Strategy has recreated banking to buy Bitcoin.Strategy has recreated banking to buy Bitcoin.

Weeks ago I was trying to come up with a good headline for Strategy's rival Strive's major product, SATA: We Need To Talk About SATAn was the funniest I found.

Alas, today Matt Levine is out talking about STRC's crazy depeg... yes, yes, yes, I understand it's not literally a peg -- go read my previous Strategy coverage (#1504544, #1504781 etc) for my credentials and previous investigations into pegs #747181.

...But Strategy and Saylor SELL THEIR "PRODUCT" As a Peg...But Strategy and Saylor SELL THEIR "PRODUCT" As a Peg

Riskless, backed by overcollateralized-yet-unencumbered bitcoin. Oh, we can cover 32 years of dividend payments -.-

Alas, it's all backed by diluting MSTR shareholders -- sorry, bagholders. Dilution as a service is ongoing #1512782.

backdrop summary:

One of the coolest weirdest worst financial instruments in recent memory is Strategy Inc.’s “Stretch” preferred stock. Stretch is a floating-rate preferred stock, but its dividend rate floats not with some benchmark interest rate but rather with Strategy’s own market-clearing interest rate. Stretch pays a monthly dividend, and it trades on the stock exchange, and each month Strategy resets the dividend to try to make Stretch trade at $100 per share.

TLDR summary:

“Let’s issue bank deposits to buy Bitcoin” sounds like a great idea when Bitcoin is going up, [3] but it has some obvious problems when Bitcoin goes down.

Throwback to auction-rate securities!

Stretch, though, is a softer and safer version of one-month financing. It’s perpetual, it’s preferred stock, and the dividend reset is in the discretion of the board. If Strategy decides “never mind, we’re going to let it trade at $80,” or even “never mind, we’re not going to pay dividends to conserve cash,” it can do that. The dividends on a preferred stock are not mandatory the way interest on debt is.

That's what makes it work as a matter of corporate finance. Not in the eyes of the bagholders, tho!

if you stop paying dividends on preferred stock, getting new financing — selling more preferred stock, for instance — gets much harder. You can’t exactly default on preferred stock, but if you stop paying it people will ask questions.

Strategy is boring old banking #1493902, tho based of a sizeable pot of (very runnable, very custodied!) bitcoin

"Strategy is not actually issuing demand deposits to buy Bitcoin, because Stretch has perpetual maturity and Strategy can turn off the dividend. But it has approximately the economic shape of issuing demand deposits to buy Bitcoin""Strategy is not actually issuing demand deposits to buy Bitcoin, because Stretch has perpetual maturity and Strategy can turn off the dividend. But it has approximately the economic shape of issuing demand deposits to buy Bitcoin"

Problem is the same convex, asymmetric rapid-change that happens when you invest the proceeds of collateralized loan in the same (or correlated) collateral asset; when things sour, they sour faaaast...

if the market gets nervous about Strategy’s balance sheet — for instance, because the value of its assets (Bitcoin) goes down — then Strategy’s cost of funding will immediately go up, just as it would for a regional bank.

and like a bank, it's vulnerable to a bank run!

Coben in the FT called it a distressed death spiral. my, oh my!.

Fiat delenda est. Saylor and his monstrosity, too.

Epic story from WSJ's Polymarket fake investigation too, #1512976