately when the market pulls back. If the price of BTC retreats by more than its margin balance, margin traders will be forced to close their positions.
Therefore, even though a savvy trader might try to emulate Saylors strategy and gradually accumulate as BTC appreciates, even a modest pullback could trigger a forced liquidation, resulting in the traders position being wiped out. This daily margin requirement makes it difficult for individual investors to replicate Strategys long-term BTC accumulation strategy through futures. As a result, Strategy has a significant financial advantage that allows it to run leveraged BTC strategies more efficiently.
MSTR’s Capital Strategy and Bitcoin Returns
Strategy’s financial engineering creates more BTC exposure per common share through increased debt and equity. This is because Strategy’s core objective is to increase the exposure of common shares to the price of BTC. Saylor refers to the increase in the number of BTC per share as “BTC Yield.” This key performance indicator (KPI) is calculated by comparing the amount of BTC held per common share over time. As of May 2025, the year-to-date BTC yield is approximately 14% (based on common shares outstanding) and approximately 13% on a fully diluted basis. Strategy’s minimum BTC yield target for 2025 is 25%. This means that the amount of BTC per 1,000 shares of MSTR common stock will increase from approximately 1.79 BTC on May 8, 2025 to approximately 1.99 BTC by the end of the year.
Strategy’s Bitcoin returns face tough outlook
Source: Strategy, as of May 8, 2025. Past performance is no guarantee of future results. This article is not a recommendation to buy or sell any security mentioned.
Strategys management team has several options for generating BTC Yield. They can acquire Bitcoin by selling various financial products, thereby increasing the numerator (Bitcoin holdings); or repurchase common stock to reduce the denominator (the calculation base of Bitcoin holdings per share). Since MSTR is trading at a premium, it makes more sense to sell high-priced stocks or issue debt to acquire Bitcoin.
Selling common stock through an ATM (At-the-Market) mechanism to purchase Bitcoin may be the simplest method, but it is also the most dilutive method and involves purchasing the most Bitcoin. During the Q1 2025 earnings call, Saylor mentioned this dynamic and noted that they prefer to acquire Bitcoin through the sale of permanent, non-convertible equity shares.
Example of BTC KPIs for a $100 million offering in different security formats
Source: Strategy, as of May 8, 2025. Past performance is no guarantee of future results. This article is not a recommendation to buy or sell any security mentioned.
If Saylor does not increase the number of common shares to achieve Strategys return target, he would need to purchase 58,312 BTC, which is about $5.9 billion at current prices. On the other hand, if he increases exposure only by issuing common shares, he would need to issue about 25.8 million shares to purchase 108,305 BTC worth of Bitcoin, which is about $10.8 billion at current prices. Given the strong demand for Strategys capital structure in the capital markets, Strategy is likely to easily achieve its 25% return target by 2025.
High BTC returns are difficult to sustain
Cost per Basis Point of Increasing MSTR Earnings ($ Millions, 90-Day Moving Average)
Source: VanEck Research, as of April 11, 2025. Past performance is no guarantee of future results. This article is not a recommendation to buy or sell any security mentioned.
The reality facing Saylors Bitcoin strategy is that high Bitcoin returns are difficult to sustain due to diminishing returns. As the Strategy holds more BTC, it becomes more difficult to generate significant additional Bitcoin returns. This is because the number of Bitcoins required for each additional basis point of return increases disproportionately as the total amount of Bitcoin increases.
For example, in August 2021, MicroStrategy only needed 2.6 BTC to generate one basis point of Bitcoin yield. By May 2025, that number had soared to 58 BTC. From a funding perspective, the funds required to achieve the same unit of yield increased from approximately $126,000 to $5.5 million. This reflects a basic mathematical reality: as Strategys Bitcoin base grows, the marginal contribution of each additional BTC to yield decreases, while the funds required to generate yield grow exponentially. This compound inefficiency leads to a decreasing upper limit on sustainable yields.
Valuing Strategys Convertible Bonds
Source: VanEck Research, Strategy, as of April 2, 2025. Past performance is no guarantee of future results.
The information, valuation scenarios and price targets in this article are provided for informational purposes only and do not constitute financial advice, any recommendations for action or buy or sell, or a prediction of the future performance of Bitcoin. The actual future performance of Bitcoin is unknown and may differ significantly from the hypothetical results depicted here. Risks or other factors that may not be considered in the scenarios may hinder its performance. These are only simulation results based on research and are provided for illustrative purposes only. Please do your own research and draw your own conclusions.
