Why MSTR Should Have Sold $2 Billion Instead of $2 Million of Bitcoin

**Jeff Dorman** (0:00)
So, you're just in a weird situation now, where again, it's not like default is immanent here, but this flywheel that he's created over six years is just slowly dying, and he's put too many pieces in the puzzle that can't be serviced at the same time.

**Laura Shin** (0:16)
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Today's topic is strategies dilemma and why it's begun selling some Bitcoin. Here to discuss is Jeff Dorman, Chief Investment Officer at Arca. Welcome, Jeff.

**Jeff Dorman** (0:52)
Hi, Laura. Thanks for having me. And as always, compliance, the views I express are my own and are provided for informational purposes only, nothing I say should be construed as investment advice.

**Laura Shin** (1:03)
You wrote a tweet last week that was somewhat prophetic. You said, quote, the MSTR story has gotten so out of hand.
Excuse me. This is the first time that MSTR, BTC and prep holders are really in a bind. Someone is going to lose badly here and it will happen in the next four months. And then of course, we heard on Monday that Indeed Strategy had sold 32 Bitcoin at the end of May for $2.5 million.
And you've written on your blog about how you used to be a fan of Strategy and would defend it against people's concerns that it would someday have to sell Bitcoin. But obviously, now your tune has changed and you ascribe that to their new capital structure. So what changed in the structure and why do you think it's a problem?

**Jeff Dorman** (1:50)
Sure. Yeah, I guess I should have said within the next four days, not necessarily the next four months. Yeah, I mean, to be fair, when I used to talk about MicroStrategy, I never really defended the MSTR stock per se. What I always said was that the fear of MicroStrategy and Saylor selling Bitcoin and as a result, this company being a risk to the price of Bitcoin was always really low up until the end of last year. What really changed was that this used to be a pretty simple capital structure. At first, they were selling equity and using the proceeds of any equity raises to then buy Bitcoin. Then they layered on a little bit of debt, nothing crazy. I think in total, they had about six or $7 billion of debt relative to a $40 or $50 billion equity market cap. It was pretty nominal from a debt to cap standpoint. It wasn't really going to be a death sentence for a company like this, especially since most of them were zero or low coupon converts. There wasn't a big cash outlay. But at the end of last year, they started introducing the preferreds.
The growth of this preferred market, they have multiple preferreds in their capital structure now. Most of you probably have heard of STRC, which is Stretch, the one that they talk about all the time and is ballooned to I think $11 billion in assets. But there's others as well. There's about four different preferreds that they have in the balance sheet. The problem with this preferred stock is that these have ballooned to about $15 billion total, and they have somewhere between 10 and 12 percent dividend rates, which means that MicroStrategy basically owes $1.7 billion in annual dividends per year.
That's what made me change by tune in the sense that he could have muddled along for decades.
Whether or not he ever was able to buy more Bitcoin was irrelevant. He never was going to have to sell Bitcoin. There was no trigger to have to ever sell Bitcoin because there was no cash obligations other than when the debt came due. And you could probably refinance the debt because it was a small part of the cap structure. Once you introduce this $1.7 billion of cash dividends, now he has to come up with $1.7 billion a year in order to satisfy those prefers. And it's a company that makes no money. So there's only so many avenues that you can come up with to come up with $1.7 billion. Either you have to continue to sell more stock, which is becoming less and less accretive as the price goes down, or you have to sell the Bitcoin. So really, in tennis terms, this is a pretty unforced error. There was really no reason to do what he did in the last few months, where he basically used all of the cash on the balance sheet that they had saved to pay down debt and now have five months left before they run out of cash unless they sell the Bitcoin.