Is Strategy Really the Next Terra Luna?

Strategy's preferred share instrument STRCH is trading at roughly 89.50 dollars against its 100 dollar par value, and has been below par for two to three weeks. When the market price falls below par, Strategy stops selling new shares through its at-the-market program because accepting 90 dollars of capital for 100 dollars of liabilities makes no financial sense. Strategy owes 1.2 billion dollars annually in dividend payments on STRCH at the 11.5 percent rate, holds approximately 1.1 billion dollars in cash reserves representing less than one year of coverage, and recently sold 32 Bitcoin raising only 1.5 million dollars to satisfy a dividend payment. In coming quarters it will need to either dilute common shareholders further or sell Bitcoin to meet obligations.

Strategy spent 64.1 billion dollars acquiring its Bitcoin holdings, which are currently worth 53.3 billion dollars, meaning it is underwater on its position. It also carries 6.7 billion dollars in convertible debt and 15.5 billion dollars in preferred shares outstanding including STRCH. The market has repriced STRCH so its effective yield at current prices is approximately 12.9 percent, roughly matching Strive's SATO offering at around 13 percent, though STRCH carries more risk because Strategy has corporate bond debt that Strive never issued.

The Terra Luna comparison centers on structural mechanics. UST was not backed by real assets but by an algorithm designed to maintain a one-dollar peg. When UST fell below a dollar, the protocol automatically burned UST in exchange for one dollar worth of Luna, inflating Luna supply. Arbitrageurs sold that Luna immediately, driving its price down and further undermining the peg in an unstoppable mechanical spiral. The Luna Foundation Guard held 1.5 billion dollars in Bitcoin as a reserve and selling it caused Bitcoin to fall from roughly 46,600 dollars in early April 2022 to 30,000 dollars by the time UST collapsed in May and to 22,500 dollars by mid-June, a roughly 50 percent decline that initiated the broader 2022 crypto bear market.

The biggest structural difference is that Terra Luna's death spiral was automated and could not be paused, while Strategy relies on a board making discretionary decisions. STRCH has no automated redemption mechanism forcing arbitrage. In Terra Luna's system, Luna served as the volatility-absorbing shock absorber for the UST peg, and Strategy's common stock plays the analogous role, but unlike Luna, Strategy's common stock is backed by a real Bitcoin treasury. In an extreme scenario where Bitcoin collapsed 80 percent in a week, Strategy could choose to pause dividend payments rather than trigger a spiral, a decision Terra Luna's protocol was structurally incapable of making. Any deterioration at Strategy would more likely be a slow and gradual grind rather than a sudden mechanical collapse.

A meaningful similarity between the two is that both rely on high-yield offerings to attract and retain capital. Anchor offered 20 percent APY on UST deposits and STRCH offers 11.5 percent annually. Chenellis also notes that behind the scenes Terra Luna involved secret dealings to prop up prices and misrepresent risks, conduct for which Do Kwon is facing approximately 15 years in prison. Michael Saylor is reported to have used ChatGPT over several hours to design the STRCH financial product, and Chenellis suggests Saylor's financial flywheel structures appear designed to inspire interest in Strategy the company rather than in Bitcoin itself.

Strategy's Bitcoin buying does not represent genuine organic demand, and Bitcoin prices may be artificially elevated as a result. If Strategy's flywheel stops due to mismanagement, the true floor for organic Bitcoin demand becomes unclear. A scenario where Strategy must liquidate large amounts of Bitcoin to satisfy dividend or debt payments could contribute to a broader price collapse, though the absence of an automated mechanism means any such deterioration would unfold more slowly than Terra Luna's implosion rather than in a matter of days.