Convertible bonds are hybrid securities that combine the characteristics of fixed income with the upside potential of equity. Specifically, they consist of a traditional bond with an embedded call option that allows the holder to convert the bond into MSTRs common stock under certain conditions. The total value of a convertible bond is equal to the bond value plus the value of the conversion option. Therefore, an investor who purchases a convertible bond actually allocates part of the principal to the companys bonds and another part to the call option. As a result, the price of a convertible bond is sensitive to option pricing variables (such as the underlying price, delta, gamma, etc.) as well as bond pricing factors (such as interest rates and credit spreads).
Strategy’s convertible notes have special clauses that limit the upside of the attached options while providing some protection for investors’ principal. Strategy embedded a “call option” that allows the company to repurchase the notes at par plus unpaid accrued interest after the call date. The most common clause in Strategy’s convertible notes is that the company can redeem the bonds if MSTR trades at 130% of the convertible bond exercise price. This clause limits the upside of the bond option value after the call date. In addition, with the exception of the bonds issued on March 1, 2030, Strategy also allows its convertible bondholders to sell the bonds back to the company at par after the holder’s call date, which can be viewed as a floor protection for the bond price in the event that Strategy encounters financial difficulties.
The March 15, 2030 convertible bond has the most leverage effect on the MSTR price due to its large option component
Source: VanEck Research, as of April 2, 2025. Past performance is no guarantee of future results. This article is not a recommendation to buy or sell any security mentioned.
Due to the extreme volatility of the underlying stock, MicroStrategys convertible bonds contain significant embedded option value. Depending on the offering, up to 74% of the total value of the bonds can be attributed to options. The higher this percentage, the greater the investors exposure to MSTRs stock price movements. This exposure can change significantly as MSTRs volatility changes and options move in or out of the money.
Among all outstanding convertible bonds, the risk characteristics of the March 2030 Class B bonds are closest to those of MSTR shares. In high volatility scenarios (e.g., when MSTRs volatility is > 80), the bond is most sensitive to MSTR prices, whether the stock price is rising or falling. Conversely, the December 2029 bonds are least sensitive to MSTR prices because their embedded options are the most deeply out-of-the-money. This results in a smaller contribution of options to the overall bond value, which reduces their impact on bond price volatility.
Implied Credit Spread vs. BTC Adjusted Credit Valuation
Source: VanEck Research, Strategy, as of May 7, 2025. Past performance is no guarantee of future results. This article is not a recommendation to buy or sell any security mentioned.
The bond portion of Strategys convertible debt is controversial for its high credit spreads. The wide credit spreads reflect the markets risk assessment of Saylors bonds, and therefore the bonds are priced cheap. As mentioned by Saylor in the Q1 2025 earnings call, the credit spreads on Strategys fixed income securities range from 500 to 1,250 basis points. This allows Strategys bonds to be classified as double or triple junk bond credit spreads.
Saylor believes that the reason these credit spreads are so wide is because the market does not properly assess the value backed by BTC collateral. Because credit rating agencies failed to adequately assess Strategy’s bonds, Saylor claims that many long-term investors did not purchase these bonds due to perceived risk. This lowered the market price of the bonds and caused credit spreads to be too wide.
Saylor conducted his own analysis of Strategys convertible bonds using option pricing models to prove that these bonds are undervalued because the value of the collateral is not fully considered. He proposed the concepts of BTC Rating and BTC Risk to describe the potential risk of Strategys debt. The BTC Rating is the multiple of Bitcoin holdings to the face value of the bond at the current BTC market price. This indicator applies to all bonds and is adjusted based on the priority of Strategys Bitcoin holdings when they are liquidated. For example, the BTC rating of the September 14, 2028 bond is 52.1 times, which means that at the current BTC price, Strategys BTC value is 52.1 times the face value of the bond.
Saylor uses the BTC rating in conjunction with the option pricing model to calculate the probability of the BTC price being lower than the liquidation price using the current BTC price and volatility, thereby ensuring that bondholders will not suffer losses. He calls this calculated probability BTC risk and inputs it into the bond pricing model to generate a new credit spread that he calls BTC Credit. As shown in the table above, Saylor believes that the market overestimates the probability of default for each bond, causing these bonds to trade at prices lower than the reasonable assessed price.
