Aaaaah! Have no fear, Matt Levine is here.
Yes, I meant to write about the Barron's article on Strategy but paywalls didn't cooperate with Mr. Den today
Thankfully, I just pull up my trusty Money Stuff and see what Mr. Levine has to say
My basic model of Strategy and its “Stretch” preferred stock is that it is soft fuzzy banking.
That's a good way of putting it. They're kind of banking the world on bitcoin... #1081555
- Issue STRC for fiat, buys bitcoin: this is reminiscent of a banking deposit on an underlying asset (which in the fiat system is a loan, thus a promise to future income, i.e., an intangible, invisible asset)
- STRC is dividend-paying and targets par (100): "It’s effectively short-term financing that automatically rolls over each month at whatever Strategy’s market-clearing interest rate is."
- Intended to work like a money-market fund (but for legal purposes, DO NOT SAY THAT IT IS!) with no risk -- "...strip volatility, strip duration, puuuure return" #1517464
"STRC is supposed to have very little duration. Strategy is essentially funding Bitcoin purchases with bank deposits."
4... buuuuut, no.
"Soft fuzzy banking is in some ways superior to regular banking: If actual banks could fund themselves like this, it would be nice."
Alas, they cannot.
This only works if you’re a goofy Bitcoin treasury company with an audience of true believers.
oh, yes WEEE KNOW. Painfully so.
the tradeoff is that the cost of this capital is quite high. As of last week, Stretch was (1) paying 11.5% and (2) trading around 75 cents on the dollar, implying that its yield (to trade at par) should be about 15%. So, more than a bank deposit.
Very expensive. And bitcoin returning... checks notes... roughly nothing over two years (while everything else is booming), yeah, that's a recipe for disaster.
Strategy is now facing something of a soft fuzzy bank run: As Stretch has traded down, Strategy’s cost of capital has gone up, and it has faced pressure to (1) pay much higher interest on the Stretch and/or (2) pay back the Stretch — just like a regular bank facing a regular bank run. Less so, because all of this is technically optional, but still sort of a bank run
- stops keeping STRC at par (i.e., a partial default, depositor bail-in)
- buying back STRC (reasonable, it's discounted from par... cheap-ish for company)
Some of it — paying higher interest, redeeming deposits, selling assets, shoring up its balance sheet — is what banks would do in a bank run. Some of it — not paying much higher interest, only redeeming some of the deposits (and not at par) — is what banks would prefer to do in a bank run, if they could, but they can’t.
If Strategy brings STRC through this and it still trades at par in a year or two, the suitcoiners are going to be insufferable.
they are already insufferable, I'm not sure there can be a higher gear, a worse level
I never understood the appeal of STRC.
People were excited that it was safer than government bonds, while returning a much higher yield.
I don't know how one can think it's safe. Seems about as safe as UST in the Terra-Luna ecosystem. But the yield on that one was 20%.
Maybe Saylor will boost the yield to match that. It's going to be fun to watch.
it's backed by digital credit, bruh. You understand nothing??:O
Only buy Bitcoin if you want to be part of building an alternative to the fiat debt slavery bankers cartel that owns your government.
Agreed 👍