Summary Strategy offers four perpetual preferred shares ('STRXs') targeting high-yield investors seeking Bitcoin exposure without direct crypto ownership. I rate STRF and STRD a BUY for their 10%+ yields, with STRF offering top liquidation priority and STRD higher yield but greater risk. I rate STRK a BUY for Bitcoin holders desiring income with potential equity upside through convertibility into MSTR common stock. STRC is best avoided for traditional investors due to its DeFi leverage risks and potential for destabilizing liquidation cascades. Overall, these shares use mechanisms similar to those of CEFs and Income Funds to generate an artificial yield. BTC exposure risk exist, but the mechanisms are not that risky, in my view. In a recent article, I argued that Strategy, Inc ( MSTR ) is now a BUY thanks to its successful pivot to being a “Bitcoin bank”. The company pivoted thanks to its strategic focus on four newly issued perpetual preferred shares: Strategy Inc 10.00% SER A PERPETUAL STRIFE PFD STK ( STRF ) Strategy Inc 9.0% SERIES A PERPETUAL STRETCH PREF STK ( STRC ) Strategy Inc 8.00% SERIES A PERPETUAL STRIKE PFD ( STRK ) Perpetual Stride Preferred Stock ( STRD ) In this article, I am covering the aforementioned four preferred shares in detail, discussing who they target and whether they represent an interesting product for yield-seeking investors. “STRXs”: overview and mechanics Strategy’s preferred shares essentially act like bonds, providing investors with regular income. They all rank higher than common MSTR stock, meaning preferred shareholders get paid first in the event of a liquidation, but they are not directly backed by the company's Bitcoin. The table below compares their yield, type and payout frequencies. Ticker Type Dividend Rate Payout Frequency Key Feature STRF (Strife) Fixed Income 10% Fixed Quarterly Maximum dividend security with up to 18% penalty rates if missed. Highest priority in liquidation. STRC (Stretch) Floating Rate Variable (~9.5% - 11.5%) Monthly (proposed Semi-monthly) Designed to maintain a stable $100 price like a checking account. Dividends are cumulative. STRK (Strike) Convertible 8% Fixed Quarterly Can be converted into MSTR common stock, allowing participation in Bitcoin price upside. STRD (Stride) High Yield ~11% - 12% Fixed Quarterly Offers the highest yield but is last in line among preferreds during liquidation. Non-cumulative dividends. How is the dividend paid? Strategy funds the dividends for its perpetual preferred shares through its corporate treasury operations. The company maintains a cash reserve (most recently at ~$2.25 billion) to cover these dividend commitments, which total ~$887 million annually. At the time of writing, the company can cover ~19 months of dividend commitment with this reserve. Strategy generates this cash by actively managing its capital structure: issuing and selling preferred shares and debt (like in its ATM programs) and using the proceeds for working capital and to buy Bitcoin. Founder Michael Saylor also mentioned that he would eventually sell Bitcoin to fund dividend obligations. This financing mechanism is also the main criticism to the “STRXs”. As long as Bitcoin rises and investors keep assigning MSTR a premium, these yields are self-sustaining. Even selling some of MSTR’s Bitcoin after it appreciates to cover for a dividend is, in my view, more than sustainable. However, once the premium compresses or financing windows close, the “yield” starts to look less like income and more like a transfer from new buyers to existing holders. As fellow Seeking Alpha analyst Rida Morwa puts it : “ Selling the furniture to pay the rent ”. Yet, I don’t think this is a valid reason to disregard these products altogether. There’s plenty of what Strategy is doing in traditional high yield funds The investing world is not exactly new to instruments that artificially create high yields. Strategy’s preferred shares are only sustainable long term if Bitcoin appreciates. But so are many other financial instruments. There are effectively four ways one can use to generate artificial yield from assets that have little to no cash flows: Covered call and options strategies, which Strategy does NOT use, at least so far, to generate BTC yield. Leverage (borrowing to boost yields), which Strategy does use when issuing new debt. Managed distributions (return of capital), which Strategy may use if it is ever to sell Bitcoin to cover their dividend obligations, as Saylor suggested. Issuing new ATM shares offering, which is the primary way Strategy finances its BTC purchases and dividend obligations today. When it comes to covered calls , two prime examples are the JPMorgan Equity Premium Income ETF ( JEPI ) and the JPMorgan Nasdaq Equity Premium Income ETF ( JEPQ ). Both generate an artificial yield by selling call options against an index. The buyers of these options pay a premium for the right to buy the asset at a certain price in the future. The fund collects this premium and distributes it to shareholders as a yield. Covered calls are also used in the FT Vest Gold Strategy Target Income ETF ( IGLD ), which like Strategy’s “STRXs” is invested in a scarce asset that generates no cash flow. As for leverage , some funds borrow money at short-term interest rates and invest it in