Implied yield on the bond portion of the MSTR convertible bond
Source: VanEck Research, as of April 7, 2025. Past performance is no guarantee of future results. This article is not a recommendation to buy or sell any security mentioned.
All forecasts in this article are based on VanEcks own research, are for illustrative purposes only, are valid as of the date of this article, and are subject to change without notice.
Strategy A major issue with convertible bonds is the large impact of the embedded option component on their pricing. As a result, many of the bonds issued are currently trading well above their par value, which acts as a degree of downside protection. That is, if the option premium weakens, a significant portion of the bonds value could decline. For example, as of May 7, 2025, the price of the 2028 convertible bond was $227.15. If MSTRs stock price fell below the bonds conversion price of $183.19 at maturity, the bond would be worth only $100 (assuming other factors remain constant). This reflects the significant option premium embedded in these instruments.
Another significant risk of embedded options is the sensitivity of option pricing factors such as changes in volatility. We estimate that if volatility drops from 85 to 50, the average bond value will drop by about (-13%); if volatility drops further from 85 to 30, the average price drop will be about (-20%).
The performance of MSTR stock is significantly influenced by the “premium”, which accounts for 87% of its volatility and 96% of its total return. We believe this suggests that investors who invest in MSTR convertible bonds are not just buying an option on the stock, they are actually buying an option that the “premium” will persist. And this premium is mainly driven by the price of Bitcoin. As the price of Bitcoin rises, the company gains more financing capabilities, thereby increasing the expected value of its holdings and supporting market speculation in MSTR stock.
If the price of Bitcoin falls, the premium may also fall with it. We estimate the beta of this relationship to be approximately 1.77 times, which means that the value of the premium could fall significantly relative to the price of Bitcoin. Such a decline would erode the value of the option portion of the convertible bond.
The fixed income portion of the convertible bond is also affected by the premium. The straight-line value of the bond is partly dependent on the companys ability to raise funds in the future. However, Strategys revenue is insufficient to cover its fixed income obligations, let alone repay the principal when it matures. If the premium falls, Strategys ability to raise funds will weaken, which may lead to a widening of credit spreads, thereby reducing the value of the corporate bond portion of the convertible bond. The main reason for the decline in the premium may be the decline in the price of Bitcoin. In addition, the decline in the price of Bitcoin will also reduce the probability that bondholders will receive full recovery value in the event of Bitcoin liquidation, further weakening the value of Strategys convertible bonds.
This downside scenario is not inevitable, but serves to highlight that both components of the convertible bond - the options and the bond itself - are tied to the same underlying drivers: Bitcoin price and MSTR premium. While some investors may be able to hedge these risks, many may struggle to understand them, let alone manage them effectively. MSTR convertible bonds may appeal to investors seeking yield and potential upside, but they involve many risks. These instruments may be better suited for sophisticated investors who can execute dynamic hedging strategies and analyze the behavior of equity-linked debt.
Convertible bonds rise in value as credit risk tightens
Source: VanEck research, as of May 7, 2025. All forecasts in this article are based on VanEcks own research, are for illustrative purposes only, are valid as of the date of this article, and are subject to change without notice.
Despite the risks, Strategy’s convertible bonds offer an exciting vehicle for speculating on advances in cryptocurrency accounting practices. If credit rating agencies view Bitcoin more positively as collateral for debt, this could lead to a significant tightening of credit spreads. This would significantly increase the overall value of Strategy’s convertible bonds by increasing the value of the bond portion. If Strategy’s bonds achieve the lowest estimate of what Saylor considers to be “real” credit spreads, we calculate that the median convertible bond value would increase (+16%). In fact, convertible bonds with a higher bond value component are likely to see the largest price increases.
The most attractive targets are the Dec 1, 2029 bonds (+31% upside) and the Mar 1, 2030 bonds (+26% upside). Given that the Mar 1, 2030 bonds are closer to the in-the-money region of options, the combination of their credit spreads translating into what Saylor defines as “BTC credit” and their high option value may be attractive to the brave speculator. However, for traditional long-term investors, the exposures contained in these bonds may be too complex to manage. On a relative basis, we believe they are less attractive than other parts of MSTR’s capital structure.
MSTR price simulation (Bitcoin price fluctuation +/- 80%, MSTR volatility = 80)
Assume that MSTR volatility is 80 and BTC falls 80% in 3 months.
