Strategy Has Real Problems

Everyone has an opinion on Strategy, Inc.

The stock has fallen roughly 26% year-to-date while Bitcoin itself is down a comparable amount. Wall Street trimmed $5.38 billion in holdings during Q3 alone. Jim Chanos, the short seller who anticipated Enron's collapse, closed his Strategy short with 100% returns and declared his thesis "largely played out." JPMorgan raised margin requirements to 95%. MSCI consulted on whether to remove Strategy from major equity benchmarks entirely, a decision that could have triggered $8.8 billion in forced selling.

The market-implied net asset value, the premium investors once paid to access Bitcoin through Strategy's corporate wrapper, has collapsed from 3.4x in November 2024 to approximately 0.91x today. Strategy's market capitalization has fallen below the value of its Bitcoin holdings, a condition that has now persisted for months.

Death spiral fears have entered mainstream financial discourse. Critics see vindication.

But in our opinion, here's what the consensus might be missing: the criticism is simultaneously correct and overstated. The structural thesis for Strategy has weakened materially. And the company is nowhere near collapse.

BOTH of these things are true. The inability to hold this nuance is where most analyses break down.

Before examining the arguments, it's worth grounding ourselves in Strategy's present circumstances:

Let's be clear about what critics get right, because they do get quite a bit right.

The most fundamental challenge to Strategy's thesis isn't something temporal. It's actually structural.

For nearly four years, Strategy served as Wall Street's Bitcoin proxy. Institutional investors who wanted exposure but couldn't hold the asset directly bought Strategy instead, accepting the corporate wrapper as the cost of access. The January 2024 launch of spot Bitcoin ETFs ended that monopoly.

BlackRock's iShares Bitcoin Trust now holds approximately 767,000 BTC compared to Strategy's 714,644. With over $55 billion in assets under management and the majority of all spot Bitcoin ETF inflows, IBIT has become the default institutional vehicle. It offers what Strategy cannot: regulated exposure without corporate governance, leverage risk, or dilution concerns. IBIT has experienced some outflows recently alongside the broader Bitcoin correction, but its structural position as the institutional default is firmly established.

The institutional response has been swift. During Q3 2025, Capital International, Vanguard, BlackRock, and Fidelity each reduced Strategy positions by over $1 billion. JPMorgan divested $500 million. Total institutional holdings declined from $36.32 billion to $30.94 billion in a single quarter.

This occurred during relatively stable Bitcoin prices, ruling out forced deleveraging as an explanation. The competitive landscape has permanently changed, and Strategy's historical role as the only institutional-grade Bitcoin vehicle no longer exists. This doesn't mean Strategy has no value proposition, but it does mean the value proposition has narrowed considerably.

Strategy's growth engine has always been capital raising: buy Bitcoin, issue equity at a premium, use proceeds to buy more Bitcoin. When mNAV exceeds 1.0x, this creates value for existing shareholders. When mNAV falls below 1.0x, the math reverses.

On July 31, 2025, Strategy published explicit guidance: "We will not issue MSTR below 2.5x mNAV except to pay interest and dividends." By August 18, Saylor had added a clause permitting dilution "when otherwise deemed advantageous." Since then, 94% of Bitcoin purchases have been funded by diluting shareholders at compressed valuations.

At 0.91x mNAV, every share issued sells for less than its pro-rata Bitcoin value. New investors get a discount. Existing shareholders subsidize it. The broken commitment damaged credibility, and the ongoing issuance represents genuine value transfer from existing to new shareholders. Whether this is prudent capital management or shareholder-unfriendly behavior depends on one's view of Strategy's long-term trajectory, but the mechanical reality is not in dispute.

The scale of dilution is worth making explicit. Strategy now has 323.9 million shares outstanding, up from approximately 76 million in 2020. That's a 4.3x increase. In the week of February 2-8, 2026 alone, Strategy sold 616,715 shares via its ATM program for just $89.5 million in proceeds, illustrating how dilutive issuance at compressed prices has become.

In an interview on the "What Bitcoin Did" podcast, CEO Phong Le acknowledged what Saylor has long denied: Strategy could sell Bitcoin. Le outlined two conditions: stock trading below 1x mNAV, and inability to raise capital through other means.

"Mathematically we would have to sell some Bitcoin. It would be the last resort."

Le framed potential sales as "several years out," pointing to the cash reserve as a buffer. Forced Bitcoin sales remain unlikely in the near term given Strategy's liquidity position. But the shift from Saylor's absolutist "never sell" to Le's conditional "last resort" represents a meaningful evolution in narrative. The thesis has become more nuanced, and perhaps more honest.

Strategy's average Bitcoin cost of $76,056 now sits above current prices. At $68,984 per Bitcoin, the company's holdings are approximately 9.3% underwater. Bitcoin would need to rally roughly 10% just to return to breakeven on Strategy's aggregate position.