higher-yielding assets. The spread between the cost of borrowing and the return on the assets is passed on to shareholders as higher dividends. An example is the Eaton Vance Tax-Advantaged Dividend Income Fund ( EVT ), using about 20% leverage to boost its yield to ~8%, investing in common and preferred stocks. Managed distributions is another way funds generate an artificial yield, and an example here is that of the Cornerstone Strategic Investment Fund, Inc. ( CLM ). CLM has a managed distribution policy targeting a massive ~19% yield. Because it cannot possibly generate 19% pure income, a massive portion of its historical distributions has been classified as Return of Capital. It routinely returns investors' own principal to them to sustain the high payout. Finally, Closed-End Funds regularly issue new shares through secondary offerings and ATM programs to raise capital, using the proceeds to sustain distributions to existing shareholders. This is structurally identical to what Strategy does. An example here is the PIMCO Dynamic Income Fund ( PDI ). Who are the “STRXs” for? In my view, these funds should appeal primarily to people that sit on a significant amount of Bitcoin and need a yield without losing BTC exposure. Or to people that are simply exploring asset diversification in their high-yield portfolios. The fact the underlying asset of the “STRXs” is Bitcoin is the main risk (which I will cover in another section), but I do not think the structure of the preferred shares should cause concern per se. No more than the structure of some high-yield Closed-End Funds should do so. In this regard, I challenge any person that is skeptical about these products to think whether they really are because of their structure or because of Bitcoin. I only see the latter as a legitimate reason. STRF and STRD: buy to get high-yield, Bitcoin exposure “Strfe” and “Stride” are in my view the most versatile products of the “STRXs”. Both offer a juicy 10%+ yield. STRF gives up on a couple percentage points in yield in exchange for more safety. “Strife” sits at the top of the priority in liquidation, and if any quarterly dividend is skipped, it has a unique escalating clause. Unpaid dividends will themselves accrue dividends (“compounded dividends”) at an initial rate of 11% (10% + 1%) and that rate bumps up by an extra 1% each subsequent quarter the payment is missed, up to a maximum of 18% per annum. I think these funds can be helpful to high-yield investors looking to gain Bitcoin exposure in their portfolios. As a thought starter, below is what a hypothetical $1,000,000 portfolio would look like in terms of yearly yield if it were to have a 10% exposure to Bitcoin via STRF. Ticker Type Allocation Yield Annual Income Monthly Income STRF Preferred Stock $100,000 10.00% $10,000 $833 JEPI Covered Call ETF $100,000 8.40% $8,400 $700 JEPQ Covered Call ETF $100,000 11.11% $11,110 $926 SCHD Dividend ETF $100,000 3.44% $3,440 $287 SCHY Intl Dividend ETF $100,000 3.34% $3,340 $278 VYM Dividend ETF $100,000 2.87% $2,870 $239 VYMI Intl Dividend ETF $100,000 3.43% $3,430 $286 VOO Index ETF $150,000 1.30% $1,950 $163 QQQ Index ETF $150,000 0.60% $900 $75 TOTAL $1,000,000 4.54% $45,440 $3,787 STRD is also a good choice for investors that want a higher yield and are comfortable with higher risks in case of liquidation or in case Strategy cannot meet its dividend obligations. STRK: buy if you want to monetize your Bitcoin holdings without losing upside “Strike” is a hybrid product, in that it blends fixed income with equity upside. It pays a fixed 8% annual dividend (accumulating if missed) quarterly, but its defining feature is its convertibility. Holders can convert one share of STRK (which has a $100 liquidation preference) into 0.1000 shares of MSTR Class A common stock at an initial conversion price of $1,000 per share. This allows investors to secure a baseline yield while still participating in the potential upside if MSTR's common stock price surges alongside Bitcoin. I think Strike is a good product for a niche of investors that are sitting on a significant amount of Bitcoin, need income but are reticent about selling their holdings. This product can still provide a very good income of 8% yearly, while some level of upside in case of a sustained BTC bull run. The table below illustrates the example of a hypothetical investor sitting on $500,000 worth of Bitcoin and evaluating the conversion of half that stack into STRK. Scenario BTC Price BTC Holdings Value MSTR Price STRK → MSTR Value vs. STRK Par ($250K) Convert? Current $81,000 $500,000 $184 $46,000 -$204,000 No BTC = $100K (Base) $100,000 $617,000 $350 $87,500 -$162,500 No BTC = $150K ( BULL ) $150,000 $926,000 $750 $187,500 -$62,500 No MSTR = $1,000 ~$200K+ ~$1.2M+ $1,000 $250,000 Break-even Neutral MSTR > $1,000 >$200K >$1.2M >$1,000 >$250,000 Positive Yes Said investor could convert 2,500 STRK shares into 250 shares of MSTR if the latter goes to above $1,000 per share, in a hyper bullish scenario where BTC grows to well above its ATH. STRC: used for farming yield in DeFi and very risky “Stretch” is a bit different from its peers in that it is not very useful purely as a dividend play. Because STRC pays a very high, relatively stable cash dividend (currently 11.5%) and acts almost like a high-yield checking