According to Financial Times News, Michael Saylor’s Strategy (formerly MicroStrategy) recently celebrated receiving a credit rating from Standard & Poor’s, only to be assigned a B- rating that places it six notches into junk territory. The rating agency cited the company’s “high bitcoin concentration, narrow business focus, weak risk-adjusted capitalization, and low U.S. dollar liquidity” as major weaknesses in its official report. This wasn’t actually a new achievement – Strategy held the same B- rating in June 2024 before S&P withdrew it at the company’s request, and the reinstated rating applies only to the company while its preferred instruments remain unrated. The situation reveals Strategy’s underlying financial challenges, including negative cash flow from operations of $37 million for the first six months of 2025 and $689 million in annual dividend and interest payments that must be funded through continuous securities issuance.
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The Currency Mismatch Problem
What makes Strategy’s situation particularly precarious is what S&P identifies as a “currency mismatch” between its dollar-denominated liabilities and bitcoin-denominated assets. This creates a fundamental structural risk that traditional capital market investors aren’t equipped to handle. When a company holds its primary assets in a volatile cryptocurrency while owing fixed payments in US dollars, it creates a timing risk that could prove catastrophic. If Strategy were forced to sell bitcoin during a market downturn to meet its $689 million in annual dividend and interest obligations, it would be liquidating depreciating assets to cover fixed liabilities – precisely when the collateral backing those obligations is losing value.
The Dilution Death Spiral
Strategy’s primary method of accumulating more bitcoin – issuing new common shares – appears to have reached its limits, as evidenced by the stock’s shocking underperformance relative to bitcoin itself. While bitcoin has risen about 15% year-to-date, Strategy shares have fallen by a similar magnitude. This creates what I’ve observed in similar situations: a dilution death spiral where continuous equity issuance drives down the share price, making future issuance less effective and forcing the company to offer ever-higher yields on alternative instruments. The recent preferred stock issues represent a desperate search for less dilutive funding, but even this path is proving difficult – Strategy has been forced to increase the coupon on its “Stretch” preferred instrument three times in just three months, hiking the yield from 9% to 10.5% to attract buyers.
The Capital Markets Dependency
What’s most concerning about Strategy’s situation is its complete dependence on continuous access to capital markets. As S&P notes in their analysis, the company intends to fund all its liabilities by issuing yet more securities, creating a financial loop where one liability is funded either by creating another or by further diluting common stockholders. This creates extreme vulnerability to any disruption in market access, particularly given that S&P would consider a downgrade if “Strategy’s access to capital markets is impeded either due to a marketed deterioration in bitcoin valuation or for any other reason.” In essence, the company’s entire financial model depends on maintaining investor appetite for its increasingly complex securities during potentially adverse market conditions.
Broader Implications for Crypto-Backed Business Models
Strategy’s predicament serves as a cautionary tale for other companies considering similar bitcoin-heavy treasury strategies. The fundamental problem lies in attempting to build a traditional corporate capital structure on top of volatile crypto assets. While bitcoin may function as a store of value over the long term, its short-to-medium-term volatility makes it unsuitable as the primary collateral for fixed income obligations. This creates what fixed income professionals call “wrong-way risk” – the value of your collateral decreases precisely when you need it most. Other companies watching Strategy’s experiment should note that while accumulating bitcoin might be strategically sound, funding that accumulation through continuous securities issuance creates structural vulnerabilities that traditional credit markets aren’t designed to accommodate.
The Validation Paradox
Perhaps the most revealing aspect of this episode is Strategy’s apparent craving for validation from the traditional financial establishment it claims to be disrupting. As noted in the company’s social media celebration of the rating, there’s a clear desire for legitimacy from pillars of the “ancien régime” like credit rating agencies and sell-side analysts. This creates what I call the “crypto validation paradox” – companies that position themselves as alternatives to traditional finance increasingly seek approval from the very institutions they’re supposedly making obsolete. This suggests deeper self-doubt about the viability of their disruptive project and raises questions about whether crypto-native business models can truly escape the gravitational pull of traditional finance.
Realistic Outlook and Predictions
Looking forward, Strategy faces several challenging paths. The company’s earnings presentation shows a legacy software business that barely breaks even, leaving the company entirely dependent on its bitcoin strategy. With $8 billion in convertible debt obligations – $5 billion of which are out-of-the-money – and continuous dilution eroding shareholder value, the company’s options are narrowing. The most likely scenario involves continued reliance on high-cost preferred instruments and further common stock dilution, creating a vicious cycle where the cost of capital rises as the company’s financial position weakens. Unless bitcoin experiences sustained dramatic appreciation that outpaces the company’s mounting obligations, Strategy’s financial engineering appears increasingly unsustainable.
