• Strategy’s new STRC preferred equity has become wildly popular in investor circles.

• Sales of the bond helped prop up 85% of Strategy’s last week Bitcoin buys.

• Analysts reckon its popularity won’t last long.

Investors can’t get enough of Strategy’s STRC preferred equity. And why wouldn’t they — the stock pays an 11.5% dividend backed entirely by Bitcoin holdings while allowing the company to stockpile even more of the cryptocurrency.

But as yield-hungry investors plough in, analysts are warning of some pretty critical risks.

“I expect the market to soon wake up to the fact that backing preferred equity with a highly speculative asset like Bitcoin is an extremely risky game, especially if the bear market continues,” Dom Kwok, former Goldman Sachs analyst and co-founder at EasyApp, told DL News. “I am not bullish on STRC.”

STRC is a security that sits between bonds and common stock in the capital structure. Think of it as a high-yield savings account backed by Bitcoin. You get 11.5% annual returns paid out regularly, which is far higher than most bonds. If the company goes belly-up, you’re first in line to get paid after creditors but before regular shareholders.

But there’s a big risk: the company can suspend dividend payments at any time, or adjust the rate of payments at will.

Last week, Strategy gobbled up around 34,164 Bitcoin worth around $2.5 billion. Roughly 85% of the funds to make that purchase came from STRC.

'Yield-starved'

STRC’s popularity stems from the simple fact that investors are desperate for yield.

“Public market investors are yield-starved and the juicy 11.5% yields are extremely attractive, resulting in high demand,” Kwok said. “This is a temporary phenomenon.”

But yield isn’t the only reason to be interested in STRC, said Satish Patel, investment analyst at CoinShares.

“Tax treatment helps,” Patel told DL News. STRC dividends are classified as return of capital, meaning they’re not treated as ordinary income. That’s enormously attractive especially to high-bracket investors who would otherwise pay some pretty high taxes on bond coupons, he said.

Patel also argued that STRC’s volatility has declined recently, making it behave “more like a stable, high-yield income instrument anchored around par, rather than a volatile proxy for Bitcoin.”

Add in Strategy’s $2.25 billion cash reserves and its overcollateralisation on its Bitcoin holdings, and investors are flocking, said Patel.

Suspension risk

So what’s the problem?

“Strategy can turn off dividends at any time,” said Kwok. “Ultimately, it’s a risky game.”

If STRC dips below $100 — it has traded at $93 in the past three months — Strategy will be forced to stop issuing shares, and the entire thesis collapses.

“Much like Strategy itself, STRC is highly (perhaps too) dependent on bitcoin doing well,” said Kwok.

Patel acknowledges that the suspension risk is real, but “economically self-limiting.”

“If the board ever suspended dividends, the entire capital-raising flywheel would collapse, STRC drops below par, the ATM issuance window closes, no new BTC purchases, and the whole thesis dies,” he said. “Strategy therefore has an overwhelming incentive to keep paying, provided it has the runway to do so.”

To be sure, STRC’s structure is innovative.

It’s a security that pays dividends ad infinitum, resets its price regularly, is backed entirely by Bitcoin, and treats payouts as tax-advantaged returns of capital instead of taxable income.

This “simply doesn’t exist elsewhere,” said Patel.

Pedro Solimano is a markets correspondent based in Buenos Aires. Got a tip? Email him at psolimano@dlnews.com.