Bitcoin Magazine: The Bitcoin reserve company craze is a bubble; it's best to sell Strategy stocks

Author: Emil Sandstedt

Compiled by: Shenchao TechFlow

It has been six months since I first published a report on the company then known as MicroStrategy (now renamed Strategy). In addition to changing its name, the company has expanded the variety of its financial products, further accumulated Bitcoin, and encouraged many companies to follow Michael Saylor's strategic model. Today, Bitcoin reserve companies seem to be everywhere.

It is time for an update, and we will explore whether the operations of these Bitcoin reserve companies align with the predictions in the initial report and once again attempt to summarize where all of this will ultimately lead.

Alarm Bells Ringing

Last December, the company appeared almost invincible: its Bitcoin yield key performance indicators (KPIs) accumulated at an incredible annual growth rate of over 60%, and optimism was high. It is no wonder that most of the carefully articulated arguments in the report released at that time were either mocked, ignored, or maliciously challenged, with calls to short the stock. The stock price, measured in dollars or Bitcoin, is essentially flat compared to that time, with almost no evidence provided to support the predictions.

Unfortunately, few understood or even realized the most important conclusion from my report last December—it concerns the source of Bitcoin yields. Therefore, we will reiterate the issues with this metric for the company and why this should raise alarms for any serious investor.

Bitcoin yield—that is, the growth per share of Bitcoin—is actually flowing from the pockets of new shareholders to old shareholders**.

Many new shareholders buy stock hoping to also receive high Bitcoin yields, but these yields either come directly from the record-breaking ATM (at market price) issuances to purchase Strategy common stock or indirectly from purchasing shares borrowed from neutral hedge funds that hold the company's convertible bonds (which are then sold). This is precisely the Ponzi aspect of the company's operations—publicly boasting Bitcoin yields far exceeding any traditional returns while obscuring the fact that these yields do not stem from the sale of the company's goods or services but from new investors themselves. They are the source of the yields, and the harvesting of their hard-earned money will continue as long as they are willing to provide funding. The scale of this harvesting is proportional to the degree of confusion, which can be measured by the premium of common stock relative to the company's net assets. This premium is cultivated and maintained through complex yet enticing company narratives, promises, and financial products.

Because the term "Ponzi scheme" has been frequently used to attack the Bitcoin space over the past decade, many Bitcoin enthusiasts have become accustomed to—and have reason to—completely ignore such criticisms.

But it must be made clear that even if a company within the Bitcoin space has intentionally or unintentionally constructed a Ponzi scheme, it does not mean that Bitcoin itself is a Ponzi scheme. The two are independent assets. Ponzi schemes existed in the past when metals were the standard for currency, but that does not mean that precious metals themselves were or are Ponzi schemes. When I make this accusation against Strategy at this stage, I do so from a definitional perspective, not out of a boredom-driven exaggeration.

Accumulation Continues

Before drawing further conclusions, we need to revisit the content of the initial report and outline the relevant decisions made by the company over the past six months.

On December 9 of last year, Strategy announced that it had purchased approximately 21,550 Bitcoins for about $2.155 billion (an average price of about $98,783 per Bitcoin). This purchase was funded through the famous "21/21 Plan" ATM (at market price) issuances launched earlier that year. Just a few days later, the company purchased over 15,000 Bitcoins through ATM issuances and subsequently announced the acquisition of another approximately 5,000 Bitcoins.

By the end of 2024, the company submitted a proposal to shareholders to increase the authorized shares of Class A common stock from 330 million shares to 10.33 billion shares—a 30-fold increase. At the same time, the authorized shares of preferred stock were increased from 5 million shares to 1.005 billion shares—a staggering 200-fold increase. While this does not equate to the total number of shares actually issued, it provides greater flexibility for the company's future financial maneuvers, as the "21/21 Plan" is rapidly approaching its conclusion. By simultaneously focusing on preferred stock, the company can also explore another avenue for financing. By the end of 2024, Strategy held approximately 446,000 Bitcoins, with a Bitcoin yield of 74.3%.

