Strategy squared: multiple channels, same exposure
Prasad Gollakota
It is unusual for a listed company to buy income-bearing securities of a peer as a treasury decision. In orthodox corporate finance, surplus capital is meant to do one of three things: fund projects that clear the hurdle rate, preserve liquidity, or be returned to shareholders. It is not normally redeployed into another company exposed to much the same trade, especially at a lower yield than the investing company pays on its own stock.
That is why Strive's March announcement is perplexing. The publicly traded asset manager has repositioned itself as a bitcoin treasury company and said it had purchased US$50m of STRC, Strategy's variable-rate perpetual preferred stock paying 11.5%.
Strategy (formerly known as MicroStrategy) is the best-known bitcoin treasury company and the archetype others have followed: a listed issuer that has built multiple layers of securities over a large bitcoin balance.
As noted in an earlier piece on Strategy, bitcoin treasury companies face a basic and fundamental constraint: bitcoin does not generate cash income yet the companies built around it still have to service real-world obligations, including preferred dividends. That makes treasury management central to their model and frames the importance of how surplus capital is deployed.
Negative carry
Strive said in its announcement that as of March 9 it had "an interest reserve totalling over 18 months of [preferred] stock dividends, consisting of 12 months held in cash and cash equivalents and six months held in STRC".
In accompanying investor materials, it described the STRC reserve as a portion of the holding "designated to support the payment of dividends" on its preferred stock. This explicitly links the purchase of Strategy’s preferred stock to support its own preferred dividend obligations.
US$50m is not a systemically large number, but it reveals an unusual, if not perverse, use of capital: choosing to invest in a closely related security at a lower yield than Strive pays on its own preferred stock. Strive is earning 11.5% on STRC while paying 12.75% on its own preferred stock, SATA.
Accepting that negative carry assumes that management is taking a broader bullish view: that bitcoin performs, capital markets remain open and future refinancings or asset appreciation more than offset the gap. In other words, this only works if the broader bitcoin treasury trade keeps working.
Liability management 101
If management believed its return on equity could earn more than 12.75%, the cost of its preferred stock, the most orthodox use of such capital would be to buy back Strive's common equity. That stock closed at US$9.23 on March 11, while Strive's March 10 investor deck put NAV per basic share at US$13.99.
Buying back stock at a 34% discount to reported NAV would have been the straightforward accretive option, assuming management believed that NAV and had legal flexibility to act.
On the preferred side, SATA closed at US$96 on March 11. Buying it back would have eliminated a US$12.75 annual dividend obligation on a US$100 stated amount for every US$96 spent: an implied cash saving, or yield-equivalent return, of about 13.3%, before any additional benefit from repurchasing further below par.
Instead, Strive chose to earn 11.5% on STRC while leaving its own 12.75% preferred outstanding. The accounting label may differ, but economically avoiding your own dividend is no different from earning someone else's.
There is no obvious indication that such buybacks were structurally impossible. If those alternatives were available, the decision was not driven by economics. Buying back Strive’s own securities would have been the cleaner and more accretive use of capital, both on the common and preferred side. Choosing Strategy’s preferreds instead meant accepting lower returns while leaving a more expensive Strive liability outstanding.
That in turn raises a more important question: what was being valued instead? One answer is flexibility. An external holding can, in theory, be sold, whereas retiring your own securities is permanent. But even that distinction is less clearcut than it appears. Companies can buy back their own securities and hold them as treasury stock, retaining the option to reissue them later. In that sense, flexibility is not obviously lost through buybacks.
Another potential value, and perhaps the most significant, is signalling. Buying back your own common or preferred stock can be read as defensive, while investing externally can be framed as a proactive allocation decision. Holding another issuer’s preferreds as part of a “reserve” supporting dividends may be easier to explain than being perceived to “reduce capital”.
None of those explanations change the economics, but they help explain why a company might choose a financially inferior option. The tradeoff is that the balance sheet becomes more complex, more circular and less directly anchored in its own cashflows.
No rebuke
Strive presents itself as a disciplined capital allocator seeking to outperform bitcoin, not merely mimic Strategy. But once part of the support architecture for Strive's preferred stock is another issuer's preferred stock, the proposition changes. Investors are no longer just exposed to Strive's judgment on bitcoin and capital structure; they are also exposed to Strive's judgment that holding Strategy's preferred stock is an appropriate way to support Strive's securities.
Interestingly, there was no obvious immediate rebuke from shareholders in terms of the price of the common shares after the announcement. If anything, that sharpens the point. When one listed bitcoin treasury company can buy another's lower-yielding preferreds while paying more on its own, and the instinctive response is not alarm, the market is effectively signalling that it is willing to finance an economically irrational proposition. Perhaps this should not come as a surprise; the company depends on investors who do not view the world in orthodox corporate finance terms.
That matters because these companies are not self-funding. Recent disclosures show that losses can be substantial and that balance sheets are sustained through continued capital market activity, including preferred issuance and follow-on offerings. In that context, cross-capital pollination is not a side detail. It becomes part of how the system sustains itself.
When bitcoin treasury companies buy each other’s securities instead of retiring their own, investors are no longer just funding exposure to bitcoin. They are funding a system that hides dependencies and only reveals fragilities once confidence turns.
At that point, in a sense, buying another bitcoin treasury company’s preferred with reserve assets becomes akin to two mountaineers clipping their safety lines to each other rather than to the rock face. It can feel secure while both are upright. The problem is that there is no independent anchor when one slips.
Prasad Gollakota is a former FIG banker and co-head of the global capital solutions group at UBS. He was later chief content and operating officer at edtech company xUnlocked and specialises in financial institutions, banking regulation, capital markets and complex capital and funding solutions.