Strategy's Daily Bitcoin Funding Relying on Unseen Buyback

Market Dependence on Buybacks

Strategy's $1.45 billion preferred-share buyback program is supporting a substantial share of trading in its variable-rate preferred stock, STRC. According to a Keyrock research report, Strategy's repurchases accounted for more than 20% of weekly trading volume in STRC during almost every week of September. This suggests that the company's buying activity is a significant contributor to the security's market liquidity.

The company's share reached about 28% the week of Sept. 8 before falling to just under 20% in early October. The findings raise questions about how much of STRC's market liquidity comes from independent investors and how trading conditions might change if Strategy reduces its purchases. Keyrock's research also found that STRC's market depth deteriorates sharply when the security moves away from its $100 reference price. On the worst 10% of trading days, estimated depth within a 10-basis-point price move falls from about $28 million to $6.5 million.

Consequences for Investors

The deterioration becomes more pronounced as the price discount widens. STRC is approximately four times less liquid when trading 1% to 3% away from par and roughly eight times less liquid when the deviation exceeds 6%, according to the report. This creates a potential problem for investors expecting to exit large positions without accepting significant price discounts. Keyrock's research also found that a typical decline from par represented approximately seven months of dividend income, while STRC's June drop toward the mid-$70s amounted to roughly two years of coupon payments. Those discounts illustrate how quickly capital losses can outweigh the income investors expect to collect from the security.

Potential Consequences of Reduced Buybacks

For a company seeking to establish preferred securities as a recurring funding channel for Bitcoin accumulation, the concern is whether those instruments can sustain investor demand without continued intervention from their issuer. Strategy's buying accounts for a fifth of STRC trading volume. If Strategy reduces its purchases, the market may become more dependent on longer-term investors and opportunistic buyers. Keyrock cautioned that the calculation does not establish how much liquidity would disappear if Strategy stopped buying. Other market participants could also change their behavior in response.