- Strategy’s STRC preferred shares create a perpetual cash obligation of $609 million annually, a liability for its common stock (MSTR).
- Short interest in MSTR is high at over 35 million shares, or 11% of the float, partly due to interplay with STRC.
- Each new STRC share sold increases Strategy‘s dividend obligations, creating an expectation of dilution in MSTR that short sellers can anticipate.
The interplay between Strategy‘s (formerly MicroStrategy) preferred share, STRC, and its common stock, MSTR, provides a unique motive for short sellers in a volatile market. According to data, short interest exceeds 35 million MSTR shares, equating to 11% of the float.
STRC pays an 11.5% dividend, a variable rate that declares at board discretion. This creates a massive $609 million annual cash obligation for the company.
However, Strategy generates negligible profits and relies on capital raises. Consequently, each new STRC share increases this perpetual cash liability.
The market expects these obligations to be funded by diluting MSTR shares. Thus, STRC creates a predictable dilution event that short sellers can front-run.
Meanwhile, Strategy holds 766,970 BTC with a $75,644 per coin average cost. CEO Phong Le admitted the company intends to pivot toward more preferred offerings like STRC, which has over $22 billion in remaining ATM capacity.
This strategy shifts focus from the core software business. Academic research confirms convertible bond arbitrageurs increase short-selling near issuance dates.
Finally, the success of STRC may siphon demand from MSTR. Shareholders buying STRC benefit the company only once via a BTC purchase but then perpetually claim its cash flow.
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