What Strategy Promoting An 11.5% Dividend Means for Bitcoin (and Michael Saylor)

Terra once promised 20% returns on a pegged asset. It didn't end well.

Bitcoin, crypto, and even Wall Street have all seen their fair share of leverage games that have all come tumbling down.

Infinitely repackaging bad mortgages eventually came home to roost in 2008. A “stablecoin” linked with promises of 20% returns eventually collapsed in 2022, evaporating $40 billion overnight. But now, a new game is capturing the attention of both crypto and Wall Street alike.

At the center of it all sits Strategy Chairman Michael Saylor. Famous for being the first CEO at a publicly traded company to bet the house on Bitcoin, Saylor has now evolved Strategy into much more than just a company buying and holding $60 billion in Bitcoin.

But Strategy’s latest foray may be its boldest yet — not just for what it is promising, or how it’s being advertised (an AI model in a swimsuit promising an 11.5% dividend is indeed attention grabbing.) But also because its success or failure could mean the same for Bitcoin and those who’ve bet on it since the beginning.

The goal of this post is simple: Unpack how the game is designed, so that you can make your own judgements on which part of the cycle we’re in. Because even as people who lost money in Terra’s collapse will tell you, there were gains to be had on the way up (and even more money to be made on the collapse.)

The Greatest Game Ever Played

Let me start by admitting I got got the last time this game was played. But as President Bush once pointed out, there is a saying in Texas that goes, “Fool me once, shame on...shame on you.’ Fool me — you can’t get fooled again.”

Interestingly, as we will explore in this article, the game that Terra played rhymes quite a bit with what Strategy is attempting now — just built slightly differently and possibly in reverse.

That is, Terra advertised a digital dollar (UST) that yielded 20%. Importantly, this dollar wasn’t backed by anything other than another cryptocurrency (LUNA) that could be printed or burned based on demand for UST. When times were good from 2020 to the beginning of 2022 plenty of people wanted to put their money in the stablecoin to chase the 20% yield and LUNA rose a staggering 22,900%. Then, as we covered in our award-winning documentary, it collapsed in May 2022.

But most people don’t remember that in the lead up to the collapse, Terra founder Do Kwon was also building one of the largest Bitcoin reserves at the time to be used in the event of a bank run on UST. The idea was that this $3 billion Bitcoin war chest would be used to buy up UST and restore its peg to $1 a coin if it ever started to waver.

In the end, the rainy day fund could do little to offset what became an overwhelming onslaught of sell pressure across the board.

Two weeks before all of that played out, a very smart friend who worked in finance his entire career implored me to realize that none of this was sustainable. Now, that same friend is saying the same thing about what Strategy is just getting off the ground.

Strategy’s 11.5% Dividend

Strategy’s journey to arrive at a game that follows Terra’s did not happen overnight. And while the two rhyme in design, it’s important to point out that they are not at all the same thing.

For one, Terra was built completely outside of the regulated securities world, without SEC and CFTC required disclosures. Saylor and Strategy have built what they’ve built within legal frameworks since day one. So why are people saying they look similar?

Strategy started building its Bitcoin reserve as the first step in its journey. At more than 780,800 Bitcoin, the stash represents nearly 4% of Bitcoin’s total supply, and at an average purchase price of $75,577 somehow after years of stacking the position, Strategy is now about break-even on the $58 billion they hold in Bitcoin at today’s prices.

The genius in what Saylor has crafted is that Strategy has been able to create value by capturing Bitcoin’s volatility. Over the years, he has been able to issue billions of dollars worth of Strategy’s common stock, MSTR, to fund more bitcoin purchases. And by virtue of being a public company he leveraged the corporate bond market to sell billions in convertible debt when the Bitcoin he held was well in the green.

But now, Strategy has introduced a third element that has raised $3 billion in just the last two weeks: A perpetual preferred stock called STRC that has been advertising an 11.5% dividend paid out monthly. The stock is designed to trade at a par value of $100 and whenever it trades above that, Strategy issues new STRC shares to buyers.

And this is where the comparisons between what Strategy is now doing with Terra’s game start to look more fair — especially when you look at how STRC and its 11.5% dividend is being presented to the market.

Last month, Saylor posted an AI advertisement for STRC to his X account with the caption, “You weren’t meant to live an uncomfortable life,” featuring a woman in a swimsuit talking about how she put her “savings” into STRC and became so wealthy she retired early. The ad even raised some eyebrows among hardcore Bitcoiners who have praised Saylor for years.

“Just like [as] a matter of taste, maybe AI ... hot girl videos is maybe not the best way to promote a serious financial product,” Swan Bitcoin CEO Cory Klippsten said.

But in our same interview, Klippsten also mentioned how his Bitcoin exchange was beginning to explore pricing buy and sell limit orders in STRC for customers so they can collect 11.5% while they wait for trades to be triggered.

It has also been interesting to hear Michael Saylor discuss STRC in interviews, including one last month with CNBC in which my former co-worker Brian Sullivan asked Saylor if he’d be offended if he called STRC a money market fund.

“No, it’s meant to be like a money market, a digital money market-like instrument that pays you double digit yields,” Saylor said.

This is the part where it seems important to note the difference between money market funds, stablecoins that are backed by U.S. Treasurys, and perpetual preferred stocks like STRC. That is, with the first two, a holder can always get their money back. But with STRC, you are parting ways with your principal forever in exchange for dividends paid out over time. There are also no guarantees STRC lives up to holding its $100 par value, and the company can adjust its dividend over time.

Looking back to the Terra example is an interesting parallel. Terra’s UST stablecoin was not at all like Circle’s USDC, which was backed by an equivalent amount of dollars in a bank and could be redeemed for an equivalent dollar. Because of that, many crypto exchanges avoided onboarding UST as an asset that their customers could transact in.

Despite some platforms shunning UST, it was still able to grow to a total market cap of more than $18 billion before it de-pegged. So far, STRC has attracted a little over $6 billion.

What Inning Is This Game In?

On Friday, the company announced a new proposal to accelerate dividend payouts to holders from monthly to semi-monthly. On the shareholder call announcing the change, Strategy CEO Phong Le pointed out a semi-monthly cadence more closely matches the average pay cycle for most US employees.

With the June vote to drop the dividend payout window down to every two weeks, STRC may get more interesting to more people. It also inches more into direct competition with what most people use stablecoins for.