Strategy’s bitcoin buying spree, funded by the STRC issuance, has driven much of the recent rally, Bitwise’s Matt Hogan said.
Bitcoin has risen more than 20% from its February lows, trading at around $77,000. But market participants are wondering whether the rally can continue.
According to Matt Hogan, chief investment officer at Bitwise, the strategy’s aggressive BTC purchases have emerged as the “single biggest factor” in the recent price rise.
Hidden driver
While other factors, such as $3.8 billion in inflows into ETFs since March 1 and renewed accumulation by long-term holders, have supported Bitcoin’s price trajectory, Hogan He explained Much of the recent gains have been driven by purchases from Strategy, which has added about $7.2 billion worth of Bitcoin over the past eight weeks.
These purchases were financed through the issuance of the STRC, a perpetual preferred stock instrument. STRC is a type of preferred stock, combining characteristics of both equity and debt, and is designed to trade at $100 per share while offering a high dividend yield, currently 11.5% per year.
“The strategy attempts to maintain this stock price by adjusting the yield up or down. If STRC is trading below $100, the strategy can increase the interest rate to attract new buyers. If STRC is trading above $100, the strategy can either issue more shares or lower the interest rate to bring prices back to $100.”
Since its launch, STRC has generally remained close to its target price, and the dividend rate has been raised from 9% initially to 11.5% to support demand. The primary purpose of issuing STRC is to raise capital for additional Bitcoin purchases, and most of the proceeds are posted to the asset. The dividend payments are largely funded by raising capital from new investors, a structure that Hogan said is supported by the company’s large Bitcoin holdings rather than a Ponzi scheme.
Dividend capacity of the strategy
strategy currently He carries About $63 billion in Bitcoin versus $8 billion in debt and $14 billion in preferred stock. In a liquidation scenario, debt holders would be paid first, followed by preferred shareholders. This leaves about $41 billion for common stockholders. At current Bitcoin prices, Hogan estimates that the company could hypothetically maintain its dividend payments for 42 years, although this assumes prices do not rise during this period.
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If Bitcoin grows at an annual rate of 20%, the company can continue paying dividends indefinitely. However, the strategy’s ability to meet its obligations depends on Bitcoin’s performance and the size of future STRC issuance, as higher issuance results in higher dividend obligations and default risk, which are only offset by gains in Bitcoin’s value. Hogan stated that investor confidence depends on a strategy that maintains a balance between increasing capital and maintaining a strong balance sheet.
He also noted that demand for STRC appears strong and noted that the company could have raised more capital in its latest offering.
With junk bond yields falling below 7% and interest on private credit falling, the STRC’s yield of 11.5% was considered “attractive.” The strategy’s current liabilities stand at $21 billion, or about 33% of its bitcoin holdings, a level that Hogan believes leaves room for an additional $10 billion to $15 billion in STRC issuances before investor concerns increase, and potentially more capacity if bitcoin prices rise.
