Strategy to comprehensively reform Bitcoin indicators to reflect debt and...

Why did Strategy change its Bitcoin indicators?

Strategy has launched a new market indicator framework designed to show ordinary shareholders how much Bitcoin value remains after deducting the company's preferred stock and convertible debt obligations. Previously, the world's largest corporate Bitcoin holder focused on overall indicators based on the size of its BTC reserves. The updated framework uses net worth data to deduct claims that have priority over common equity, allowing investors to have a clearer understanding of the assets available to them after considering priority repayment obligations. The change comes at a time when both Strategy and Bitcoin are facing difficulties. Bitcoin is currently trading at close to $65,000, down about 50% from its all-time high, while Strategy's common stock is down 84% from its November 2024 peak. The company's flagship preferred stock, STRC, is trading at close to $85 and has been below its set $100 face value since mid-May. The discount raises scrutiny of Strategy's capital structure as the company continues to rely on common stock, preferred stock and convertible debt to finance its purchase of Bitcoin.

What does the new net reserve indicator measure?

The first important new indicator is net reserves, currently calculated at US$36.6 billion. The indicator starts with Strategy's $55.6 billion bitcoin reserves (including 843,775 BTC's) and adds $3.2 billion in U.S. dollar reserves. Strategy then subtracted $6.8 billion in off-the-money convertible debt and $15.5 billion in nominal preferred stock. Together, these instruments represent $22.3 billion in senior claims that would have priority over ordinary shareholders in a liquidation scenario. The difference between the company's total Bitcoin holdings and net reserves is important because Strategy's financing model has become more complex. When preferred investors and creditors hold preferred claims on the company's assets and cash flows, the large BTC balance does not entirely belong to ordinary shareholders. As a result, net reserves may provide a more conservative starting point for MSTR's valuation. It allows investors to assess Bitcoin exposure after deducting financing obligations used to build reserves, rather than treating every Bitcoin as the value of unburdened common equity.

Investor revelation

Strategy's new framework has made its capital structure even more important to ignore. Ordinary shareholders can still obtain leveraged exposure to Bitcoin, but the value of that exposure depends on what remains after deducting debt and senior claims.

How does Strategy modify its mNAV formula?

Strategy also revised its calculation method of the price-to-book ratio (mNAV). Under the old approach, the threshold used to determine whether issuing common shares had a thickening effect was generally held above 1.0 times, making it more difficult for investors to determine whether selling additional MSTR shares actually increased the per capita bitcoin of existing holders. The new framework fixes the release threshold at 1.0 times. When MSTR traded above that level, Strategy believed that issuing common shares and using the proceeds to buy Bitcoin would increase net bitcoin volume per share. If the offering price is less than 1.0 times, the indicator will be diluted because the company will sell its stake at a price lower than the net Bitcoin value represented by each share. The company defines the revised multiple as MSTR share price divided by the net bitcoin volume per share. The results are intended to show whether the stock is traded at a premium or discount to ordinary shareholders 'share of Bitcoin after taking into account convertible debt and preferred stock claims. During periods of continued market weakness, this indicator may become more useful when the premiums attached to the Strategy Bitcoin acquisition model may narrow and the certainty of obtaining thickened common equity financing declines.

Can Bitcoin growth cover Strategy's financing costs?

Another new indicator-BTC's minimum annual return-estimates the minimum sustained average annual bitcoin growth rate needed over the life of Strategy's credit structure before restructuring needs to be considered. The company currently sets its BTC break-even annual return at 3.22%. In theory, an annual appreciation of Bitcoin above this level could create enough value for Strategy through long-term BTC gains to cover its interest and preferred stock dividend obligations. However, this indicator does not eliminate short-term financing risks. Interest and dividends still need to be paid in cash, and Bitcoin gains may not yet materialize and could reverse sharply. However, it does provide investors with a benchmark to compare Strategy's recurring funding costs with the long-term growth required for its key assets. Strategy also added market indicators, including Bitcoin's premium relative to its 200-week moving average and the Fear and Greed Index. These indicators place a company's balance sheet within a broader market cycle framework rather than focusing solely on the amount of Bitcoin held. The adjustment reflects the core challenges Strategy faces during the current downturn: its Bitcoin reserves remain large, but the performance of its common stock now depends on Bitcoin prices, financing costs, preferred stock valuations, and the company's ability to issue new shares at a price above net asset value.