account pegged near $100, it makes an excellent "raw material" to build exotic financial products on the blockchain with DeFi protocols. Specialized DeFi platforms are already buying real STRC shares in the traditional stock market and holding them in custody. In exchange, they issue digital tokens on the blockchain that are backed 1:1 by those STRC shares. As a result, anyone holding these tokens receives the 11.5% STRC cash dividend, paid out directly to their crypto wallet. Once STRC is a token, it then gets plugged into a DeFi protocol called Pendle Finance . Pendle takes the STRC token and splits it into two separate assets: The "Principal Token", representing the underlying $100 share. The "Yield Token", representing only the future 11.5% dividend payouts. Pendle allows traders to speculate purely on the dividend rate, or to lock in a fixed yield (e.g., guaranteeing a 14% return for 6 months instead of accepting the variable 11.5% rate). Pendle has seen over $318 million of STRC-backed tokens flow into its system. Traders then take their fixed-yield STRC tokens from Pendle and deposit them as collateral into a decentralized lending protocol called Morpho . Because the STRC tokens are perceived as stable (at ~$100), Morpho allows users to borrow against them heavily. The trader can then execute a leverage loop: Deposit STRC tokens yielding ~14%. Borrow USDC (a dollar stablecoin) against them at a very low borrowing cost. Use the borrowed USDC to buy more STRC tokens. Deposit the new STRC tokens, borrow more USDC, buy more STRC, and repeat. By looping this 5x, a trader collects the 14% yield five times over, while only paying the 1.5% borrowing cost five times. This chain can bring the annual interest up to 39% or even 60%+ on the trader's original capital. Obviously, the main risk of this whole ordeal is that if the price of STRC suddenly drops well below $100 (a "de-peg"), the value of the collateral in these DeFi loops collapses. Morpho’s smart contracts would then automatically liquidate STRC tokens to pay back the USDC loans. This would cause a massive wave of forced selling of STRC in both the crypto and traditional stock markets at the exact moment the asset is already crashing, potentially creating a death spiral for MSTR's preferred shares. In my view, this risk is probably the single biggest point of failure of STRC and main reason why I would stay away from STRC purely as a TradFi tool. Risks to my thesis The bull case for all four "STRXs" rests on a single assumption: Bitcoin will continue to appreciate, allowing Strategy to keep its capital markets flywheel spinning. If that breaks, the risks can cascade quickly. A sustained BTC bear market is the largest single risk. Strategy's $2.25 billion cash reserve covers roughly 19 months of dividend obligations, but if Bitcoin collapses and ATM equity programs dry up, that runway shortens fast. STRD holders, sitting last in line with non-cumulative dividends, would be the first to lose. The premium compression risk is arguably even more insidious. Strategy's ability to issue new equity and preferred shares at a premium to Bitcoin NAV is what makes the whole model work. If that premium collapses, the "selling furniture to pay rent" criticism becomes much harder to dismiss. History is full of examples of other high-yield financial instruments seeing significant capital losses and unable to maintain their high yields long term, and the “STRXs” are no exception to this risk. Finally, the STRC-specific DeFi liquidation risk that I just covered must also be taken into account. With over $318 million locked in leveraged DeFi trades, a de-peg below $100 would trigger a cascade of automatic liquidations. This risk does not apply to STRF, STRK or STRD, which trade at floating premiums and are structurally unsuitable as DeFi collateral. Conclusion In writing this article I found myself in a unique position: having to discuss crypto-related speculative products that act like a high income fund. MSTR’s preferred shares are obviously not funds. Yet, I think their target is very similar. With the exception of STRC, I think anyone looking for a high yield and being comfortable with Bitcoin exposure can legitimately consider them. The idea that MSTR's preferred shares are somewhat “unsafe” because of the way their yield is generated is, in my view, ludicrous. Strategy is hardly inventing anything new here. They are just adding a new type of financial product to a long list of high-yield instruments that use call options, leverage and managed distribution to generate an artificially high yield. In this regard, there are plenty of other products that “sell the furniture to pay rent”. Doing so is actually OK, as long as you believe in Bitcoin maturing as a global reserve asset and appreciating indefinitely. Obviously, the main risk of buying these products is tied to whether or not Bitcoin will appreciate indefinitely. But if you do not believe in Bitcoin, it seems to me you would never consider these products in the first place. Overall, I rate STRF and STRD a BUY for investors seeking high-yield and diversification into Bitcoin. STRK is also a BUY for investors sitting on Bitcoin and unwilling to forego potential appreciation. STRC is better avoided due to its speculative nature in the DeFi space.
