According to Krueger, Strategy can stay safe with 20%, and even 30%, leverage.
In the face of a bear market, Krueger affirms that the company has mechanisms to react.
Analyst Fred Krueger addressed an existing concern in some sectors of the bitcoin (BTC) and cryptocurrency ecosystem, around the leverage strategy that Michael Saylor carries out through Strategy. According to the divulger, unlike what certain figures in the space think, the company’s focus is not at risk of collapse.
Krueger recalled that Saylor often jokes about an extreme idea for people to increase their exposure to bitcoin: selling a kidney. However, the specialist maintains that, in practice, Strategy leader employs “much more modest leverage”.
Leverage is understood as the proportion of debt that Strategy uses to buy more bitcoin than it could acquire with its own capital alone. For example, if the company has 100 dollars (USD) and borrows 25 more to buy BTC, its leverage is 20% (25 debt over 125 total).
To evaluate whether the organization’s model is at risk in the face of an adverse scenario within the market, Krueger analyzed the historical declines of BTC. Based on this, he concludes that any solid strategy must be able to resist recoil of around 80%.
A collapse that does not seem imminent
Taking the current level of leverage as a reference, the analyst estimates that Strategy, the public company with the largest amount of bitcoin in the world —641,692 BTC—, is probably about 20% from the peak of the bull market. The real risk, he clarifies, arises if the price falls from the highs without the company acting accordingly, that is, securing financing.
Without moves to adjust its exposure, that debt ratio could rise to 80% or more, placing the firm in a “complicated situation.”
Even so, Krueger highlights that there are internal mechanisms that protect the company against this extreme scenario. One of them is the structure of “junior prefs”, that is, preferred securities that Strategy has issued to raise capital from institutional investors in exchange for a fixed dividend, generally paid in cash or shares.
“Thanks to ‘junior prefs’, you could simply not pay the dividend and still survive,” express the disseminator.
Furthermore, Fred clarified that Strategy would have enough time to react as a bear market progresses and your level of leverage (“amplification”) increases. The company could reduce it by issuing new preferred shares or other debt instruments, even if these carry higher interest rates, thus avoiding a forced crisis.
Strategy should maintain 20% leverage, says Krueger
According to Krueger, everything remains in clear numbers as long as Strategy’s leverage is around 20%. That level, according to his criteria, offers an ideal balance: it increases the compound annual profitability of BTC from 30% to 35% without putting the stability of the organization in check.
Despite this, the investor opens the door to greater debt: “30% could also make sense with preferreds,” as long as the financing structure supports it. “This would further boost BTC’s compounded annual returns, but retain the flexibility of preferred stock as a safety net.”
However, not everyone agrees with Krueger’s optimistic vision. Arthur Hayes, co-founder of BitMEX and CEO of Maelstrom, warned in January that the company could face problems if the price of bitcoin falls significantly, questioning its reliance on convertible debt and other fixed income instruments. As CriptoNoticias reported, this concern is also shared by others such as Peter Schiff, a renowned gold advocate.