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

Author: Emil Sandstedt

Compiled by: Deep Tide TechFlow

It has been six months since I first published a report about the company then known as MicroStrategy (now renamed Strategy). In addition to changing its name, the company has also expanded the variety of its financial products, further accumulated Bitcoin, and encouraged many companies to follow Michael Saylor's strategic model. Nowadays, 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 reports, and once again attempt to summarize where all this will ultimately lead.

Alarm bells ring

In December of last year, this company appeared nearly unbeatable: its Bitcoin revenue key performance indicators (KPIs) accumulated at an astonishing annual growth rate of over 60%, with optimism running high. It's no wonder that most of the arguments meticulously presented in the reports released at that time were either ridiculed, ignored, or maliciously challenged, with calls to short the stock. The stock price, measured in USD or Bitcoin, is basically flat compared to that time, and there is currently almost no evidence to support the forecasts.

Unfortunately, only a few people understand or even realize the most important conclusion of my report from last December - it pertains to the sources of Bitcoin profits. Therefore, we will reiterate the issues with this metric within the company and why it should raise concerns for any serious investor.

Bitcoin gains - that is, the increase per share of Bitcoin - actually flow from the pockets of new shareholders to those of old shareholders.

Many new shareholders buy stocks hoping to obtain high Bitcoin returns for themselves, but these returns either come directly from the record-breaking issuance of ordinary shares through the company's large-scale ATM ("at market price") buying strategy or indirectly from purchasing stocks 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 returns far exceeding any traditional returns while obscuring the fact that these returns do not stem from the sale of the company's goods or services, but rather from the new investors themselves. They are the source of the returns, 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 ordinary shares compared to the company's net assets. This premium is cultivated and maintained through complex yet enticing corporate narratives, promises, and financial products.

Since 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 needs to be made clear that even if a company in the Bitcoin space intentionally or unintentionally constructs a Ponzi scheme, it does not mean that Bitcoin itself is a Ponzi scheme. The two are independent assets. Ponzi schemes also existed in the past when metals were the currency standard, but that does not mean that precious metals themselves were or are Ponzi schemes. When I made this accusation against Strategy company at this stage, I was coming from a definitional perspective, not out of a boredom-induced exaggeration.

Accumulation is still ongoing.

Before drawing further conclusions, we need to review the content of the initial report and summarize the relevant decisions made by the company in the past six months.

Strategy Company announced on December 9 last year that it purchased approximately 21,550 bitcoins for about $2.155 billion (an average price of about $98,783 per bitcoin). This purchase was made using funds generated from the well-known "21/21 plan" ATM ("at market price") launched earlier that same year. Just a few days later, the company bought over 15,000 bitcoins through ATM issuance and then announced the purchase of an additional approximately 5,000 bitcoins.

By the end of 2024, the company submitted a modification proposal to shareholders, requesting to increase the authorized number of Class A common shares from 330 million shares to 10.33 billion shares—an increase of 30 times. At the same time, the authorized number of preferred shares also increased from 5 million shares to 1.005 billion shares—an increase of as much as 200 times. Although this does not equate to the total amount actually issued, this move provides the company with greater flexibility for future financial operations, as the "21/21 plan" is rapidly nearing completion. By simultaneously focusing on preferred shares, the company can also explore another financing method. By the end of 2024, Strategy Company held approximately 446,000 bitcoins, with a bitcoin yield of 74.3%.

perpetual preferred stock

At the beginning of the new year, Strategy Company submitted an 8-K filing, indicating that it is ready to seek a new round of financing through preferred stock. This new type of 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 initially set fundraising target was $2 billion. As of January 12, during the preparation of the new tool, 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 shares, as the conversion price at that time was below the market price of the shares. For those "deeply profitable" Strategy convertible bonds, the largest buyers—funds engaged in gamma trading and neutral hedging—often choose to convert early and then issue new convertible bonds, rather than holding 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, with a stipulated cumulative dividend of 8% for a liquidation preference of $100 per share. In practice, this means a dividend of $2 per share will be paid permanently each quarter, or will stop when the Strike shares are converted into Strategy shares (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 instrument is similar to a perpetual call option that pays dividends, linked to Strategy common stock. If necessary, Strategy Company can choose to pay dividends in the form of its common stock. By February 10, the company had purchased approximately 7,600 bitcoins using the proceeds from the issuance of Strike and from ordinary share ATM issuance.

