STRC no longer holds its peg, and Bitcoin will not have a bull market

Original: Odaily Planet Daily (@OdailyChina)

Author: Azuma (@azuma_eth)

The "depegging" of Strategy's preferred stock STRC is still intensifying.

During U.S. stock trading yesterday, STRC broke below the 80 mark for the first time, hitting a low of $73.62. Although it rebounded slightly by the close, the price was still only $75.69, nearly 25% "depegged" from its target par value of $100.

Last week, we wrote an article about STRC's depegging situation, "STRC Depegs 11%, Can Strategy's Perpetual Motion Machine Keep Running?", focusing on the reasons for STRC's depeg and briefly outlining the potential future impacts.

However, based on community discussions, it seems many readers are still unclear about the truly dire consequences of STRC's continued depeg. So, we decided to write another article to break down this issue.

Strategy's Most Important Funding Channel Has Failed

What exactly is STRC? In a nutshell, it's Strategy's cheapest and most efficient funding channel.

The essence of Strategy's business model is to continuously increase its BTC holdings through ongoing market financing, then finance more, and buy more BTC. This is a cycle that must keep running. Strategy's high valuation largely stems from the market's belief in its ability to continuously raise funds and buy BTC. As long as this funding ability exists, it can keep expanding its BTC holdings; these growing BTC holdings, in turn, further support the market's expectations for its future fundraising capacity.

Over the past few years, Strategy has tried almost every financing method – issuing common stock, convertible bonds, and various types of preferred stock, then reinvesting the raised funds into BTC. Among all these financing tools, STRC was once considered by the market to be the closest to "perfect" and Michael Saylor's proudest creation. Saylor once boasted, "STRC was designed by AI; humans couldn't have designed it."

As a preferred stock, STRC's advantages are very clear. Issuing common stock could dilute existing shareholders' equity; issuing convertible bonds creates future debt repayment pressure; but STRC, as a perpetual preferred stock, has no maturity date, doesn't dilute common shareholders, and only requires paying fixed dividends. For Strategy and Saylor, this is arguably the lowest-cost, most efficient financing method.

From its inception, STRC was designed as a product anchored to $100. Strategy's plan was to dynamically adjust the dividend rate to keep STRC trading around $100 for the long term (does this feel like algorithmic stablecoins?). As long as the secondary market could maintain this price, the company could continuously issue new STRC near its par value, constantly raising new funds to buy more Bitcoin.

In other words, STRC's core value lies in its endless fundraising ability, but this ability is predicated on the price remaining near the target par value. When STRC continuously depegs, this funding channel is effectively blocked. Because for any investor, if buying the same STRC on the secondary market costs only $75, they would never participate in a new share issuance from the company near $100.

For Strategy, the options are either to constantly increase the dividend rate to attract capital (which has proven to have limited appeal), or to accept the reduced efficiency of issuing at a discount (which effectively breaks the original target par value). Either way, it means this fundraising machine is starting to face increasing friction.

Funding Tool Has Become a Cash Flow Burden

If it were just a temporary failure of fundraising ability, that might be manageable. The bigger problem is that STRC requires Strategy to continuously pay substantial cash dividends.

According to the latest official data from Strategy, the total issuance of STRC has reached approximately $10.49 billion, with a current dividend rate of 11.5%. This means STRC alone entails an annual cash dividend payment obligation of over $1.2 billion. Adding in Strategy's other preferred stocks like STRD, STRK, and STRF, this figure climbs to roughly $1.7 billion.

In its common stock issuance filing on June 21st (note it's common stock, more on that below), Strategy disclosed its cash reserves were approximately $1.4 billion. At this cash reserve level, Strategy's book cash can cover less than one year of preferred stock dividend payments.

Breaking the Deadlock Requires Money, But Where Will It Come From?

Whether it's sustaining its business model or escaping the current dire cash flow situation and avoiding dividend payment defaults (the more pressing issue), Strategy needs more funds. Theoretically, only three "money-raising" paths remain for Strategy.

First, issuing common stock.

This is currently the most direct and mature financing method. Through its ATM (At-the-Market Offering) program, Strategy can continuously sell MSTR common stock to raise funds.

But common stock financing is not without cost. Continuous issuance means an increasing number of outstanding shares. If the BTC bought with the new funds cannot outpace the share dilution rate, the BTC Per Share growth will slow, and common shareholders will face ongoing dilution – pay attention here, as the next section is important.

Second, continuing to issue debt.

Over the past few years, Strategy has raised funds multiple times through debt instruments like convertible bonds, which was a major source of funding for its early large-scale BTC accumulation.

However, as the scale of preferred stocks expands and fixed cash expenditures continue to rise, the market has started paying more attention to Strategy's liquidity and debt repayment ability. In the current financing environment, if the company issues bonds again, investors will likely demand a higher risk premium, meaning financing costs will be significantly higher than in the past.