Source: VanEck Research, as of April 2, 2025. All forecasts in this article are based on VanEcks own research, are for illustrative purposes only, are valid as of the date of this article, and are subject to change without notice. This article does not constitute a recommendation to buy or sell any security mentioned.
STRK Overview and Analysis
STRK is known as Preferred Perpetual Convertible Equity, which combines several concepts into one security. It offers a perpetual dividend of 8% of par value, which can be paid in cash or common stock. However, there are restrictions on the payment of dividends in common stock, for example, if the value of MSTR is less than 35% of its price on January 27, 2025 ($347.92), the total number of common shares paid will be limited.
STRK also offers an MSTR stock option with no expiration date (i.e., no time decay in option value) and liquidation rights typically associated with preferred stock. Similar to a convertible bond, but with a lower priority, it is a fixed income security with a deep out-of-the-money call option with a strike price of $1,000, which is 2.5 times the current MSTR trading price (as of May 7, 2025).
According to our calculations, about 36% of STRKs current price comes from call options, which allows holders to gain upside exposure to MSTR. Due to the extremely high volatility of MSTR and the perpetual nature of options, the option portion of STRK is already trading at a Delta close to 1, despite the options being deeply out-of-the-money. This means that STRKs price fluctuations are already closely linked to MSTRs price fluctuations in the option portion.
Until MSTR shares approach the conversion strike price, we expect STRKs sensitivity to changes in volatility to be significantly asymmetric and biased to the downside. For example, if implied volatility increases from about 80% to 120%, we estimate that STRKs price will increase only slightly (+0.01%). However, if volatility decreases from 80% to 40%, we expect STRKs price to decrease by about (-3%), while a further decrease in volatility to 20% would result in a loss of about (-19%).
The reason for this asymmetric risk is that STRKs embedded call option is currently deeply out-of-the-money and perpetual. In this case, an increase in volatility above a certain level has little effect on the probability that the option will eventually enter the money, thus making the upward reaction flat. Conversely, a decrease in MSTRs current volatility will significantly reduce the probability of the option entering the money, resulting in a sharp drop in price. This convex volatility exposure, limited upside, and significant downside risk are key to STRKs risk profile. In other words, STRK can be thought of as a security that pays you to hold a call option, but its upside is more limited than buying MSTR directly.
STRK price falls asymmetrically as volatility decreases
Source: VanEck research, as of April 7, 2025. All forecasts in this article are based on VanEcks own research, are for illustrative purposes only, are valid as of the date of this article, and are subject to change without notice. This article does not constitute a recommendation to buy or sell any security mentioned.
From a pricing perspective, we expect STRKs price movements to be significantly muted relative to changes in MSTRs stock price, both up and down. For example, we calculated that if MSTRs stock price were to increase (+100%), ceteris paribus, STRKs price would increase by approximately (+37%). Conversely, if MSTRs stock price were to decrease (-50%), STRKs value would be expected to decrease by approximately (-17%).
However, in a downside scenario, STRKs credit spreads could also widen, which has important implications for the value of its preferred tranche. For example, if the credit spread increases by 500 basis points from 700 basis points to 1,200 basis points, and at the same time MSTRs stock price declines (-50%), the combined effect could cause STRKs price to decline by approximately (-30%). We believe this scenario is likely to occur, as Strategys credit spread direction tends to follow MSTRs price movements.
Interestingly, STRK’s implied credit spread is closer to Saylor’s Bitcoin-based estimate than to Strategy’s convertible bonds. This suggests that STRK has less upside if its credit spread converges to Saylor’s calculation.
Strategys Debt and Capital Structure
Assume a Bitcoin price of $95,000, Bitcoin volatility of 50%, and Bitcoin annualized return of 0% (the “Skeptic” scenario).
Source: FactSet, Strategy, as of May 7, 2025. This article is not a recommendation to buy or sell any security mentioned.
The duration of convertible bonds is calculated to the redemption date, and the duration of preferred stocks is calculated based on the Macaulay duration.
The log-normal model is used to adjust the Bitcoin annualized return rate (BTC ARR) and Bitcoin volatility (BTC Volatility) to calculate the probability that the BTC rating will fall below 1x within a specific duration.
Assuming the risk is the same every year and there is no recovery when the collateral is insufficient, the BTC risk is annualized to obtain the BTC credit value (BTC Credit = -ln( 1 - BTC Risk) ÷ Duration).