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

The Dispute and Steps of Permanent Preference Shares: The Arrival of Strife and Stride

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

On May 1, Strategy announced plans to launch another $21 billion common stock ATM issuance. This statement comes immediately after the ATM portion of the initial "21/21 plan" was exhausted, fully validating previous reports and the logic articulated on the X platform. Since any net asset value premium creates arbitrage opportunities for the company, management is bound to continue issuing new shares that are overpriced relative to the underlying Bitcoin asset value to capture this premium. The issuance began almost immediately, allowing for more Bitcoin to be accumulated. As the fixed income portion of the initial "21/21 plan" expands due to new preferred stock, investors now face a massive "42/42 plan," which includes up to $42 billion in common stock issuance and $42 billion in fixed income securities issuance. May also saw the company submit a new $2.1 billion Strife perpetual preferred stock ATM issuance application to the U.S. Securities and Exchange Commission (SEC). By the end of the month, all three ATM issuances were printing shares to purchase new Bitcoin.

In early June, the company announced another new tool: Stride ($STRD), a perpetual preferred stock asset similar to Strike and Strife, which is set to launch soon. Stride offers a 10% optional non-cumulative cash dividend and does not have equity conversion features, with its priority lower than all other instruments, only higher than common stock. Initially, slightly less than 12 million shares were issued, valued at approximately $1 billion, paving the way for the company to increase its holdings by about 10,000 Bitcoins.

The dazzling puzzle of the Bitcoin vault company

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

In the initial report, I pointed out that the main logic behind convertible bonds is not as the company claims, to provide opportunities for parts of the market that need and desire exposure to Bitcoin. In fact, the buyers of the bonds are almost exclusively funds employing neutral hedging strategies that are simultaneously shorting the stocks of the Strategy, and thus have never truly gained exposure to Bitcoin. This is merely a scam. The real reason the 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 on common stock, the net asset price discrepancies and the opportunities for risk-free Bitcoin returns also grow proportionally. The greater the economic confusion, combined with Michael Saylor's rhetorical skills and vivid metaphors, the greater the arbitrage opportunities the company can seize.

In the past six months, by issuing three different types of perpetual preferred stock securities, as well as various existing convertible bonds, these complex financial products are now capable of creating an appearance of financial innovation, thereby further driving the bidding of common stocks.

At the time of writing, the trading price of common stock is close to twice its net asset value. Considering the scale and activity of the common stock ATM issuance, this is a remarkable achievement for the company's management. This means that Strategy can buy about two bitcoins at the price of one bitcoin in a risk-free manner.

In 2024, the company benefited from the popular "reflexive flywheel" theory, which posits that the more Bitcoin the company buys, the higher its stock price will rise, thereby creating more opportunities to purchase Bitcoin.

By 2025, this self-referential logic has slightly transformed into a "torque" narrative, which is reflected in the official description from the company: fixed income gears drive the operation of the core component, ordinary shares, while Bitcoin returns are the product of this "mechanical device." However, where these returns come from and how they are generated seem to rarely be questioned by investors, who instead blindly celebrate this fictional dynamic.

Preferred stock is a financial asset and is not constrained by physical laws. As an engineer, Saylor uses these fallacious analogies to make Bitcoin returns look like they stem from some sort of financial alchemy, which is not surprising. However, since the company has no actual revenue and does not have a real banking operation (the company borrows but does not lend), Bitcoin returns ultimately only originate from the Ponzi elements mentioned earlier in the company's business model: attracting retail investors through a carefully crafted narrative, causing them to bid up the price of common stock, thereby creating the opportunity for Bitcoin returns. As for the Bitcoin returns that come from various debt instruments, they cannot yet be considered fully realized, as debt ultimately needs to be repaid. Only the Bitcoin returns generated from common stock ATM issuance are immediate and final—this is the true profit.

