Summary MicroStrategy (MSTR) employs circular financing to buy Bitcoin using overvalued equity, convertible debt, and preferred shares, creating significant dilution and risk. MSTR’s funding model only outperforms Bitcoin if shares trade at a massive premium to NAV; otherwise, direct Bitcoin investment offers superior risk-reward. The preferred shares’ 10% dividend and convertible debt obligations force ongoing dilution or Bitcoin sales, undermining long-term shareholder value. I see no compelling reason to own MSTR, as its structure yields no meaningful alpha over Bitcoin and exposes investors to dilution and funding risk. Introduction While I am not a Bitcoin fan, this report on Strategy ( MSTR ) is neutral crypto and focused on the entities' creative investor funding schemes that most financial professionals would call a house of cards or, as I see it, upside-down math. At the heart of the strategy is to buy Bitcoin with highly overvalued MSTR shares, which runs into a serious problem when the market no longer believes in the iteration. While the convertible debt carries an under 1% coupon, the $8bn needs to be paid or converted through 2032. The Preferred shares need to pay $1bn a year in USD. Both funding mechanisms require Bitcoin sales, equity dilution, or debt. The math suggests that a direct investment in Bitcoin has less risk than MSTR, while any of the Preferred shares seems sounder as long as Bitcoin does not collapse. Created by author with data from MSTR The Magic of Circular Reference When the result of a formula is dependent on itself, the math does not close unless you apply iteration, which calculates the circular reference 100x and accepts the outcome. In my experience, using this is a recipe for disaster; you can no longer rely on the data outcomes. This is what Strategy has done. They borrow capital (convertible bonds), issue preferred shares, and raise equity at a significant premium to NAV to buy Bitcoin; in reality, it could be Gold or any “asset” that does not generate income and depends on investor psychological demand to drive up the price. But the bond and preferred investors will require a return, and if the market loses confidence in this circular reference and won't price MSTR at a high premium to NAV, at best, it will underperform Bitcoin, and the Bitcoin Yield idea is eliminated. The Bitcoin Yield I built an operating model to test the company's strategy. I assume they will buy $20bn in Bitcoin per year, funded by $16bn in equity and $6bn preferred shares. The $2bn extra is to pay dividends and keep a cash cushion. I do not assume they will issue debt given the high yield (B-) rating by S&P. The new shares are issued at 3% discount, and the preferred carries a 10% dividend. I also assume the stock trades 0% preimium vs its NAV (value of bitcoin less debt). I also incorporated the Convertible bond swaps into equity, except for the 2029 $679 issue. This results in MSTR slightly outperforming the Bitcoin price. Mr. Saylor wants to double Bitcoin per share in seven years, which I understand as the number of Bitcoins/shares outstanding, which means earning about 10% per year more than the Bitcoin return. This can't be accomplished unless MSTR trades at 150% over NAV, and this requires the market to overvalue MSTR shares. I also ran a sensitivity analysis to gauge how much MSTR could outperform Bitcoin under varying premiums or discounts to NAV. The results are obvious: the greater the premium, i.e., the higher MSTR shares are overvalued, the better the return. This means that Mr. Saylos's Bitcoin Yield is really based on a circular reference, convincing investors that MSTR is worth more than Bitcoin because that's how MSTR can outperform. Created by author with data from MSTR Created by author with data from MSTR The Preferred Share Risk For the MSTR shareholder, the convertible debt is negative, but the preferred shares are far more value-destructive. First, they carry an over 10% divided payout or $1bn per year, which means MSTR needs to sell Bitcoin, issue more debt, or issue more common & preferred shares to pay for it. This means that Bitcoin needs to increase about 2% per year to cover the dividend cost, assuming it sells Bitcoin. While the Preferred have no maturity date, Strategy can call them at par (100) plus all unpaid dividends; the total bill would be over $10bn. This would be funded by Bitcoin sales, debt, or equity. For the Preferred investors, a 10% yield, sometimes paid semi-monthly, is very attractive but also high risk since the ability to meet these payments is dependent on Bitcoin levels and the market's willingness to fund MSTR by buying more of its equity and debt. Another circular reference. Created by author with data from MSTR The Convertible Debt The problem with the equation is that MSTR needs to eventually pay back the debt ($8bn) or cross their fingers that Bitcoin increases to over $300k so that MSTR’s stock price reaches the convertible strike price. However, since this means issuing more shares, the value of MSTR is diluted, and the math suggests an investor is better off buying Bitcoin. The premise that MSTR should be valued at a premium to Bitcoin is upside-down math; it should be at a discount, given the modest debt cost, plus the operating expenses, and $1bn and growing in dividend costs. Think of this as a closed-end fund with one asset acquired with leverage and worse new common and preferred shares that continuously dilute NAV. I am perplexed at the rationale for investing in these convertible bonds, given the low or zero coupon and out-of-money strike prices. There is a sizable probability that they mature without ever being in the money, and the holders would have received nearly nothing in return. Under the various Bitcoin price scenarios, in the best case, that Bitcoin reaches $310k by 2029 and the debt is converted to equity, the MSTR price would be around $688, or a 280%, but a straightforward investment in Bitcoin is a 280% gain. Why invest in MSTR and take the dilution risk? If the debt comes due, Strategy will need to rollover with, I would assume, at normal coupon (adding costs), sell Bitcoin, or issue more shares, all of which are negative for the NAV and MSTR share price. Convertible Debt (Created by author with data from MSTR) Created by author with data from MSTR Risk The main risk to the sell rating is not Bitcoin increasing in value, it’s the market's willingness to fund MSTR with zero cost convertible bonds and high dividends yielding preferreds, and most importantly, to continued equity issues at a larger premium to NAV. I would not short MSTR, as we have seen, the market can be irrational for far longer than one can stay liquid. Conclusion I see no reason to own MSTR. The companies' funding schemes to buy Bitcoin and outperform it are based on a circular reference, pricing MSTR far above the values of its Bitcoin holdings. A real risk lies in MSTR trading at a discount, given the debt and negative cash flow from dividend payments. In my view, if an investor is positive Bitcoin, buy Bitcoin.