It feels a bit wrong to kick a dog while he is down. The timing is a little harsh. However, I have had enough people come to me asking about Michael Saylor and Strategy that it is probably time to get my thoughts out on the matter. I carry respect for Saylor and Strategy. But I also carry concern.
It has been interesting watching Saylor on his journey. He is incredibly intelligent and has in several ways furthered my thinking on Bitcoin. Whatever criticisms I have here should be read through that lens first. He clearly learned something real. And like all bitcoiners who stay around long enough, some of that understanding was earned the hard way. That being said, I feel like he is learning lessons we all learned before he was involved with Bitcoin.
In the earlier days of the project, there was rich debate around how best to handle the knowledge gap of the broader market. The truth is, it will take a long time for the idea of Bitcoin to fully penetrate the zeitgeist of our modern fiat era. It’s been incredibly fun watching this shift happen slowly over time. One of the unfortunate truths, though, is that people cannot be herded like cattle by sheep dogs in order for Bitcoin to win. The knowledge gap is the bridge that everyone must cross on their own time. And, when Bitcoin becomes big enough to be impactful on a personal level, that will force reflection. That’s the idea behind the previous article — “Bitcoin is on a need to know basis”.
Some of the early tinkerers in the space would create new projects that would derail from the very things that make Bitcoin special: Decentralization, immutability, the instantiation of money for all, the inability to be changed by the few. What was interesting about these projects is that they would often have the same funding mechanism: Bitcoin. The ICO craze was polluted by these projects. The pattern of “I love Bitcoin, buy my Sh*tcoin” became a real phenomenon.
Strategy is not dead, and Saylor has not become an idiot overnight. In fact, if you ran the simulation a hundred times, I think Strategy probably walks out alive in most of them. Maybe 95 out of 100. Focusing on odds of survival though kind of misses the point.
My primary concern is misalignment. Saylor has built products for a market in a way where there has to be winners and losers. And from what I can tell, Strategy will likely be one of the winners over a long enough time horizon. So who exactly are the losers in this game?
The earlier version of Strategy was actually fairly simple. The company had Bitcoin on the balance sheet and basically raised money in two primary ways:
At-the-Market (ATM) Equity: The company issued common equity. In plain English, if the market was willing to pay a high enough price for Strategy shares, the company could print a new share, sell it into the market, take the cash, and buy Bitcoin. While dilutive because it increased the share count, if the economics worked, it was still accretive in Bitcoin terms because the company increased its Bitcoin-per-share ratio.
Convertible Debt: Strategy issued near-zero-coupon convertible bonds that converted into equity at a premium to the current stock price. For example, if the stock traded at $10 and a convertible was issued up 30%, the holder would convert at $13. Strategy effectively sold future equity at a premium, took the cash immediately, and bought Bitcoin. Then, the debt was settled.
This structure allowed the company to raise large amounts of capital without building large, current cash obligations into its framework. The company itself was not a massive cash-producing machine like Microsoft or Amazon; its operating business was relatively small and did not throw off the kind of cash flow required to comfortably support large recurring payments. Because of this, the cheapness of their early capital mattered immensely.
There was no interest burden of real significance. The convertibles matured. They converted into equity if the trade worked. The company did not have to keep feeding a massive cash obligation every month just to keep the machine alive. In that earlier world, there was no obvious scenario where they would be forced to sell Bitcoin.
This is why I believe the earlier version of Strategy was much more aligned with the spirit of what Saylor had spent years preaching: Bitcoin as superior money. Bitcoin as the answer to the melting-ice-cube problem. Never sell your Bitcoin.
At some point, Strategy outgrew the convertible market. He could have said the trade had reached its natural limit. In many ways though, the market prices growth projections forward. It’s tricky because once you genuinely see the light of what Bitcoin actually is, you want to turn the world upside down to get as much exposure as possible. Surely, if you have seen it, others will soon follow. Almost everyone gets out over their skis the first time they truly grok Bitcoin. This is another piece of earned Bitcoin wisdom.
Strategy then entered a new chapter: preferred stock. This is where the conversation starts to get fuzzy. The preferred stack can be broken down into four products, totaling roughly $15 billion in obligations:
Strike (STRK): 8% convertible preferred (~$1.4 billion outstanding)
Strife (STRF): 10% senior preferred (~$1.3 billion outstanding)
Stride (STRD): 10% junior preferred (~$1.4 billion outstanding)
Stretch (STRC): The flagship variable-rate perpetual preferred (~$10.5 billion outstanding with a current dividend rate of ~11.5%). This is the one that really matters.
These products create a recurring debt that must be fulfilled against either income or capital gains. Given that Strategy lacks a substantial operating business, this leaves only one realistic option: Strategy will have to sell Bitcoin in a substantial way in the future to meet its obligations.
The other glaring issue is that perpetual preferreds have no clear end date; they last forever. It bothers me that there is no mechanism for the company to clear this off the cap table. Does that not incentivize hyperinflation?
