A Bit Of A Stretch

Abstract: We take a look at Stretch ($STRC), an extremely novel MSTR debt type instrument, designed for price stability, by varying the dividend rate each month, based on the market price of the debt. The product is therefore marketed as a low risk product and compared to short duration US treasuries. It is another attempt at a hack of the financial system from Mr Saylor, again to accumulate more Bitcoin. We read the SEC fillings and based on our understanding MSTR can abandon the price stability objective and lower the dividend payment by up to 25 bps each month, if it wants to, which could mean the dividend rate could hit zero in just over three years. Therefore, we consider the product as favourable to MSTR and that it can be considered as considerably more risky than short duration treasuries from an investment point of view.

Overview

In November 2024, we posted about MSTR, with our “we did the ponzi maths” post:

https://x.com/BitMEXResearch/status/1859559585301909660

This was relatively simplistic, only looking at the stock. In addition to the stock, MSTR has a whole range of financial products one can invest in. In particular, new relatively new wave of preferred perpetual securities:

In this piece, we are going to focus on what we consider as the most interesting of the four products, STRC. In particular, following on from our November 2024 post on X, STRC is the product that has resulted in us getting the most questions. Questions such as: What happens when the music stops and the flow of new money into MSTR dries up? How will MSTR afford the STRC dividend payments then? Will MSTR be forced to sell Bitcoin? Is STRC a ponzi scheme? Given all these questions, we decided to write this quick note, with our basic view on STRC.

What is STRC?

STRC is marketed as the lowest risk part of the suite of the MSTR investment products. So low risk in fact, that is compared to US treasury securities or stablecoins. Except, with a much higher yield than these low risk alternatives. One can see below an image from MSTR’s recent investor presentation, where STRC is compared to “Treasury Credit”.

Source: https://assets.contentstack.io/v3/assets/bltf8d808d9b8cebd37/blt9b84fb10213f43b9/6903bc2de0bf2aa118a4627f/q3-2025-strategy-earnings-presentation.pdf

The price of STRC has recently traded up to the par value of $100. This indicates its somewhat of a success, with the price being somewhat stable.

How is the interest rate determined?

The objective of STRC appears to be to trade at or near the $100 price. Dividends are typically paid each month and the dividend can be adjusted at the company’s discretion. The idea is that if STRC trades below $100, the dividend payment can be increased, which should push up the price of MSTR. In the other scenario, if STRC trades above $100, the dividend amount can be decreased, which should in theory push the price down towards $100. Therefore, the instrument should be very stable and trade at or around $100 all the time. This therefore makes STRC a cash like instrument and an alternative investment to short duration treasuries. A key difference to treasuries being that the money raised by issuing STRC is used to buy Bitcoin. This is another attempted hack of the financial system, to buy more Bitcoin.

As far as we can tell, STRC is a novel product. There are no other debt instruments like it. Debt instruments typically have a fixed coupon or a variable coupon, where the interest varies depending on other interest rates in the economy such as the Fed funds rate. We are not aware of any other debt instrument, where the interest rate varies to keep the market price of the debt stable. It seems like MSTR are confident because of the success of their previous hack of the the financial system, selling their own stock at a premium to buy Bitcoin, that they have come up with an even more brazen hack, issuing debt to buy Bitcoin, where due to some novel trickery, the debt looks like it has the same risk as short duration treasuries.

On the face of it, this new model of debt issuance immediately feels potentially unsustainable for a company. If a company has fixed coupons and gets into difficulty, the liability remains unchanged. However, if a company has a variable coupon, where the variation is designed to keep the price of the debt stable, then if the company gets into difficulty and credit risks increase, the coupon payments will need to increase to keep the price of the debt stable. This means that as the company hits difficult times, its liabilities will increase. A downward death spiral is therefore possible, where the credit worthiness of the company goes down and down, until bankruptcy. Therefore, these novel instruments potentially increase the instability of the company. In the case of MSTR, it could be declining Bitcoin prices that cause a decline in the value of STRC, which could then increase MSTR’s monthly payment liabilities, resulting in a downward spiral.

What are the rules on the interest rate?

Given the above mechanics, it's worth looking at the rules on how the monthly dividend payments are set, not just the objective of STRC price stability. In particular the rules around a reduction in the coupon rate. The rules are set out below but can be challenging to understand given the legalistic language.

