Strategy’s financial approach: leveraged Bitcoin treasury and debt management

Strategy (formerly known as MicroStrategy) has established itself as the premier corporate Bitcoin treasury, pioneering a revolutionary approach to capital allocation and Bitcoin accumulation. By leveraging financial markets to increase its Bitcoin holdings, Strategy has created a unique investment vehicle that provides shareholders with leveraged exposure to Bitcoin’s price movements. This article examines Strategy’s approach to leverage, its capital acquisition methods, and its market positioning as it continues to lead corporate Bitcoin adoption.

Current state of Strategy’s leverage model

Strategy’s Bitcoin accumulation approach centers on maintaining an optimal level of financial leverage while maximizing the efficiency of its capital raising activities. The company manages this balance through strategic issuance of equity and debt instruments.

Target leverage ratio

Strategy aims to maintain a leverage ratio between 20-30% of its Bitcoin holdings’ value. This relatively conservative approach - comparable to a homeowner financing approximately one-quarter of their property’s value - provides financial flexibility while enabling the company to amplify its Bitcoin exposure.

Currently, Strategy’s leverage ratio sits at approximately 19%, below its target range of 20-30%. This indicates the company is somewhat underleveraged compared to its preferred financial structure. The company had previously deleveraged to an even lower level of approximately 12%, following aggressive equity issuance through its At-The-Market (ATM) offerings in late 2024.

Leverage impact on valuation

The market closely monitors Strategy’s leverage ratio as it directly impacts the company’s multiple to Net Asset Value (NAV) - the premium at which its shares trade relative to the underlying Bitcoin holdings. When the company operates with higher leverage, its NAV multiple typically expands, reflecting the increased upside potential during Bitcoin bull markets.

As Strategy’s leverage ratio decreased to 12% through equity issuances, the market responded with a compression in its NAV multiple. This demonstrates the direct relationship between the company’s financial structure and its market valuation. With leverage now increasing back toward target levels, investors may expect an expansion in Strategy’s NAV premium, particularly if Bitcoin volatility remains elevated.

Capital acquisition strategies

Strategy employs multiple capital-raising mechanisms to fund its Bitcoin purchases, with each approach offering distinct advantages based on market conditions and the company’s current financial position.

Convertible bonds

Convertible bonds represent one of Strategy’s primary capital-raising tools. These instruments function as debt initially but include provisions allowing bondholders to convert to equity if the share price exceeds a predetermined threshold.

When Bitcoin’s volatility is high (as it is currently at around 60%), Strategy can secure more favorable terms on its convertible bonds. This is because the conversion option becomes more valuable in volatile markets, allowing the company to achieve higher conversion premiums and potentially lower interest rates.

Strategy’s recent convertible bond offerings featured conversion premiums of 35% above market price, but higher Bitcoin volatility could enable the company to secure even more favorable terms, potentially reaching 55% premiums on future issuances.

At-The-Market (ATM) offerings

Strategy also raises capital through ATM offerings, which allow the company to sell shares directly into the market at prevailing prices. While this approach increases the outstanding share count, it can be accretive to shareholders if executed when the company’s shares trade at a significant premium to its Bitcoin holdings.

In late 2024, Strategy executed a large ATM program, raising over $10 billion. While initially well-received, the market eventually showed signs of “equity issuance fatigue” as the size and pace of these offerings increased. This experience has likely informed the company’s more balanced approach to capital raising, with a renewed focus on debt instruments to complement equity issuances.

Strategic planning for debt issuance

Strategy appears to be strategically timing its debt issuances to align with anticipated Bitcoin market cycles. By issuing convertible bonds in the first quarter of 2025, the company positions itself to potentially benefit from early conversion in the third quarter - traditionally a period of strength in Bitcoin’s four-year cycle.

The convertible bonds typically include provisions allowing for early conversion if Strategy’s stock trades at 130% of the conversion price for 20 out of 30 trading days in a quarter. With a one-quarter lag before this provision becomes effective, Q1 issuances would be eligible for potential early conversion in Q3 2025.