The bubble of Bitcoin Vault Company

Whether or not they realize that narratives cannot forever influence reality, the concept of Bitcoin gains from Strategy has rapidly spread among the management teams of many small companies worldwide. CEOs of various companies have witnessed insiders at Strategy accumulating enormous wealth by continuously selling stocks to retail investors, and thus they have begun to imitate this model. The continuous selling behavior of insiders at Strategy can be verified by looking at 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 all of this will eventually come to an end, as many companies have fallen into difficulties or even failed due to their traditional core businesses, and have turned to bold Bitcoin treasury strategies. These companies will be among the first forced to sell Bitcoin assets to repay creditors when the situation worsens. Michael Saylor himself admitted that he was in a state of despair before discovering Bitcoin.

Metaplanet used to operate under the name Red Planet Japan and struggled to achieve profitability in the budget hotel sector in Japan.

Before Méliuz SA desperately turned to a Bitcoin acquisition strategy, it underwent a 100:1 reverse stock split.

Vanadi Coffee SA operates five cafés and a bakery in the Alicante region of Spain, on the verge of bankruptcy, but after its pivot to a Bitcoin strategy, it seems to have miraculously boosted its stock price.

The notorious meme stock company Trump Media & Technology has no revenue to speak of and is now seeking billions of dollars in funding to create a Bitcoin vault company to save its stock price, which is at an all-time low.

Bluebird Mining Ventures Ltd is also in despair — at least from the stock price perspective — and recently decided to sell all the gold it has mined to fund its purchase of Bitcoin as treasury assets; as of the time of writing this article, its stock price has increased nearly 500% in a month.

H100 Group, a small and until recently struggling Swedish biotech company, has seen its investors gain about 1,500% returns within a month as of the writing of this article, due to Blockstream's CEO Adam Back providing funding to the company through some type of convertible bond to support its Bitcoin vault strategy.

There are many examples like this, but I think it has illustrated the problem: it is not Microsoft, Apple, or Nvidia that has become a Bitcoin treasury company, but those companies that are on the verge of failure and have no way out. Jesse Myers, a supporter of Strategy and a direct influence on Michael Saylor's Bitcoin valuation model, once admitted:

"[…] MicroStrategy, Metaplanet, and Gamestop are all zombie companies. They all need to seriously examine themselves and acknowledge 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 attention 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 caught up in a massive transfer of wealth, while the Bitcoin treasury company bubble is nearing its end.

When the puzzle shatters

Although Strike, Strife, and Stride are part of this impressive company's puzzle, they take priority over equity. The same goes for convertible bonds, not all of which are currently "profitable." Future free cash flow must always first meet the demands of these instrument holders before the remaining portion can be allocated to common stockholders. This is clearly not an issue in good economic times, as the company's debt ratio is relatively low; but in poor economic conditions, the value of the company's 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 may hesitate to lend for the purpose of repaying other debt obligations. The initially intoxicating narrative and exaggeration may ultimately backfire on its creators.

The situation has worsened due to the prolonged duration of the Bitcoin bear market. At that time, many struggling Bitcoin treasury firms will further exert selling pressure on their assets. In other words, the more popular Strategy's approach becomes, the deeper the potential Bitcoin crash will be in the future, which could completely destroy the equity value of most companies that cling to this strategy until the very last moment.

Summary: Michael Saylor likes Bitcoin. Like us, he prefers to have more Bitcoin rather than less. Therefore, it is extremely naive to think that he would let the company's management pass up an opportunity that is, by definition, arbitrage.

When the trading price of common stock is higher than its net assets, the company can create risk-free profits for existing shareholders by transferring wealth to buyers of newly issued shares. This practice will continue to manifest in larger-scale common stock ATM issuances, accompanied by some new and obscure "innovative products," even though there may be protests or dissatisfaction from the outside regarding equity dilution.

The evidence for this viewpoint lies in the fact that my prediction made in March this year has been validated: less than a month and a half later, the company announced a new ATM issuance worth $21 billion. If Strategy does not take advantage of this arbitrage opportunity, all imitators will rush to seize this opportunity to increase their Bitcoin reserves in the same risk-free manner. In this frenzy of arbitrage opportunity expansion competition, the company will incur debt in various forms, and the potential risks will consequently increase.

In the next round of the Bitcoin bear market, the stock price of Strategy will fall to—and eventually drop below—the net asset value per share, resulting in significant Bitcoin-denominated losses for investors who purchase stocks at a premium today. The best course of action for investors in Strategy today is to follow the example of the company and its insiders: sell the stock!

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