MicroStrategy's Bold Move: A Bitcoin-Backed Preferred Stock Offering with Up to 10% Yield

MicroStrategy is making headlines again with its innovative approach to funding its Bitcoin acquisitions. The company has announced a new $500 million preferred stock offering, dubbed STRC, which is expected to yield between 9.5% to 10%. This move is part of MicroStrategy's strategy to diversify its funding sources beyond traditional equity sales.

A Bitcoin-Backed Financial Instrument

The STRC offering is unique because it's designed to function similarly to U.S. Treasury bills, but with a twist—it's backed by Bitcoin. MicroStrategy, the largest corporate holder of Bitcoin, currently owns over 600,000 BTC, valued at approximately $72 billion. This massive holding provides a solid backing for the new preferred stock.

How It Works

• Initial Yield: The offering is expected to carry an initial yield of 9.5% to 10%.
• Floating Rate: Unlike traditional preferred stocks with fixed rates, STRC will have a floating rate, adjusted monthly to maintain a stable price around $100.
• Investor Bonus: If the stock price moves from the expected offering price of $90-$95 to its face value of $100, investors could see a 5% gain.

Why This Matters

MicroStrategy's approach is groundbreaking in the preferred stock market, where most offerings have fixed rates and reset every five years. The company's ability to adjust dividends monthly aims to keep the stock price stable, making it an attractive alternative to money-market funds and Treasury bills.

Risks and Rewards

While the offering is innovative, it's not without risks. MicroStrategy's small software business doesn't generate much free cash, and its Bitcoin holdings yield nothing. The company may need to rely on equity sales to fund the dividends. However, the Bitcoin backing provides a layer of security, as the value of MicroStrategy's BTC holdings far exceeds its debt and preferred stock.

Market Reception

Previous preferred stock offerings from MicroStrategy have been well-received, with yields now lower than at issuance. The STRC deal, with its floating rate and Bitcoin backing, could attract even more interest from investors looking for high-yield, crypto-backed securities.