Overview of Stretch (STRC)
A recently released report from Bitmex Research takes an in-depth look at Stretch (STRC), an innovative debt instrument created by Strategy to ensure stable pricing by modifying its monthly dividend based on current market valuations. The research aims to elucidate the workings of STRC and the potential risks it poses for investors. Marketed as the most stable option within Strategy’s assortment of perpetual instruments, STRC has drawn parallels to short-term U.S. Treasurys, despite its association with the company’s bitcoin acquisition strategy.
Unique Features of STRC
The Bitmex report outlines a unique feature of STRC: its variable dividend rate, which increases when the debt trades below a targeted price of $100 and decreases when it trades above that threshold. This mechanism is designed to stabilize the instrument, and recent trading activity has seen STRC hover around its par value, indicating positive initial interest from the market.
What sets STRC apart from traditional debt instruments is its innovative approach to adjusting dividends—rather than following standard benchmarks set by interest rates, STRC adjusts its dividends in response to its market price. This raises questions about the commercial viability of the instrument, as funds generated from STRC’s issuance are redirected to bitcoin purchases, rather than typical operational expenses. Bitmex describes this strategy as a novel approach to amass a bitcoin treasury.
Key Distinctions and Risks
“Unlike treasuries, which operate on fixed or fluctuating interest rates tied to wider market conditions, the issuance of STRC explicitly funds the purchase of Bitcoin.”
The research finds that STRC invents a new class of debt instruments, asserting that none currently on the market function in this way.
A key risk identified in the report involves Strategy’s authority to diminish the dividend rate by up to 25 basis points monthly at its discretion, irrespective of STRC’s market conditions. This could lead to a substantial drop in returns; for example, a 10% monthly dividend could diminish to zero in just over three years under maximum reduction circumstances.
“MSTR has the unequivocal power to cut the dividend rate by 25 basis points each month without consideration for external market factors or STRC pricing. This flexibility allows the firm to manage investor expectations at their discretion.”
Additionally, the report underscores that any unpaid dividends could impact Strategy’s ability to compensate holders of other financial instruments until these debts are settled. Notably, STRC holders lack claims to security and there is no obligation for dividend payments if the firm chooses to forgo them, even with outstanding balances.
Conclusion and Implications
Though the report examines the potential for STRC to resemble a Ponzi scheme, it concludes that it does not fit this classification. However, it points out that the firm’s current dividend payouts rely heavily on ongoing capital inflows and bitcoin inventory sales. The flexibility of dividend decreases, it argues, provides Strategy with a long-term advantage while shifting substantial risks onto investors.
Ultimately, the conclusion of the report warns that, despite similarities to short-term Treasurys, STRC poses a much greater risk. Should the market conditions deteriorate, the company could simply opt to reduce dividends, which would likely result in a decrease in STRC’s trading price while making financial management easier for the firm. The researchers contend that this structure is much more advantageous for Strategy and potentially detrimental for investors if dividend cuts occur more frequently.