As someone who professionally manages debt-based leverage inside a fund, I can honestly say I would not want Strategy’s obligations. Their stack is genuinely impressive. However, the more debt you accrue, the narrower your window for “being right” becomes.
Strategy’s bet is that Bitcoin, as a whole, will likely yield a 30-40% CAGR over the next decade. I personally think it will land around the low end of 30%. However, another piece of earned wisdom is that Bitcoin follows no one’s timeline. It does not care about the clock. It will be absorbed at whatever pace humanity can process it—which is anyone’s guess.
When you speculate with leverage on Bitcoin, you are effectively guesstimating the rate at which humanity will digest and understand the asset. The end state is obvious to me, but the path is not. When I take leverage, I give myself the widest window possible. I also generally do not recommend that everyday people take leverage, as 99% will fumble the ball along the way. The vast majority are better served simply storing their excess value in Bitcoin long-term.
This brings me back to my primary issue with products like STRC. Strategy’s ability to pay you back depends entirely on Bitcoin’s appreciation outperforming their capital obligations. This means you will always be better off buying Bitcoin directly rather than a product like STRC. In this arrangement, you are the product. Living beneath your means, storing value in BTC, and financing your life conservatively over a long time horizon will easily beat a perpetual preferred. And if it doesn’t, Strategy wouldn’t be able to pay you anyway.
Look at the competing interests across their capital stack:
The Debt Holders: Sitting at the top, they care about asset coverage and seniority. Their core belief is that assets will always exceed liabilities, and they will get out first if the structure unwinds.
The Preferred Holders: They are not backed by Bitcoin in any direct sense. If they want out, Strategy isn’t handing them Bitcoin; they must sell their security on the secondary market. They care about the dividend and market confidence. Their core belief is that the dividends will keep flowing.
The Common Equity Holders: They are buying the upside story. They care about Bitcoin-per-share accretion and the premium to net asset value. Their core belief is that Bitcoin’s appreciation will keep the equity attractive enough for the machine to keep running. However, their upside is capped because Strategy will dilute them in both up and down markets.
The Bitcoiners: The wider market now cares whether Strategy will ever be forced into becoming a meaningful seller. Their core belief is that Strategy will never dump Bitcoin. Yet, make no mistake: by equipping themselves with perpetual preferreds, Strategy has become a forced seller.
Individually, each of these beliefs can hold for a long time. Collectively, I do not believe they can hold together because the incentives are hopelessly misaligned. Someone in this stack is going to be the loser.
The company does not produce $1.7 billion of annual operating cash flow to service that burden in the ordinary way. So where does the money come from?
One option is to sell Bitcoin (making Bitcoiners nervous).
One option is to issue more common stock (diluting common holders).
One option is to let the preferreds suffer and forego distribution (the pitch wasn’t quite what they thought).
One option is to rely on continued balance sheet strength and sheer confidence long enough for the whole machine to clear itself.
Strategy is stressed right now. They will likely survive this stress and then they will look like geniuses in the next run up. But at the end of the day, they still have a misaligned capital stack that is basically “I love Bitcoin, buy my Sh*tcoin”.
When someone borrows Bitcoin’s credibility only to sell something adjacent to it, I find it unsettling. Bitcoin is the source of trust. It is the asset that those in the know understand truly matters. Instead of helping people understand and own Bitcoin directly, Strategy built something next to it and asked people to buy that instead.
I am not saying Strategy is the same as an ICO. It obviously is not. The quality of thought is higher. The seriousness is higher. The legal reality is different. But I do think there is a parallel worth naming.
Part of Bitcoin wisdom is learning that the market wanting something does not make it aligned. Markets want convenience. They want yield. They want exposure without custody. They want upside without responsibility. They want to feel close enough to Bitcoin to benefit from it without having to do the work. But by monetizing that desire Strategy pushes people away from what would ultimately make its success happen sooner.
That market demand will get met – and people will continue to seek this out for a very long time. To Strategy’s credit, their offering is light years better than their predecessors. But the complexity has probably added too much misalignment. This is why I keep coming back to the same place. Strategy will likely survive and if they do they will be a megalith. But it does bother me understanding that it’s off the backs of those who would have been better served owning Bitcoin.
I respect the original insight. I respect the boldness. I respect that Saylor likely learned many real lessons and that Strategy’s stack is beyond impressive. In a perfect world, I wish they hadn’t gone down the perpetual preferred path. What Strategy has done does not remove the burden of understanding. It delays it. It moves it. It hands it to somebody else for a time. Are the newer products being sold around this structure aligned with the people buying them? I do not think they are. And if that is right, then the real mistake here is not intelligent financial engineering. It is forgetting that Bitcoin’s revolution was always going to require society to do the work. There was never going to be a shortcut.
Nate Slemp · BTC Strategy