Perpetual Preferred Stock

At the beginning of the new year, Strategy submitted an 8-K filing, indicating its readiness to seek a new round of financing through preferred stock. This new financial instrument, as its name suggests, will take precedence over the company's common stock, meaning that preferred stockholders have a stronger claim to future cash flows.

The initial financing target was set at $2 billion. During the preparation for this new tool, as of January 12, the company had accumulated 450,000 Bitcoins. By the end of the month, the company requested to redeem all convertible bonds maturing in 2027 and exchange them for newly issued stock, as the conversion price was now below the market price of the stock. For those "deeply profitable" Strategy convertible bonds, the largest buyers—funds engaged in gamma trading and neutral hedging—typically choose to convert early and subsequently issue new convertible bonds rather than hold the old bonds until maturity.

On January 25, 2025, the company finally submitted the prospectus for Strike Perpetual Preferred Stock ($STRK). A week later, approximately 7.3 million shares of Strike stock were issued, stipulating an 8% cumulative dividend on a liquidation preference of $100 per share. In practice, this means a quarterly dividend of $2 per share will be paid indefinitely, or will stop when the Strike stock is converted into Strategy stock (when the latter reaches a price of $1,000). The conversion ratio is defined as 10:1, meaning that every 10 shares of Strike stock can be converted into 1 share of Strategy stock. In other words, this tool resembles a dividend-paying perpetual call option linked to Strategy common stock. If necessary, Strategy can choose to pay dividends in the form of its common stock. By February 10, the company used the proceeds from the Strike issuance and the common stock ATM issuance to purchase approximately 7,600 Bitcoins.

On February 21, Strategy issued convertible bonds worth $2 billion, maturing on March 1, 2030, with a conversion price of about $433 per share and a conversion premium of about 35%. With this financing, the company could quickly purchase approximately 20,000 Bitcoins. Shortly thereafter, the company released a new prospectus allowing for the issuance of up to $21 billion in Strike perpetual preferred stock, indicating that last year's already ambitious "21/21 Plan" seems to be evolving into a much larger new plan.

The Disputes and Pace of Perpetual Preferred Stock: The Arrival of Strife and Stride

After the company publicly announced its ambitious financing plan expansion, another new tool was launched—perpetual preferred stock named Strife ($STRF). Similar to Strike, Strife plans to issue 5 million shares, offering a 10% cash dividend per year—paid quarterly—rather than the 8% cash or common stock dividend of Strike. Unlike Strike, Strife does not have a conversion feature but has a higher priority than common stock and Strike. Any delay in dividends will be compensated by future higher dividends, with a total annual dividend rate of up to 18%. At issuance, the initially planned 5 million shares seemed to have increased to 8.5 million shares, raising over $700 million. Through common stock and Strike's ATM issuance activities, Strategy finally announced in March that its Bitcoin holdings exceeded 500,000. April primarily involved regular ATM activities for common stock until this financing method was nearly exhausted. Strike's ATM activities also continued, but due to potentially lower liquidity, the amount of funds raised was negligible. With these funds, Strategy's total Bitcoin holdings surpassed 550,000.

On May 1, Strategy announced plans to initiate another $21 billion common stock ATM issuance. This announcement came immediately after the ATM portion of the initial "21/21 Plan" was exhausted, fully validating the logic outlined in the previous report and on the X platform. Since any asset net value premium creates arbitrage opportunities for the company, management will inevitably continue to issue new shares at prices that are too high relative to the underlying Bitcoin asset value to capture this premium. The issuance began almost immediately, allowing for the accumulation of more Bitcoins. As the fixed-income portion of the initial "21/21 Plan" expanded due to the new preferred stock, investors now faced a massive "42/42 Plan," involving up to $42 billion in common stock issuance and $42 billion in fixed-income securities issuance. May also saw the company submit a new application to the U.S. Securities and Exchange Commission (SEC) for a $2.1 billion Strife perpetual preferred stock ATM issuance. By the end of the month, all three ATM issuances were printing stock to purchase new Bitcoins.