This doesn't trigger any mechanical forced-sale provision, and under fair value accounting the unrealized loss flows through Strategy's income statement as a non-cash item. In Q4 2025, this produced a $17.4 billion operating loss and $12.6 billion net loss, figures that look alarming in isolation but reflect no actual Bitcoin sales.

Still, the psychological and narrative significance is real. For the first time, critics can point to Strategy's entire Bitcoin position as a losing trade in aggregate. The cost basis breach doesn't threaten solvency on its own. But it removes the cushion that previously separated Strategy from distress scenarios, and it adds urgency to the question of what happens if Bitcoin stays flat or declines further from here.

Jim Chanos entered his position in November 2024 near 2.5x mNAV, betting the premium would compress. He exited November 7, 2025 at 1.23x with approximately 100% returns. "MSTR inevitably marches toward a 1.0x mNAV," he told clients.

He was conservative. The mNAV has since fallen to 0.91x.

Chanos's success validates the thesis that Strategy's premium was unsustainable. But it also suggests the easy compression trade has largely played out. The question now isn't whether the premium will compress. It already has. The question is what Strategy is worth at current levels, without that premium.

Here's where the analysis gets more interesting, and where consensus may be pricing in more risk than warranted.

Perhaps no single event loomed larger than the January 2026 MSCI decision. The consultation period ended December 31, 2025, with market participants bracing for potential forced selling in the February 2026 rebalance.

MSCI had been consulting on whether companies with more than 50% of their balance sheet in digital assets belong in major equity benchmarks. Strategy, with over 90% of assets in Bitcoin, sat at the extreme end. Thirty-eight companies were under review, but Strategy's size made it the primary focus. JPMorgan estimated $2.8 billion in forced selling from MSCI exclusion alone, rising to $8.8 billion if other index providers followed.

The resolution: MSCI has paused the proposal to exclude digital asset treasury companies from its global equity indexes as part of the February 2026 review. Strategy is safe from forced selling by passive funds tracking MSCI benchmarks, at least for now.

This is near-term relief, not a final resolution. The decision doesn't permanently rule out future exclusion. MSCI's broader review could still produce new rules that materially affect Strategy later.

However, MSCI's decision included a subtle poison pill that most commentators have missed: newly issued shares by digital asset treasury companies like Strategy will no longer be included in MSCI index calculations. As a result, future share issuance will not increase index weights or trigger additional passive buying.

This rule change directly undermines Strategy's dilution-funded accumulation model. The flywheel depended partly on passive funds mechanically absorbing new share issuance. That automatic demand is now structurally removed. Without this tailwind, converting Strategy's convertible bonds also becomes less attractive to holders, since new equity issued upon conversion won't benefit from index-driven demand.

The near-term outlook is better than it was before the ruling. Strategy had already fallen significantly since the October 10 consultation announcement, pricing in exclusion risk that has now been deferred. But the growth engine has been quietly impaired even as the headline risk disappears.

By the end of Q4 2025, Strategy had built a $2.25 billion USD reserve for dividend and interest payments, providing more than 2.5 years of coverage for all obligations. The company raised $25.3 billion in total capital during 2025, making it the largest equity issuer among U.S. public companies for a second consecutive year. In January 2026 alone, despite a deteriorating Bitcoin market, Strategy raised $3.9 billion.

"We did it to address the FUD," Le acknowledged, "and to show people we're still able to raise money when Bitcoin is under pressure."

Death spiral scenarios require Strategy to lose market access. The pace and scale of capital raising through a Bitcoin correction suggests that hasn't happened. When critics argue Strategy might lose the ability to issue equity, management can point to billions raised during adverse conditions.

There is a caveat worth noting. While capital markets remain open, the productivity of ATM issuance is declining at lower prices. In the week of February 2-8, Strategy sold shares for just $89.5 million in proceeds, a fraction of what it was generating months earlier. Access and efficiency are different things.

Strategy's capital structure is more complex than a simple debt analysis suggests. The company now funds itself through two distinct layers: convertible debt and preferred equity.

Convertible Debt:

Critically, the convertible bonds cannot force liquidation. Holders can only convert to equity at prices ranging from $183 to $672. However, with MSTR currently trading at $138.44, all conversion prices are above current levels. This creates a nuance that cuts both ways. Bondholders won't convert at these prices because doing so would be value-destructive. If the stock remains below $183 when the September 2027 put arrives, holders may demand cash repayment of the approximately $1 billion tranche. Management has confirmed the $2.25 billion reserve could be used for this purpose, though doing so would consume nearly half the buffer.

The preferred equity layer is an entirely different animal. Strategy executed five preferred equity IPOs in 2025, shifting its capital-raising strategy from convertible debt toward what it calls "digital credit" instruments. Unlike convertible debt, preferred equity carries no maturity date and no refinancing risk. But it does carry a permanent, growing cash drain: $853 million per year in dividends, against $477 million in software revenue. The STRC instrument alone, at an 11.25% dividend rate, represents a substantial ongoing cost.