Source: Bloomberg and Kynex. Assuming borrowing costs of 0.50% and volatility of 60% to calculate credit spreads on convertible bonds; assuming the embedded call option in STRK is worth 200 basis points.
As mentioned above, Strategy plans to issue approximately $20 billion of additional STRK. These future issuances will further increase the claim on dividends generated by Strategy, thereby increasing its risk level. Even without additional STRK issuance, Strategys ability to pay existing dividends with cash appears to be limited. STRKs capital stack position is even lower than Strategys convertible bonds, which leads Saylor to rate STRKs Bitcoin Risk (BTC Risk) as much higher than the convertible bonds. In Strategys baseline assessment (assuming that Bitcoin prices do not rise), there is a 46% probability that the value of Bitcoin held by Strategy will fall below STRKs implied support within one year.
We believe that several structural features of STRK present significant downside risk without corresponding upside potential. These features include weak Bitcoin support, the possibility of a dividend suspension, and a small options component in the bond. In addition, STRKs credit spread re-rating provides very limited price upside.
Therefore, we believe that STRKs risk-reward ratio is not ideal for long-term investors, especially when compared to the risk-reward ratio of MSTR stock. However, for active investors who can expertly hedge STRKs risk, its volatility and dividend characteristics may be attractive. Income-oriented active investors who want some upside potential from MSTR stock may be interested in STRK. In addition, investors who are long-term bullish on the Strategy may find STRK more attractive because its option portion has a Delta close to 1 while also offering an attractive yield.
STRF Overview and Analysis
STRF is a simple preferred stock instrument that provides a fixed cash coupon of 10% per year. Unlike STRK, STRF cannot pay dividends on common stock. Currently, STRF is trading at $94.30, and its effective annualized yield is about 10.6%.
STRFs valuation is primarily driven by current interest rates and Strategys credit spread. Under the terms of the agreement between Strategy and STRF holders, the coupon rate will increase by 100 basis points for each missed dividend payment, up to a maximum of 18%. If dividends are not paid four times in a row or eight times cumulatively, STRF holders have the right to elect a director to Strategys board of directors. This right will be revoked once all unpaid dividends are repaid. STRF has a higher priority in the capital structure than STRK and MSTR common stock and has a stronger claim in the event of liquidation. However, its support capacity is weaker, with its Bitcoin rating at 5.8 times, while STRK is 5.3 times.
These protections make sense given that MSTR has not generated significant cash flow since 2021, but they are still relatively weak given Bitcoins volatility. Dividend payments could be suspended if MSTRs core business deteriorates further or the company loses access to capital markets. In this scenario, STRF would be similar to a long-term subordinated bond with significant credit risk but no equity upside potential. If this event coincides with a drop in Bitcoin prices (a possible scenario), the value of STRF would be significantly affected.
The biggest challenge for STRF is that it cannot benefit from the rise in Bitcoin, but is exposed to the risk of a significant drop in Bitcoin prices. Since a drop in Bitcoin prices could weaken Strategys ability to meet its cash obligations, its credit spread will widen. This view is empirically supported, as STRF has a 50% correlation with MSTR and a 55% correlation with Bitcoin. We calculate STRFs credit spread to be approximately 6.1% based on current market prices. If this credit spread is close to the median of 10.25% for convertible bonds, the value of STRF will drop by approximately (-28%). Similar to STRK, STRF is also highly exposed to the impact of Bitcoin prices and the MSTR premium.
We believe that STRFs risk profile is not ideal for long-only investors due to limited upside and exposure to unpredictable risk factors. However, STRFs risk profile may be ideal for very advanced investors who could use STRFs dividends to purchase options on Bitcoin for some upside exposure or downside protection.
Summary of Strategys capital structure
Strategys capital structure is highly dependent on the following factors:
Bitcoin Price
Strategy Ability to raise more funds to buy Bitcoin
Price volatility of Bitcoin and MSTR
MSTR offers an asymmetric investment opportunity that combines leveraged exposure to Bitcoin, regulatory compliance, and public market liquidity. Despite a complex capital structure and significant risks, MSTRs design provides investors with a unique tool to participate in Bitcoins upside through leverage and strategic selectivity that is difficult to replicate. For investors who are unable or unwilling to directly hold Bitcoin or managed futures strategies, MSTR is a more practical and effective alternative. Continued investor confidence, stable access to capital markets, and strict execution remain key to maintaining this investment logic.