At the beginning of June, the company announced another new tool: Stride ($STRD), a perpetual preferred stock asset similar to Strike and Strife, which is set to launch. Stride offers a 10% optional non-cumulative cash dividend, does not have a conversion feature, and has a lower priority than all other tools, only above common stock. Initially, just under 12 million shares were issued, valued at about $1 billion, paving the way for the company to acquire approximately 10,000 Bitcoins.

The Dazzling Puzzle of Bitcoin Vault Companies

With the launch of STRK, STRD, and STRF products, and the full rollout of Strategy's "21/21 Plan," the overall picture of what has transpired over the past six months should be clearer.

In the initial report, I pointed out that the main logic behind the convertible bonds is not, as the company claims, to provide an opportunity for the part of the market that needs and craves Bitcoin exposure. In reality, the buyers of the bonds are almost all funds employing neutral hedging strategies, who simultaneously short Strategy's stock, and thus never truly gain Bitcoin exposure. This is nothing but a scam. The real reason Strategy provides these securities to lenders is to create an impression of financial innovation targeting a trillion-dollar industry for retail investors while further accumulating Bitcoin without diluting equity. As investors bid for common stock, the net asset price differential and the opportunity for risk-free Bitcoin yields grow proportionately. The greater the economic confusion, combined with Michael Saylor's rhetorical skills and vivid metaphors, the greater the arbitrage opportunities the company can seize.

Over the past six months, through the issuance of three different perpetual preferred stock securities, along with various existing convertible bonds, these complex financial products can now create the appearance of financial innovation, further driving bids for common stock.

At the time of writing, the trading price of common stock is nearly twice the net asset value. Considering the scale and activity of common stock ATM issuances, this is an impressive achievement for the company's management. This means that Strategy can buy about two Bitcoins for the price of one Bitcoin in a risk-free manner.

In 2024, the company benefits from the popular "reflexive flywheel" theory, which posits that the more Bitcoin the company purchases, the higher its stock price will be, creating more opportunities to buy Bitcoin.

By 2025, this self-referential logic slightly shifts, evolving into a "torque" narrative, as reflected in the company's official description: the fixed-income gears drive the core part of common stock, while Bitcoin yields are the product of this "mechanism." However, few investors seem to question where these yields come from or how they are generated, instead blindly celebrating this fictional dynamic.

Preferred stock is a financial asset and is not bound by physical laws. As an engineer, Saylor uses these erroneous analogies to make Bitcoin yields appear to stem from some form of financial alchemy, which is not surprising. However, since the company has no actual revenue and no real banking operations (the company borrows but does not lend), Bitcoin yields ultimately only derive from the previously mentioned Ponzi elements in the company's business model: attracting retail investors through carefully crafted narratives, causing them to bid up the price of common stock, thereby enabling the realization of Bitcoin yield opportunities. As for those Bitcoin yields originating from various debt instruments, they cannot yet be considered fully realized, as the debt ultimately needs to be repaid. Only the Bitcoin yields generated through common stock ATM issuances are immediate and final—this is the true profit.

The Bubble of Bitcoin Vault Companies

Whether aware of it or not, the narrative cannot influence reality indefinitely; the concept of Bitcoin yields from Strategy has rapidly spread among the management teams of many small companies globally. CEOs of various companies have witnessed insiders at Strategy amass enormous wealth by continuously selling stock to retail investors, prompting them to begin emulating this model. The ongoing selling behavior of insiders at Strategy can be verified by reviewing numerous Form 144 filings.

Many companies have successfully implemented this strategy, allowing management and old shareholders to profit at the expense of new shareholders. But this will all come to an end, as many companies, facing difficulties or even failures in their traditional core businesses, will turn to bold Bitcoin vault strategies, becoming the first to have to sell Bitcoin assets to repay creditors when conditions worsen. Michael Saylor himself has admitted that he was in a state of despair before discovering Bitcoin.

• Metaplanet once operated under the name Red Planet Japan and struggled to achieve profitability in Japan's budget hotel sector.

