What are some ways to recover from a Bitcoin flywheel failure?

Author: Chloe, ChainCatcher

Since October, MSTR has fallen by about 50%. After reaching a high of $457 last year, it has fallen sharply, significantly underperforming the market. MarketBeat data shows a 12-month low of about $155.61 and a high of over $450. It is currently in a relatively undervalued low range with extremely high volatility.

Why has MSTR's stock price been sluggish for months, not only significantly underperforming the market but even performing worse than Bitcoin itself? This has led the market to question whether the Bitcoin flywheel effect has failed.

Enjoying double the joy in a bull market, and suffering double the pain in a bear market.

The Bitcoin price crash is the most direct trigger.

Since its peak on October 6, Bitcoin has fallen by about 31%, and Strategy, holding approximately 650,000 Bitcoins (3.1% of the total supply), has naturally not been spared. MarketWatch further calculated that the correlation between BTC and MSTR is close to 0.97, meaning that the two are almost in a one-to-one linkage. However, due to leverage, the volatility of MSTR is further amplified; while Bitcoin has fallen by 31%, MSTR has fallen by more than 50%. The market is also questioning whether the flywheel model upon which MSTR relies is failing. Strategy's mNAV is currently 1.15. According to CryptoSlate, the market is currently only willing to pay a 15% premium to MSTR over its Bitcoin holding value. Once mNAV falls below 1.0, further share issuance will become extremely dilutive. Bloomberg also points out that with Strategy's market capitalization only slightly higher than its Bitcoin holding value, the premium has been severely compressed, and this positive feedback loop is failing. Furthermore, Strategy purchased only 130 bitcoins between November 17th and November 30th, spending $11.7 million, a negligible amount for a company holding approximately 650,000 bitcoins. This suggests that Strategy recognized that at the current premium level, large-scale stock issuance would harm rather than enhance shareholder interests, and therefore proactively applied the brakes. The Financial Times also noted that MSTR's stock price, after falling from its peak, has begun to underperform compared to bitcoin itself, raising questions about whether the equity vehicle can still add more value than simply holding BTC. Especially with the launch of bitcoin spot ETFs, allowing investors easier and more direct allocation to bitcoin, why continue to bear the debt burden, management risks, and potential equity dilution associated with MSTR? Additionally, Strategy has further financed its bitcoin purchase plan this year by issuing a large amount of convertible bonds and high-yield preferred stock, these financing instruments bringing a heavy fixed payment burden. A Seeking Alpha analysis report points out that this will increase the annual preferred stock dividend burden to hundreds of millions of dollars; and according to CryptoSlate's estimates, this figure could be as high as $750 million to $800 million annually, not including convertible bond interest. The problem is that while MSTR's traditional software business still generates more than $100 million in revenue each quarter, it is still unable to independently support this increasing preferred stock dividend burden. This is precisely the core reason why the company announced the establishment of a $1.44 billion cash reserve. To address concerns about selling cryptocurrency for cash, Strategy establishes a dollar reserve. On Monday, Strategy announced the establishment of a $1.44 billion dollar reserve specifically for paying preferred stock dividends and existing debt interest, aiming to address various external doubts about whether Strategy would "sell cryptocurrency for cash" to pay preferred stock dividends. According to Strategy's press release, the $1.44 billion came from proceeds from the sale of Class A common stock under its market offering plan. The current plan is to maintain reserves sufficient to cover at least 12 months of dividend payments, and to gradually strengthen these reserves, with the ultimate goal of building a buffer pool capable of covering 24 months or more of dividend payments. This time, Strategy invested the vast majority of the funds raised from the stock sale into US dollar cash reserves, rather than aggressively buying Bitcoin as in the past. This suggests that even Saylor, facing volatile cryptocurrency prices, must find more defensive financial strategies. However, despite the reserve announcement, the market reaction remained lukewarm; MSTR fell more than 11% intraday, marking its fourth consecutive month of decline. With the company's mNAV hovering near 1 for an extended period, it signifies that the initial "sell stocks, buy crypto" flywheel strategy has officially become ineffective. CEO Phong Le previously admitted that if funding dries up, the company may ultimately consider selling Bitcoin. Reserves temporarily alleviated market concerns, but capital structure risks remain. According to independent researcher Spreek, the overall decline in mNAV indicates that the Bitcoin strategy has encountered a bottleneck. Saylor had already begun shifting to debt instruments as a new financing channel earlier this year. These instruments have less direct correlation with stock prices, aiming to avoid further depressing MSTR prices and mNAV. Spreek stated that STRC directly targets retail investors, emphasizing stability and high returns, but neglecting underlying risks. "STRC is more like LUNA and UST than MSTR's previous products." However, MSTR's balance sheet is still much stronger than Luna's back then, but the reflexivity mechanism still exists: every time Strategy raises its product interest rate, its annual cash dividend payout increases significantly, and considering selling Bitcoin to raise funds may only be a matter of time. According to research predictions, Strategy has roughly three predictable trajectories. First, it will choose to reduce leverage, adopt a conservative stance, stop issuing large amounts of STR series preferred stock or debt, reduce the scale and speed of Bitcoin purchases, maintain reserves as much as possible, and not sell BTC, even if this means the stock price will run below mNAV for a long time, and this is essentially a default end to the Bitcoin flywheel, with MSTR trading at a discount for a long time. Another path relies on external macroeconomic drivers, such as liquidity injections from the Federal Reserve or political factors reigniting the Bitcoin craze, allowing Saylor to temporarily escape its predicament and restart its old strategy: issuing more stocks and convertible bonds to buy more Bitcoin at higher prices. However, this will likely only postpone the end result, as the company's structural flaws in cash inflows mean that even if Saylor's direction is correct, it will only stay on the edge of profitability. From Bitcoin's perspective, this is the most favorable development in the near term, easing selling pressure and supporting prices. The third path involves maintaining operations through the accelerated expansion of preferred shares such as STRC, attracting retail investors by raising yields and pushing debt to billions or even tens of billions of dollars. This seems superior to directly selling stocks or Bitcoin in the short term, avoiding immediate market shocks and allowing the flywheel to recover temporarily. However, the previously mentioned reflexivity mechanism is likely to be amplified gradually: as payment obligations swell—currently nearly $750 million in annual dividends, potentially doubling in the future—the company will face a heavy burden of dollar debt. Selling Bitcoin to raise funds for repayment may ultimately become a last resort. According to a recent Bloomberg report, Strategy CEO Phong Le stated that Strategy is considering lending out some of its tokens. This implies that Strategy hopes to gain a new revenue stream through lending, with annual interest rates typically between 3-5%, but this is still far from being implemented. Strategy's decision to release $1.4 billion in reserves may be a concession to its strategy of not selling Bitcoin. However, facing reality, Strategy has also simultaneously lowered its full-year financial forecast and key performance indicators, setting a year-end Bitcoin price target between $85,000 and $110,000. Its full-year Bitcoin dollar revenue target has also been significantly reduced from the original $20 billion to $8.4 billion to $12.8 billion. Furthermore, Strategy predicts that its full-year net profit will fall within a wide range, from a loss of $5.5 billion to a profit of $6.3 billion, a substantial decrease from its original forecast of $24 billion.