Strategy's position has fallen below its cost basis and needs to buy back shares at a discount
With Bitcoin price nearing $74,800 after falling to $74,000 over the weekend, its lowest level since August, the total position is currently down approximately 0.9%, equivalent to a paper loss of nearly $550 million.
11/10/20263 min read
Capital allocation is the main focus
For a company whose entire public image is about accumulating bitcoin, spending more than two dollars to buy back its own preferred stock for every dollar invested in the coin is a remarkable statement. STRC is designed to trade near its face value of $100, and Strategy has spent over $2 billion this year to support it as the price fluctuates around that level.
That spending is not optional in any practical sense. A perpetual preferred stock trading significantly below par value signals market doubt about the issuer's ability to repay its debt, and once that signal is received, the instrument becomes unissueable. Strategy's capital structure depends on its ability to continuously issue preferred and common stock, so protecting the price of preferred stock is essentially protecting the financing mechanism. The buyback is maintenance work, not a return on equity for shareholders.
It is also financed by selling common stock at market price, meaning common shareholders are being diluted to support the price of a preferred instrument. It is a justifiable transaction if it preserves access to capital and a costly one if price pressure persists.
The value of assets stored underwater is not as important as it might seem
The unrealized loss of 0.9% on a six-year accumulator position is negligible and will reverse as the market rises slightly. The accounting consequence under the fair value rule is a reported loss, which is merely confounding, as the $885 million gain from MARA's fair value this quarter demonstrates.
The key is how holding near cost affects the funding mechanism. Strategy's model requires issuing shares above net asset value so that each issuance adds more bitcoin per share rather than diminishing its value. That premium is a function of market euphoria, and euphoria correlates with positions showing profitability. A company with an average purchase price higher than its current price will be harder to sell for in the next preferred stock issuance, precisely when the company needs to issue shares most to pay existing dividends.
This is a pro-cyclical structure that every company holding treasury assets has, evident in Strive's 15% perpetual preferred stock and in its aggressive buying pattern at the industry peak. The difference lies in scale. At 850,364 BTC, Strategy is that structure.
The industry is diversifying
Three data points from the same week reveal a divergence. Strategy made its largest purchase since September, something Bitmine and Strive failed to do as both slowed down. MARA, on the other hand, went in the complete opposite direction, selling 13,597 BTC for approximately $1.1 billion to pay off $750 million in bitcoin-backed loans and cut its total debt by 37% this year.
These were contrasting reactions to the same price environment. MARA delevered at a price near $81,000 and accepted missing out on upside potential. Strategy added more coins and protected its preferred stock by issuing shares. One company decided the financial structure was risky, the other decided the position was the key factor.
Which one is entirely true depends on what happens next, and that's the frustrating part of this model. There's no outcome where both are correct.
Assessment and Conclusion
Three indicators provide information. The trading price of STRC relative to its face value, as the ongoing pressure to continue the buybacks suggests the funding channel is shrinking. The ratio of spending on share buybacks to spending on Bitcoin, which this week is higher than two to one and, if maintained, indicates the company is spending more to protect its debt than to pursue its business strategy. And whether the buying will continue if Bitcoin continues to fall, because as soon as the share issuance is unsuccessful, accumulation will stop regardless of confidence in that strategy.
MSTR fell about 3% following the news this week despite the largest buy order in six weeks, suggesting the market is viewing capital allocation in the same way.
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Compiled and analyzed by HCCVenture
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