With the Bitcoin flywheel failing, what are some strategies for getting out of a losing position?

Author: Chloe, ChainCatcher

Since October, MSTR has dropped about 50%. After peaking at $457 last year, it has significantly retraced, vastly underperforming the broader market. According to MarketBeat data, its 12-month low is around $155.61, with a high above $450. It is now at a relatively undervalued low point with extremely high volatility.

Why has MSTR’s stock price remained sluggish for months, not only underperforming the broader market but even doing worse than Bitcoin itself? This has raised market doubts about whether the Bitcoin flywheel effect has already failed.

Enjoying double the gains in a bull market and bearing double the pain in a bear market

The plunge in Bitcoin prices is the most direct trigger. Since its October 6 peak, Bitcoin has fallen about 31%. Strategy, which holds about 650,000 Bitcoins (3.1% of total supply), naturally could not escape the impact. MarketWatch calculated that the correlation between BTC and MSTR is close to 0.97, meaning the two move almost one-to-one. However, due to leverage effects, MSTR’s volatility is further amplified; Bitcoin dropped 31%, but MSTR dropped over 50%.

The market is also questioning whether the flywheel model that MSTR relies on for survival is breaking down. Strategy’s mNAV is currently 1.15. According to CryptoSlate, the market is currently only willing to pay a 15% premium over MSTR’s Bitcoin holdings value. If mNAV falls below 1.0, issuing new shares will become highly dilutive. Bloomberg also noted that as Strategy’s market cap is now only slightly higher than its Bitcoin holdings, the premium has been severely compressed and this positive feedback loop is malfunctioning.

Moreover, Strategy only purchased 130 Bitcoins between November 17 and November 30, spending $11.7 million—a negligible amount for a company holding about 650,000 Bitcoins. This suggests that Strategy has realized that issuing large amounts of shares at current premium levels would harm, rather than benefit, shareholder interests, so they have proactively hit the brakes.

The Financial Times also noted that after MSTR’s stock price dropped from its peak, it has begun to underperform Bitcoin itself, leading to doubts about whether the equity vehicle can really add more value than simply holding BTC. Especially now that spot Bitcoin ETFs are available and investors can easily gain direct exposure to Bitcoin, why take on MSTR’s associated debt burden, management risks, and potential equity dilution?

Additionally, this year Strategy has financed its Bitcoin purchase plan by issuing a large amount of convertible bonds and high-yield preferred stock, resulting in a heavy fixed payment burden. According to a Seeking Alpha analysis, this raises annual preferred stock dividend obligations to several hundred million dollars; CryptoSlate estimates this could reach as high as $750–800 million annually, not including interest on convertible bonds. The problem is that while MSTR’s traditional software business still generates over $100 million in quarterly revenue, it remains unable to independently support the growing preferred stock dividend burden.

This is the core reason the company announced the establishment of a $1.44 billion cash reserve.

Addressing concerns of Bitcoin sales, Strategy establishes USD reserve fund

On Monday, Strategy announced the establishment of a $1.44 billion USD reserve fund, specifically to pay preferred stock dividends and existing debt interest. The aim is to address outside concerns about whether Strategy will “sell Bitcoin for cash” to pay preferred stock dividends.

According to Strategy’s press release, the $1.44 billion comes from proceeds from selling Class A common stock under its market issuance plan. The current plan is to maintain a reserve at least sufficient to cover 12 months of dividend payments, with the goal of gradually strengthening the reserve to ultimately cover 24 months or more of dividend payments.

This time, Strategy put most of the funds raised from stock sales into cash reserves, unlike previously when it would aggressively buy Bitcoin. Even Saylor, under extreme price volatility, has had to adopt a more defensive financial approach.

However, even after the reserve announcement, the market reaction remained lukewarm. MSTR fell more than 11% intraday that day and has posted losses for four consecutive months.

With the company’s mNAV long stuck near 1, it symbolizes that the original “sell shares to buy Bitcoin” flywheel strategy has officially failed. CEO Phong Le previously admitted that if funding dries up, the company might ultimately consider selling Bitcoin.

The cash reserve temporarily addresses market concerns, but capital structure risk remains unchanged

According to independent researcher Spreek, mNAV is comprehensively declining, and the Bitcoin strategy has hit a bottleneck. Saylor already began turning to debt instruments as a new funding channel earlier this year, as these are less directly tied to stock prices and help avoid further depressing MSTR’s price and mNAV.

Spreek noted that STRC targets retail investors, emphasizing stability and high returns but ignoring 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 was, but the reflexivity mechanism still exists: every time Strategy raises product rates, annual cash dividend outlays increase significantly, and selling Bitcoin to raise funds may be just a matter of time.

Research forecasts suggest Strategy has roughly three foreseeable paths. First, it could choose to converge leverage, shift to a conservative stance, stop large-scale issuance of STR series preferred stock or debt, and reduce Bitcoin purchases in scale and speed, maintaining the reserve without selling BTC—even if this means the stock price trades below mNAV long-term, essentially marking the end of the Bitcoin flywheel, with MSTR trading at a discount for the long haul.

Another path depends on external macro catalysts, such as Fed liquidity injections or political factors reigniting Bitcoin’s rally, temporarily allowing Saylor to escape his predicament and restart the old playbook: issuing more stock and convertibles as the share price recovers, buying more Bitcoin at the top. But this mostly only delays the endgame, as the structural flaw in the company’s capital inflows means Saylor, even if directionally right, only stays at break-even. From a Bitcoin perspective, however, this is the most favorable near-term outcome, as it relieves sell pressure and supports price.

The third path is to maintain operations by accelerating expansion of preferred stock such as STRC, attracting retail funds through higher yields and pushing debt to tens or even hundreds of billions. In the short term, this might seem better than directly selling stock or Bitcoin, avoiding immediate market impact and temporarily reviving the flywheel. But as noted earlier, the reflexivity mechanism will likely be amplified: as payment obligations balloon—current annual dividends already near $750 million and potentially doubling in the future—the company will face a heavy dollar debt burden, and selling Bitcoin to cover obligations may become an unavoidable last resort.

According to a recent Bloomberg report, Strategy CEO Phong Le stated that the company is considering lending out some tokens. This means Strategy is looking to generate new revenue through lending, with annual rates typically between 3–5%, though this is still far from implementation.

Now, Strategy’s decision to set up a $1.4 billion reserve may be a concession to its insistence on not selling Bitcoin. But facing reality, Strategy has also revised down its full-year financial forecasts and key performance indicators, setting an end-of-year Bitcoin price target between $85,000 and $110,000. The full-year dollar income target from Bitcoin has also been sharply cut from the original $20 billion to $8.4–12.8 billion. Strategy further projects full-year net profit will be in a wide range between a $5.5 billion loss and a $6.3 billion profit, a substantial downgrade from the previous forecast of $24 billion in net profit.