Borrow money through convertible debt. Buy Bitcoin (CRYPTO:BTC) to drive prices higher. Sell new stock to buy more Bitcoin. Wash, rinse, repeat.
This has been MicroStrategy‘s (NASDAQ:MSTR) business strategy since 2020 when it decided to become a bitcoin treasury company. So far it’s been an infinite money glitch for the dwindling software and data analytics firm. MSTR stock is up 2,810% over the past three-and-a-half years.
Yet MicroStrategy is running out of stock to sell while doubling its debt load to $4.2 billion in less than a year. While it is about to increase its stock issuance capacity 30-fold, it is also preparing to raise the risk level of the company by raising $2 billion through creation of perpetual preferred shares.
The maneuver is touted as an embedded, indefinite call option, but especially because the economy is entering a period of even greater uncertainty, it’s a supremely risky maneuver that won’t end well for small, retail investors.
Sending MSTR into perpetual decline
MicroStrategy’s plan for a new perpetual preferred stock increases the risk to common shareholders
Details of the new proposal have yet to be finalized, but MicroStrategy’s perpetual preferred stock will be convertible into Class A shares while buyers will receive a dividend, though no voting power. The company can buy back the preferred shares at a predetermined price after a specific date. Should MicroStrategy go under, preferred stock owners get paid before regular investors, but after debtholders.
Although CEO Michael Saylor has previously used convertible bonds to raise money to buy bitcoin, as MSTR stock rises, bondholders can convert the stock into equity. Some previous bonds are already in the money and eligible for conversion. The preferred stock simply continues on in perpetuity.
It is also a way for MicroStrategy to attract institutional investors such as insurance companies, pension funds, and banks. But it’s not a risk-free strategy. In fact, it dramatically increases the risk MSTR investors face.
The tables are about to turn
Bitcoin’s strength could be undermined by rising inflation, interest rates, and even a government crypto reserve
As noted, we’re entering a unique period of economic uncertainty. After an historic period of Federal Reserve interest rate hikes, the central bank pivoted to rate easing again. Jobs were supposedly strong, inflation was shrinking, and a soft landing was in the cards.
Yet yields on 10-year Treasuries are approaching 4.7% while mortgage rates are rising to 8%. Since the Fed pivot began, Treasury yields have risen over 110 basis points, a completely unprecedented event as interest rates fall when the Fed cuts rates.
Inflation is also rising again. The core Consumer Price Index is back up to 3.3% even as headline CPI is at 2.7% and rising. Shorter-term inflation rates over one-month, three-months, and six-months are going up even faster.
Gold and the U.S. dollar are also moving higher in tandem, again, something that typically doesn’t happen when rates are cut.
The Fed has all but taken additional rate cuts off the table, and there is the possibility we could see new rate hikes.
That’s bad news for perpetual preferred stock, which is sensitive to interest rate changes. When rates rise, the value of preferred stocks tends to fall because their fixed dividend payments become less attractive compared to assets with higher yields.
Inflation is bad for perpetual preferreds too, because the fixed payments can lose purchasing power as the real value of dividends diminish.
The New York Post also just reported that although President Trump is open to creating the U.S.’s first crypto reserve, something Bitcoin promoters have advocated for, the proposal would apparently prioritize digital coins founded in the U.S., like Solana (CRYPTO:SOL), USD Coin (CRYPTO:USDC), and Ripple (CRYPTO:XRP). It could deal a heavy blow to Bitcoin advocates.
Key takeaways
In short, MicroStrategy has taken on enormous debt loads to finance the purchase of bitcoin, and wants to severely dilute existing shareholders to continue buying more. Saylor wants to create a new stock to help purchase even more of the crypto, but macroeconomic conditions indicate that could be a disaster.
The correlation between MSTR and BTC has been sharply diverting with the crypto rising and the stock falling. MSTR stock down 33% from its peak. A reset lower in Bitcoin’s price could cause the game of musical chairs come to a dramatic close, undercutting the financial stability of MicroStrategy. The period of writedowns and asset sales that followed would bring an immediate halt to MicroStrategy’s infinite money glitch game.
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