This strategic approach could allow Strategy to become more deleveraged heading into a potential market peak, providing financial flexibility at a crucial point in the market cycle.

Bitcoin yield and accretive dilution

Strategy’s management of its capital structure is focused on increasing Bitcoin per share through what can be termed “accretive dilution” - the paradoxical result where issuing more shares actually increases the Bitcoin backing each share.

The Bitcoin yield concept

“Bitcoin yield” measures the percentage change in Bitcoin per share over time. It reflects Strategy’s ability to grow its Bitcoin holdings at a faster rate than its share count increases. When this occurs, shareholders benefit from increasing Bitcoin exposure per share despite the dilutive effects of new equity issuance.

Strategy aims to generate Bitcoin yield by issuing equity and debt at a premium to its Bitcoin NAV, then using the proceeds to purchase more Bitcoin. This approach can succeed when the company’s shares trade at a premium to their underlying Bitcoin value, as is currently the case with Strategy trading at 1.856xx NAV.

Managing market sentiment

The market’s reaction to Strategy’s capital raising activities is closely tied to the perceived effect on Bitcoin yield. When the company appeared to be overusing ATM offerings in late 2024, market sentiment deteriorated as investors became concerned about excessive dilution.

To maintain positive market sentiment, Strategy must balance its financing activities across both equity and debt instruments. The fixed income side of its balance sheet - particularly convertible bonds - is generally viewed more favorably as it offers higher potential for accretive transactions.

Strategic impact of the U.S. Bitcoin Reserve

The recent establishment of a U.S. Strategic Bitcoin Reserve through executive order represents a significant development with positive implications for Strategy’s business model. This formal recognition of Bitcoin as a strategic asset by the U.S. government removes a major barrier for corporate Bitcoin adoption.

Companies that may have been hesitant to establish Bitcoin treasuries due to regulatory uncertainty now have a clear signal that Bitcoin is viewed as a legitimate strategic asset. This validation could accelerate the adoption of corporate Bitcoin treasuries, with Strategy’s model serving as a blueprint.

As more companies evaluate Bitcoin as a treasury asset, Strategy’s pioneering approach and market leadership position it to benefit from broader institutional adoption.

Looking forward: Strategy’s potential moves

Based on current market conditions and Strategy’s financial position, several near-term developments appear likely:

1. Increased debt issuance: With leverage below target levels and Bitcoin volatility elevated, Strategy will likely issue additional convertible bonds to increase its leverage ratio toward the 20-30% target range.

2. Timing alignment with market cycles: The company appears to be positioning its capital structure to optimize for a potential Bitcoin market peak later in 2025, with Q1 bond issuances that could convert in Q3.

3. Bitcoin treasury leadership: Strategy will likely maintain its position as the leading corporate Bitcoin holder, potentially inspiring other companies to adopt similar treasury strategies following the U.S. government’s Bitcoin reserve announcement.

Conclusion

Strategy has established a unique financial model that leverages capital markets to maximize Bitcoin accumulation while attempting to grow Bitcoin per share. By carefully managing its balance sheet and utilizing both equity and debt instruments, the company provides shareholders with leveraged exposure to Bitcoin’s price movements.

The company’s current position - slightly underleveraged with rising Bitcoin volatility - suggests near-term opportunities for additional capital raising, particularly through convertible bonds. With Bitcoin gaining increased institutional legitimacy through developments like the U.S. Strategic Bitcoin Reserve, Strategy’s pioneering approach to corporate Bitcoin treasuries appears well-positioned for the evolving financial landscape.

For investors and financial analysts watching this space, Strategy’s capital allocation decisions and leverage management provide valuable insights into the emerging field of corporate Bitcoin strategy. As Bitcoin continues to gain mainstream adoption, Strategy’s innovative approach may serve as a template for the next generation of corporate treasury management in the digital age.