The recent drop in the STRC index has raised concerns about MicroStrategy's (MSTR) financial stability. However, an examination of the market dynamics suggests that this decline is not necessarily a reflection of MSTR's underlying fundamentals.
The key factor at play here is market reflexivity, which refers to the phenomenon where market prices can change reality through their expectations. In this case, the attacker's playbook involves declining cash reserves, forcing market participants to anticipate a liquidity crisis, and then exploiting this expectation to drive down the price of Bitcoin (BTC).
The STRC index is sensitive to changes in BTC prices due to its floating-rate bond nature. As market concerns about MSTR's cash flow increase, the required rate of return for holding STRC jumps, making the 11.5% coupon insufficient to cover the risk. However, since STRCs have floating rates, allowing adjustments to the numerator, the price cannot remain below par value for an extended period.
The article highlights the importance of replenishing reserves through issuing new shares rather than selling cryptocurrencies. Issuing new shares not only improves the debt ratio but also preserves the BTC content per share and maintains the premium. In contrast, selling cryptocurrency worsens the debt ratio, reduces the amount of BTC per share, and significantly hurts the premium.