#What is the trick with Bitcoin and corporate debt?
One strategy that has gained attention in recent years involves holding large amounts of Bitcoin while borrowing against it. This approach allows companies like Strategy Inc., formerly known as MicroStrategy, to amass substantial capital without triggering tax obligations, as they are not selling their Bitcoin. This year alone, Strategy has successfully raised around $16 billion in debt and preferred obligations without incurring tax liabilities.
#How does this money machine operate?
Strategy has raised an impressive total of approximately $21 billion through diverse financial instruments including equity issuances, convertible debt, and a significant $2.5 billion in perpetual preferred stock. These perpetual preferred shares, labeled as Stretch (STRC), entice investors with a competitive 11.5% dividend yield.
Most of the capital raised is directed toward acquiring more Bitcoin, reinforcing Strategy’s position as the largest corporate holder of Bitcoin globally. Understanding that proceeds from debt or equity are not classified as income is crucial. They represent capital raised with obligations attached, thus averting any realization of profits and corresponding tax bills.
#What is the Digital Credit Capital Framework?
Strategy's innovative Digital Credit Capital Framework permits regulated sales of up to $1.25 billion in Bitcoin. The funds from this initiative are strategically allocated to support dividend payouts to preferred shareholders and to strengthen cash reserves during times of market instability.
This overarching suite of products, known as Digital Credit products, aims to attract yield-seeking investors desiring Bitcoin exposure without the need to hold actual Bitcoin.
#What are the risks of this strategy?
Advocates of Strategy’s model, including co-founder Michael Saylor, believe this approach may create a new asset class. Their perspective is that a digital credit market centered around Bitcoin-backed instruments could grow into a multi-trillion dollar market.
However, this entire framework hinges on the performance of Bitcoin's market value. Currently, Strategy’s obligations total about $16 billion. Should Bitcoin experience a prolonged downturn, the value of the Bitcoin collateral could diminish while the financial obligations remain unchanged. Given that the company does not have a substantial software arm generating cash flow, a sustained price decline could compel Strategy to liquidate Bitcoin at depressed prices to meet dividend and debt requirements.
The 11.5% yield on the Stretch shares should not be mistaken for free money. It compensates for the concentrated exposure to a single, volatile asset structured within a leveraged corporate framework.