• Méliuz SA experienced a 100:1 reverse stock split before desperately turning to a Bitcoin acquisition strategy.

• Vanadi Coffee SA, which operates five cafes and a bakery in Alicante, Spain, was on the brink of bankruptcy, but its pivot to Bitcoin strategy seemingly miraculously boosted its stock price.

• The notorious meme stock company Trump Media & Technology has no revenue and is now seeking billions in funding to create a Bitcoin vault company to rescue its historically low stock price.

• Bluebird Mining Ventures Ltd is also in a state of desperation—at least from the stock price perspective—recently deciding to sell all its mined gold to fund its purchase of Bitcoin as vault assets; as of the writing of this article, its stock price has risen nearly 500% in a month.

• H100 Group, a small and recently struggling Swedish biotechnology company, has seen its investors achieve approximately 1,500% returns in a month, as Blockstream's CEO Adam Back provided funding through some type of convertible bond to support its Bitcoin vault strategy.

Many such examples can be cited, but I believe the point is made: the companies becoming Bitcoin vault companies are not Microsoft, Apple, or Nvidia, but those on the brink of failure with no way out. Jesse Myers, a supporter of Strategy and a direct influencer of Michael Saylor's Bitcoin valuation model, has candidly stated:

"[…] MicroStrategy, Metaplanet, and Gamestop are all zombie companies. They all need to take a hard look at themselves and admit that we cannot continue down the original strategic path. We must completely rethink how to create value for shareholders."

These struggling companies have turned their gaze to Michael Saylor and his Strategy, believing they have found a clear path to wealth. By mimicking this so-called financial alchemy, they are now embroiled in a massive transfer of wealth, and the bubble of Bitcoin vault companies is heading towards its end.

When the Puzzle Shatters

Although Strike, Strife, and Stride are part of this impressive company puzzle, their priority is higher than equity. The same goes for convertible bonds, not all of which are currently "profitable." Future free cash flows must always first satisfy the needs of the holders of these instruments before any remaining portion can be allocated to common stockholders. In good economic times, this is clearly not an issue, as the company's debt ratio is relatively low; but in poor economic times, the value of company assets can plummet while debt obligations remain—looming like a towering threat over any new creditors. Due to a phenomenon known as "debt overhang," any new creditors will hesitate to lend for the purpose of repaying other debt obligations. The initially intoxicating narrative and exaggeration may ultimately backfire on its creators.

All of this is exacerbated by the prolonged duration of the Bitcoin bear market. At that time, many struggling Bitcoin vault companies will further exert selling pressure on assets. In other words, the more popular Strategy's strategy becomes, the deeper the future Bitcoin crash will be, potentially completely destroying the equity value of most companies that cling to this strategy until the last moment.

Conclusion: Michael Saylor loves Bitcoin. Like us, he prefers to have more Bitcoin rather than less. Therefore, it is extremely naive to think that he would allow the company's management to forgo an opportunity that is, by definition, arbitrage.

When the trading price of common stock exceeds net asset value, the company can create risk-free profits for old shareholders by transferring wealth to buyers of newly issued stock. This behavior will continue, appearing in the form of larger-scale common stock ATM issuances, accompanied by some new, obscure "innovative products," even if the outside world may protest or express dissatisfaction over equity dilution.

Evidence of this viewpoint lies in the validation of my prediction from this March: less than a month and a half later, the company announced a new $21 billion ATM issuance. If Strategy does not seize this arbitrage opportunity, all imitators will rush to capture it, increasing their Bitcoin reserves in the same risk-free manner. In this frenzy of arbitrage opportunity expansion, the company will take on debt in various forms, with potential risks increasing accordingly.

**In the next Bitcoin bear market, Strategy's stock price will fall to—and ultimately below—the level of **net asset value, causing significant Bitcoin-denominated losses for investors who bought stock at a premium today. Today, the best course of action for Strategy's investors is to emulate the actions of the company and its insiders: sell the stock!

Bitcoin is no longer the main strategy of this company, nor of the constantly emerging Bitcoin vault companies; you are.