However, we will not be permitted to reduce the monthly regular dividend rate per annum that will apply to any regular dividend period: (i) by more than the following amount from the monthly regular dividend rate per annum applicable to the prior regular dividend period: the sum of (1) 25 basis points; and (2) the excess, if any, of (x) the “monthly SOFR per annum” (as defined in this prospectus supplement) on the first business day of such prior regular dividend period, over (y) the minimum of the monthly SOFR per annum rates that occur on the business days during the period from, and including, the first business day of such prior regular dividend period to, and including, the last business day of such prior regular dividend period; or (ii) to a rate per annum that is less than the monthly SOFR per annum in effect on the business day before we provide notice of the next regular dividend rate.

Source: https://www.sec.gov/Archives/edgar/data/1050446/000119312525165531/d852456d424b5.htm

Note: The SOFR is a market based benchmark overnight interest rate in the US. It was designed to replace LIBOR, which was more easily manipulated by certain banks.

Our understanding of the above is that MSTR can, at its absolute discretion, lower the dividend rate by up to 25 bps a month, no matter what else is happening. It doesn't matter what is happening to the STRC price or on the wider market, the dividend rate can be reduced by 25 bps a month. This equates to 300 bps or 3 percentage points per annum. Therefore, based on a prevailing 10% dividend rate, it will take three years and four months to bring the rate down to zero, at the maximum allowed rate of decline. In certain scenarios the company can reduce the dividend rate even faster each month, if market interest rates in the wider economy are also in decline. So for example if the market overnight rate declines by 100 bps in a month (from the start of the month to the floor), then the STRC dividend rate could decline by 100 bps + 25 bps = 125 bps in any given month. This seems fair, if the base rate is declining then STRC should be able to adjust.

There are also complex rules about what happens if MSTR fails to make a declared coupon payment. If this happens, then the unpaid dividends continue to accumulate. Our understanding is that until this outstanding balance of accumulated dividends is paid, MSTR cannot pay dividends on “any class or series of dividend parity stock”, unless it also makes an STRC dividend payment and the proportion of this compared to the cumulative unpaid dividend is not less than the same ratio for the other class of stock paying a dividend. As in, the higher the cumulative unpaid dividend, the harder it is to pay any significant dividend on any other class of stock. Therefore, if MSTR starts to accumulate unpaid dividends on STRC, it becomes harder to make payments on any other stock instrument. However, there is still no form of security or risk of bankruptcy and the company does not have to pay dividends to STRC holders at all, if it doesn't want to.

Is STRC a Ponzi?

Now that we understand the mechanics of STRC, we can address the question of whether it shares characteristics with Ponzi schemes. Of course it's not literally a Ponzi scheme, because it's not based on lies or fraud, however if something shares a lot in common with a Ponzi scheme, such that it earns investors an apparently strong and consistent return, but financing this return it dependent on the constant flow of new capital into the system, such that when the flow stops, the thing crashes hard, then it's fair to contrast it to a Ponzi scheme.

STRC is proving expensive from a cash flow point of view, there is around $3bn in issuance, so at 10% this is $300m per annum in dividend payments. MSTR cannot afford this without raising new money or selling Bitcoin, and therefore in that sense, this instrument is a bit like a Ponzi scheme. However, when one considers that the dividend payments can gracefully and gradually decline at the company’s absolute discretion, such that the dividend payments are affordable, this isn't really like a Ponzi scheme at all. Therefore, on balance, we would say that STRC is not really like a Ponzi scheme. However, we do not believe investing in STRC at a price of $100 is necessary demonstrating fantastic investment acumen. In our view, the risks related to STRC are substantially greater than those related to short duration US treasuries.

Conclusion

When the music stops, if things become challenging for MSTR, instead of selling Bitcoin, MSTR could just abandon the narrative that STRC is targeting stability. The company could just choose whatever path is easier. MSTR could just then reduce the STRC dividend rate by 25 bps each month. At the current rate of 10.5%, this would take 3 and a half years to get to zero. While the rate is declining, the dividend payments become more and more affordable. This feels very favourable for MSTR and the dividend payments are therefore quite sustainable and affordable, in our view. Of course, this means that the price of STRC should crash, perhaps by around 87%, to the present value of the cashflow over the next 3 and a half years.

The MSTR story may not be what some of the sceptics expect. In our view, MSTR’s debt won't necessarily lead to the forced selling of Bitcoin and a downward price spiral, with potential disaster and bankruptcy for MSTR. One needs to understand that MSTRs debt instruments are novel, they are not plain vanilla. They were written by the company for the company. Saylor is no idiot! Saylor is the genius of our time, raising billions in capital, often using fantastical mechanisms, debt or equity, that are highly favourable to his company. MSTR will be fine whatever happens to the Bitcoin price or the flow of capital. In contrast, it's the investors who may feel somewhat aggrieved when the music stops. In our view, STRC is a perfect demonstration of this phenomenon.