Stretch Lesson
VICTORY LAP TIME
Last December, I bought $STRC at $97.69 with emergency account funds. These funds need to be liquid and stable, so our family can pay for unplanned medical expenses. The market offered 11% to 12% yield.
I made1 a little web site to understand and monitor the capital structure.
At the time, I told friends that Strategy preferreds were safer than long-dated US Treasuries. They reacted as one might react to a homeless man shouting at the clouds about microchips in vaccines, but I still think I had a provocative point worth making:
- $STRC had lower realized volatility than $TLT
- there is an audited, highly visible pool of assets to cover dividend payments for 30+ years
- this is more coverage than the US government has
- Saylor and Le would rather sell their kidneys, than ever sell a single bitcoin that they control
- Trump, his shadowy cabal of advisors, and the politicians who oppose them, seem 1000x more willing to strategically default on US debt2
I held for 6 months in total, compounding the yield by reinvesting monthly dividends in the preferred. I sold it all mid-June when the price hit $96.40.
LOGIC REVIEW
The investment rationale was:
- collect ~1% per month in safe dividends
- asset holds a stable price (for liquidity needs)
- ~2.3 points in capital appreciation as the $STRC mechanism ratchets the yield higher in order to target a stable $100 price
PLAN REVIEW
Generic trading rules for any algorithmic stablecoin, which by definition is subject to ponzinomic forces and animal spirits:
- if yield > 10%, buy at 100 and compound (Rule of 72 tells you how long it will take to double your money)
- stop loss at 96. The market is telling you it doesn't trust something
- Texas hedge (buy back in) if it collapses to 70-75 range. Strict stop loss at 50, take profits at whatever level the bounce takes you to
- re-underwrite your investment after things settle. The structure had to change in order to survive
SITUATION REVIEW
Strategy management made a tactical mistake when they used cash to retire their outstanding bonds. This left them in a precarious cash management position. Then, they made a sentiment mistake when they sold a tiny amount of bitcoin, to "inoculate the market".
They made two more credibility mistakes: when they sold common shares below mNAV=1.20, and when they cooked the investor metrics shown on their website. I leave it to others to describe in detail, but the misrepresentation is borderline criminal. The fact that their lawyers signed off on it makes me deeply question the control structure and culture at the firm.
These are all serious mistakes on their own, but not death blows. But they highlight that Saylor himself has a riverboat gambler's character. While any one bet might carry a low risk of ruin, a gambler who continues to take high-variance, low-to-negative-EV swings will almost certainly get wiped out by a bad draw.
OUTLOOK
The new Strategy will actively manage its bitcoin. Investors in any of their securities must ask themselves, what makes me believe this management team will outperform my other investment opportunities? I think there is no good answer to this question. I am avoiding all long-term holdings3.
Saylor's actions remain immensely important to bitcoin price. Everyone saying otherwise is: 1) blinded by bag bias, 2) blinded by their emotional sense-of-self as someone who will perpetuate their bloodline based on their ability to laser-eye and diamond-hand bitcoin in this life.
Strategy was the most innovative DAT4. It also had a historical advantage that no other DAT can ever have. Like how bitcoin has a historical advantage over all other blockchains. Like how Atari has a historical advantage over all other video game makers.
The collapse evolution of Strategy's business model is horrible for $BMNR, Metaplanet, Strive Capital, Forward Industries $PURR, etc. Why not an ETF or open-ended fund?
Strategy has to suspend its regular bitcoin purchases, as the market no longer allows it to raise net-new funds via financial engineering. This is horrible for bitcoin price5. Sorry, not sorry.
My best guess is that Strive securities are completely mispriced by the market, because they are too small to hunt outright while the big Strategy game is still out there. Smart arbs will sell Strategy/buy Strive securities rather than the other way around, because the reflexivity of a Strategy forced unwind is immensely powerful. You can't really point to the pricing of a minnow, to price a whale.
let's be honest, Claude did most of the work. First commit was on Dec 17th↩
The U.S. federal government has experienced funding lapses, and subsequent partial or full shutdowns due to budget showdowns in every single decade since the 1970s. These are outcomes that were designed never to happen (in a game theory sense). But after 6 consecutive decades, shutdowns are frequent, severe, and generate little outrage amongst the general population. The next political impasse may lead to even more extreme outcomes. The prospect of US sovereign debt default is clearly rising, not falling↩
I may trade when things appear mispriced↩
outside of some Solana-style DATs that offer to efficiently access validator economics, within a corporate structure↩
bitcoin's only narrative savior right now seems to be that Trump will do something very funny with Strategy, the national bitcoin reserve, with his own family insider dealings, etc.↩