The combined annual obligation is approximately $888 million. Strategy's software business does not cover this, which means continued reliance on capital markets or Bitcoin price appreciation. The $2.25 billion reserve buys time, more than 2.5 years of coverage, but the structural gap between obligations and operating income is real.

Strategy faces no debt-driven existential pressure until 2028 at the earliest. Critics who cite $8.2 billion in convertible debt without acknowledging the distant maturities and convertible structure are presenting an incomplete picture. But critics who ignore the $8.36 billion in preferred equity and $853 million in annual preferred dividends are also presenting an incomplete picture, just from the other direction.

Bitwise CIO Matt Hougan has argued that forced Bitcoin sales require three simultaneous conditions:

Saylor claims the structure can "survive an 80-90% drawdown lasting 4-5 years." All three conditions occurring simultaneously appears unlikely in the near term. But the fact that one condition is already met, and Bitcoin has now fallen below Strategy's cost basis, suggests the margin of safety is thinner than it was a year ago. The structure is being stress-tested in real time, not hypothetically.

The debate over Strategy ultimately comes down to trade-offs. Different vehicles for Bitcoin exposure carry different risk and return characteristics:

Direct Bitcoin and ETFs offer straightforward exposure. Strategy offers something more complex: potential for premium expansion and implicit leverage, but with corporate risks, dilution, and governance considerations attached. The historical outperformance that Strategy once offered is now a function of when you measure from and to.

Through most of 2025, the story was a massive divergence: MSTR dramatically underperforming Bitcoin as the market repriced the stock from "leveraged Bitcoin proxy" to "Bitcoin holding company with corporate risk."

That repricing appears to be largely complete. In 2026, MSTR and Bitcoin have fallen in near-lockstep, both down approximately 26% year-to-date. The premium compressed from 3.4x to 0.91x. Chanos closed his short. The corporate risk discount has been priced in.

But the convergence also reveals something about MSTR's new correlation profile. It now tracks Bitcoin closely on the downside (the premium no longer provides a buffer) while retaining the potential to outperform in strong BTC rallies if any premium re-emerges. That's an asymmetric bet, but not the asymmetry most MSTR bulls signed up for. The upside optionality comes with corporate overhead, dilution, and $888 million in annual obligations that didn't exist two years ago.

When MSTR makes sense: You want convex upside exposure, believe the premium can re-expand, and accept dilution risk as the cost of that optionality.

When it doesn't: You want clean BTC exposure, prioritize capital efficiency, or lack conviction in management's ability to rebuild the flywheel.

Strategy in February 2026 is a different instrument than Strategy in February 2025. The premium is gone. The leverage effect has diminished. The competitive moat has narrowed. The cost basis cushion has been breached.

But the company is not on the verge of collapse.

The $2.25 billion cash reserve, distant debt maturities, convertible debt structure, and demonstrated capital markets access make forced Bitcoin liquidation unlikely in the foreseeable future. The MSCI exclusion risk, once the most pressing near-term concern, has been deferred.

What remains genuinely uncertain is whether the premium can recover as the market digests ETF competition, whether MSCI's broader review eventually produces new rules that threaten Strategy's index inclusion, whether Strategy's continued ability to raise capital persists through a prolonged Bitcoin bear market, whether the convertible debt holders eventually create pressure through conversion or cash repayment, and whether $888 million in annual preferred dividend and interest obligations can be sustained when operating revenue covers barely half that amount.

The underappreciated risk is structural rather than existential. MSCI's new rule excluding future share issuance from index calculations quietly undermines the dilution-funded accumulation model that powered Strategy's ascent. Passive funds will no longer mechanically absorb new shares. The preferred equity layer, while eliminating refinancing risk, has created a permanent cash drain that grows with each new issuance.

The flywheel has lost a gear, even as the headline risk recedes.

For four years, the MSTR thesis was simple: pay a premium for leveraged Bitcoin exposure with corporate optionality. That trade is over.

The new question is whether you believe Saylor can rebuild the premium engine without passive flow tailwinds, ETF scarcity value, or the benefit of the doubt from institutional allocators. Strategy's answer has been to pivot toward "digital credit" instruments, preferred equity products that generate fixed-income demand for Bitcoin-collateralized securities. Whether this new flywheel can replace the old one is an open question.

That's not a Bitcoin bet. It's a management execution bet with Bitcoin collateral.

At 0.91x mNAV, you're buying Bitcoin at a discount through a corporate wrapper that adds governance risk, dilution risk, and operational overhead. The discount compensates for those risks. Whether it over-compensates depends on your view of two things:

The mental framework we suggest you keep in mind: MSTR at a discount is a bet on Saylor's ability to manufacture new demand drivers. MSTR at a premium is a bet you should probably avoid making again.