Tips for Businesses Considering Bitcoin Financial Strategies
From a strategic perspective, Strategy offers the following key lessons for businesses considering implementing a Bitcoin financial strategy:
Clear strategic goals: Adopting a Bitcoin financial strategy must have a clear goal. Strategys case shows that its core goal is to increase the number of Bitcoins held per share, rather than following traditional financial metrics such as dilution effects or corporate value in fiat currency. Under the leadership of Michael Saylor, the company re-adjusted its valuation framework around Bitcoin itself. Saylor defines success as the number of Bitcoins represented by each share of MSTR, rather than returns in US dollars. This clarity of goal allows it to maintain a consistent and long-term decision direction amid market fluctuations.
Structured Funding Strategy: The company needs to develop a funding strategy that fully exploits market dynamics to support the accumulation of Bitcoin. Strategy successfully attracted market funds by taking advantage of investors preference for volatility and embedded options. Saylor built a financial ecosystem to attract retail investors and active traders through convertible bonds, preferred stocks and common stock issuance. The volatility of Bitcoin is transmitted to the volatility of MSTR, thereby maintaining the market demand for its securities. For example, the size of open interest in MSTR stock options ($9.5 billion) exceeds that of GOOG and AMZN ($8 billion and $8.4 billion, respectively), even though GOOGs market capitalization is 15 times that of MSTR. This flywheel effect enables Strategy to finance Bitcoin purchases on favorable terms while reducing cash obligations and avoiding complete reliance on traditional debt or equity issuance.
Creation of market demand: Companies must recognize that market demand for Bitcoin-related securities will not automatically form. Investor participation, innovative structuring, and transparent communication are essential. Whether through traditional issuance, structured products, or the integration of digital assets, companies need to design financial instruments that can provide returns and/or significant upside potential to attract capital. Because Bitcoin Financial Strategy is inconsistent with traditional financial theory, companies need to build an unbreakable investment narrative to support Bitcoin Strategy. Michael Saylors high-profile profile in the public sphere is not accidental, indicating that the market needs to have confidence in Bitcoin Financial Strategy in order to succeed.
Strategy The main risks of Bitcoin financing model
Strategys Bitcoin accumulation strategy and MSTRs valuation may face the following macro, structural and execution risks:
Bitcoin price decline: Strategys business model relies on the appreciation of Bitcoin. A continued decline in Bitcoin prices could undermine the value of existing holdings and affect the feasibility of future financing.
Lower volatility in Bitcoin or MSTR: Lower volatility would reduce investor interest in MSTR convertible bonds and preferred stocks, which rely on volatility to attract capital.
Collapse of MSTR premium relative to net asset value (NAV): The market premium is key to MSTR’s upside and ability to issue value-added equity. A sharp contraction in the premium would weaken its fundraising ability and shareholder returns.
Deterioration in core business operations: While the core software business is becoming less important, it still contributes to cash flow. If it deteriorates further, it will limit financial flexibility during a market downturn.
Regulatory changes allow leveraged Bitcoin products: Newly launched Bitcoin leveraged ETFs or structured products may reduce investor demand for MSTR as a Bitcoin proxy tool.
Competition with copycat strategies: New companies adopting financial models similar to Bitcoin may divert investor interest and saturate capital markets with demand for leveraged Bitcoin exposure. Emerging competitors may achieve higher Bitcoin returns and Bitcoin holdings per share with less capital due to their smaller size.
Forced Liquidation to Satisfy Debt Obligations: In the event of a severe market decline or funding shortage, Strategy may be forced to sell its Bitcoin holdings to repay debts, negatively impacting the amount of Bitcoin held per share.
Weakening demand for Strategy securities: Strategy plans to raise more than $22 billion to continue purchasing Bitcoin. If investor demand declines, its ability to execute the plan will be affected.
Dilution of Bitcoin Holdings Per Share: Issuance of new shares, for example, to satisfy dividend or financing obligations, could reduce Bitcoin holdings per share, thereby weakening Strategy’s core key performance indicator (KPI): Bitcoin earnings.
Capital Market Instability: MSTR’s business model depends on continued access to well-functioning and liquid capital markets. Market disruptions could threaten its operations and financial expansion.
Rising interest rates: Higher interest rates would increase debt issuance costs and reduce investor appetite for low-yielding convertible bonds, limiting Strategy’s ability to finance its Bitcoin acquisitions.
