When Strategy (MSTR), the largest public company holding Bitcoin, first floated the idea of selling its Bitcoin reserves to fund its dividend obligations during a recent earnings call, it caused concern among investors and the crypto community.
However, executive chairman Michael Saylor sat down with CoinDesk senior analyst James Van Straten at the Consensus conference in Miami to explain: Why this announcement is “irrelevant”.
In a wide-ranging conversation with CoinDesk as the company expands from a Bitcoin finance firm into a full-service capital markets business, Saylor discussed the possibility of the company selling Bitcoin to fund dividends, the mechanics of its preferred stock (called Stretch, or STRC), and misunderstandings among critics about its trading strategy.
This interview has been edited for brevity and clarity. This is the first in a series of stories from CoinDesk interviewing Michael Saylor
CoinDesk: Your earnings call suggested Strategy may sell Bitcoin to fund its dividend. That spooked some investors. How important is it actually?
Michael Thaler: From a financial standpoint, it’s a no-big-deal burger. If we paid all dividends over the next year solely by selling Bitcoin, we would buy 20 Bitcoins for every Bitcoin sold. So this is no different than buying 20 Bitcoins but not selling the Bitcoins. From a market perspective, Bitcoin’s current liquidity is approximately $20 to $50 billion. If we paid all the dividends in Bitcoin, you’d probably need $3 million; that’s immeasurable. It really doesn’t matter.
CoinDesk: So, how do you decide between buying Bitcoin, paying down debt, or buying back your own shares?
Sailor: We use two indicators. The first is Bitcoin yield. What are the benefits to common shareholders? If there is no yield, then it is equity neutral. If the yield is negative, it will be diluted. If there is a positive return, it is value-added. The second indicator is credit: what is the impact on the balance sheet? Does it bring more risks?
For example, if we used all the dollars to buy back stock, it would be equity positive, it would create yield, but it would be credit negative. The market prices of Bitcoin, all of our credit instruments, all of our bonds change every day. We adjust our capital markets activities every day to take advantage of revenue opportunities and repay debt.
We prioritize transactions that create more Bitcoin per share. If we can create 10x more Bitcoin per share in one transaction than another, we will prioritize that first.
CoinDesk: Bitcoin is currently down about 36%-37% from its historical high. Is Now a Good Time to Sell High-Cost Bitcoin and Get Tax Credits?
Sailor: We have the option to receive up to $2.2 billion in tax credits. The value of that credit changes every day, every minute. We also have the option of calculating the mispricing of convertible bonds: there are huge gains. We also have the option to get Bitcoin on the transaction. We make this decision week after week, day after day.
Everything we do prevents us from doing anything else. So we always have to think about is this equity positive but credit negative? Maybe it’s great for equity, making $500 million, but kind of bad for credit. If the credit is very strong, I would do something with a positive stock value and a negative credit value. If credit is very weak, we won’t.
We do not communicate exactly when or if we do this. But the options are there, and this is one of the most interesting trades right now.
CoinDesk: Critics on X (formerly Twitter) say you always buy at Bitcoin’s weekly highs. What happened?
Sailor: This is ignorant criticism. What actually happens is that when we buy Bitcoin through an equity swap, it’s because equity goes up and there’s a huge equity premium. When Bitcoin surges, equity soars, premiums widen, and it actually becomes more profitable for us to do swaps. When the premium widens, that is, when Bitcoin rises, we will exchange shares of MSTR for shares of BTC.
In a 168-hour week, the market might go up for three hours, and we might raise $250 million in swaps during those three hours. So, yes, we’re picking the top of the Bitcoin market, but we’re also picking the top of the equity capital market and swapping the two – we’re generating greater gains. Through these swaps, we make money for our shareholders without risk.
If we wanted to do these swaps when prices were lower, the premium would be low. It makes much less money, otherwise we would lose money [shares] By exchanging stakes when Bitcoin prices are lower. That’s why it looks like we might buy the top, but we won’t buy it with our spare money.
CoinDesk: STRC is your breakthrough product. Can you explain how it differs from a typical bond?
Sailor: We built this instrument so it’s very strong. The key is that we create a permanent priority that never expires. When someone decides to sell $2 billion of STRC, we won’t redeem it. No liquidation rights. There is no correct one. This is not a bank deposit.
If I sell you $2 billion in stablecoins on Friday and you can redeem them on Monday, I have to come up with $2 billion in cash. But when we sell you $2 billion of Stretch, that’s a perpetual contract. We agree to pay you SOFR [Secured Overnight Financing Rate] Plus the forever credit spread. You agree to give us your money forever. We plan to hold Bitcoin forever.
We do not provide liquidity. This is provided by the market. Some at Soros, Millennium, and Citadel actually want quick trades in minutes or hours. If I price the entire thing at 100 and absorb all the liquidity myself, they have no chance. I’m going to take $100 billion of risk, which is going to be a problem for equity, and I’m going to take away their ability to make very healthy annualized returns with almost no risk.
CoinDesk: Stretch has recently been trading at a slight discount to face value and will take longer to recover after the dividend date. What’s going on?
Sailor: You must view it on a full monthly cycle. We sold $3.2 billion in a matter of weeks, with a base value of about $5 billion. So we expanded our supply significantly. I’m not surprised it took the market a while to digest this. Some of it must have been people buying $1 billion to cut the 90 cent dividend and then selling it back.
Our growth rate is close to 400%. Considering the high growth, I’m not surprised [STRC] digest it [the sell pressure]. In the past few days, [STRC] Trading within five cents [of $100 per share] Daily fluctuations, three cents yesterday. It’s all very comfortable. We think about it the same way you design an airplane wing: you want the wing to flex. If you try to take the elastic away, they will snap. The instrument is designed to bend under pressure but not break.
Disclosure: The author of this article owns shares of Strategy (MSTR).
Read More: Michael Saylor’s Latest Tax Strategy Echoes Strategy’s 2022 Bitcoin Sales
