Digital Credit Offerings Plunge Amidst Leverage Liquidation
Preferred share offerings tied to Bitcoin treasury firms experienced their most significant downturn on Thursday, a day marked by sharp price declines attributed to leveraged positions, according to Strive CEO Matt Cole. Cole, however, maintained that the underlying credit instruments remain sound.
The price drops affected SATA and STRC, the preferred equity and digital credit products respectively from Strive and Bitcoin treasury giant MicroStrategy. Both fell considerably below their par values, the price points at which they are intended to trade.
“Today was the most difficult day in the history of digital credit,” Cole stated on X Thursday afternoon. “What happened today was a leverage liquidation event, not a deterioration in underlying credit quality.”
Cole explained that investors often increase their exposure to attractive yield opportunities with perceived limited volatility by borrowing capital, a practice known as leveraging. “Many eventually decide that owning it is not enough. They borrow against it. They lever it,” he wrote. “That works until it doesn’t.”
Both SATA and STRC saw exceptionally high trading volumes on Thursday. According to data shared by Strive’s Chief Risk Officer Jeff Walton, SATA recorded its second-largest trading day with $153 million, while STRC had its fourth-largest with $941 million. Walton suggested these figures, when contrasted with the significantly lower daily trading volumes of larger preferred equity instruments like JPMorgan’s JPM.PD and Blackrock’s PFF, indicate a higher likelihood of a leverage unwind.
“Leverage appears to have been flushed, fundamentals intact, and the instruments absorbed the flow and found bids throughout the day,” Walton posted on X.
When questioned on X about the concentration of SATA leverage, Walton indicated that Strive is “aware of a couple anecdotal sources” and is conducting a “deeper postmortem analysis” to be shared later.
SATA and STRC are designed to trade around $100 per share. However, on Thursday, SATA dropped to a low of $92.88, while STRC fell further, reaching a daily low of $82.53 before closing at $88.59.
While it is typical for STRC to trade below its par value following its dividend date, analysts told Decrypt on Thursday that uncertainty surrounding the firm’s dividend payment strategy appears to be contributing to “continued weakness.”
These digital credit products, created to help Strive and MicroStrategy accumulate funds for Bitcoin purchases, have attracted retail investors seeking dividends and lower volatility compared to the firms’ common equities or direct Bitcoin exposure. However, questions about how dividend obligations will be met have raised skepticism regarding the financial engineering of these products. Last month, MicroStrategy sold 32 BTC for $2.5 million, a move signaled by Michael Saylor, demonstrating the firm’s willingness to deviate from its “never sell” stance if necessary.
Despite bolstering its cash reserves and consistently messaging its ability to meet obligations, MicroStrategy’s common shares and preferred equity have continued to underperform. By the close of trading on Thursday, MicroStrategy (MSTR) had fallen an additional 3.46% to $112.53, marking a decline of over 32% in the past month. Shares in Strive (ASST) decreased by 3.8% to $14.85, bringing its monthly losses to nearly 6%. U.S. markets will be closed on Friday for the Juneteenth federal holiday.
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