More importantly, bonds differ from preferred or common stock; their interest payments and principal repayments are rigid obligations. Against the backdrop of declining cash reserves and increasing dividend payments, continuing to expand the debt scale will undoubtedly worsen the company's financial burden and compress future financing capacity.

Third, selling BTC.

From a financial perspective, this is the fastest way to replenish cash reserves. Strategy has certainly considered this path. They previously posted on their official X account regarding dividend payment pressure, stating: "If you factor in its massive Bitcoin reserves, it's enough to cover 32 years of dividend payments."

But for Strategy, this is also an extremely dangerous choice. Earlier this month, Strategy sold part of its Bitcoin holdings for the first time. Although the sale was only 32 BTC and was packaged as a "proactive market desensitization test," with mention of "buying back more later," this move caused a sharp short-term market drop.

As the largest single holder of Bitcoin in the market, Strategy's actions can easily trigger chain reactions. If it increases the sale amount later, it will undoubtedly have a huge impact on the already fragile BTC price. If BTC drops further, Strategy's so-called "reserves" will shrink rapidly.

Overall, in the current situation, every viable financing channel for Strategy comes at a higher cost than in the past.

Has Strategy Made Its Choice?

Considering Strategy's latest moves, besides hinting at possibly selling BTC, the company seems to have chosen its path.

Since June, Strategy has been relying on its common stock ATM (At-the-Market Offering) program for three consecutive weeks to raise funds. The latest round (June 22nd) is particularly illustrative.

According to Strategy's latest 8-K filing, the company sold 2,714,839 shares of MSTR common stock in one week, raising a total of $335.5 million. However, that same week, Strategy only purchased 520 BTC, costing a total of $34.9 million, at an average purchase price of approximately $67,068. In other words, of the $335.5 million raised, only about 10% was actually used to continue accumulating BTC. The rest was primarily used to replenish the company's cash reserves, increasing cash from the previous ~$1.1 billion to the current ~$1.4 billion.

Seems quite effective? But there's another trap here.

For MSTR common shareholders, the most critical metric is how much BTC the funds raised from each new common share issued can eventually buy, and whether this is enough to cover the BTC equity corresponding to that share. If the new funds can buy more BTC than the share originally represented, then the value per common share is actually increased. Conversely, if the funds buy less BTC than the share's underlying BTC equity, common shareholders suffer dilution.

Clearly, Strategy's recent common stock issuance comes at the cost of diluting common equity. Official Strategy data also shows that MSTR's BTC per share has dropped from a peak of 220,900 Sats to 218,046 Sats.

This is also the biggest limitation of common stock financing. For most listed companies, issuing common stock is just one of many financing options; but for Strategy, the common stock itself is part of its business model.

Over the past few years, Strategy was able to keep growing essentially by relying on the continuous operation of the "raise funds ➡️ buy BTC ➡️ solidify market expectations ➡️ raise more funds ➡️ buy more BTC..." flywheel. The core expectation of the market for Strategy was its ability to continuously create more BTC equity for common shareholders, not dilute it.

However, when Strategy has to rely increasingly on common stock financing to replenish cash reserves rather than to continue accumulating BTC, the logic of this flywheel changes. While common stock financing can alleviate Strategy's cash pressure in the short term, it is difficult for it to become a long-term replacement for STRC.

Once common stock financing consistently erodes BTC equity per share, the very foundation for MSTR's high premium could be challenged – and this is the core competitive advantage of the entire Strategy business model.

What Will Happen to BTC?

Over the past few years, Strategy has become the most important marginal buyer of BTC (possibly without qualification). To date, Strategy holds a total of 847,363 BTC, accounting for about 4% of BTC's current circulating supply, worth over $50.7 billion. The market has long been accustomed to Saylor's massive, weekly, unwavering purchases.

But now, this situation is changing. Strategy can still raise funds through common stock, but most of the capital is no longer flowing into BTC; it's prioritized for replenishing cash reserves. This means for the same amount of fundraising, the new buying pressure actually entering the BTC market is decreasing.

What's more unfavorable is that this situation could persist. If STRC fails to re-peg for a long time, and preferred stock financing remains blocked, Strategy will be forced to rely on common stock financing for the long term to maintain cash flow, potentially even further reducing the proportion of funds used to buy BTC. For the BTC market, this means the most stable and certain institutional buying pressure of the past will no longer grow as it did in previous years.

But what's more alarming is that if the excessive issuance of common stock overly dilutes MSTR shareholder equity, Strategy might have to consider another funding channel – selling coins.

From the weakening of new buying pressure to the potential emergence of selling pressure, today's Strategy is no longer the biggest marginal buyer of BTC; it has become a giant sword hanging over BTC.