MicroStrategy's Financial Viability in a Downturning Bitcoin Market: Assessing the Sustainability of Preferred Stock Financing Amid Bearish Sentiment and Index Exclusion Risks

MicroStrategy's (MSTR) transformation into a Bitcoin treasury company has redefined its capital structure and risk profile. By leveraging preferred stock issuances to fund Bitcoin acquisitions, the firm has created a financial model that is both innovative and precarious. As Bitcoin faces bearish pressures and index inclusion risks loom, the sustainability of this strategy-and the viability of its preferred stock financing-comes under intense scrutiny.

The Bitcoin-Driven Capital Structure

MicroStrategy's 2025 Q3 financial results underscore its reliance on Bitcoin. The company reported $3.9 billion in operating income and $2.8 billion in net income, driven entirely by a $3.9 billion fair value gain on its Bitcoin holdings. As of October 26, 2025, it held 640,808 Bitcoin, valued at $70.9 billion, with an average cost of $74,032 per coin according to the company's filings. This aggressive accumulation has been funded through a mix of common equity, convertible debt, and preferred stock.

Preferred stock has become a cornerstone of MicroStrategy's capital-raising efforts. In Q3 alone, the company raised $152.8 million via the STRK ATM Program by issuing 1,404,499 shares of 8.00% Series A Perpetual Strike Preferred Stock, and $217.3 million through the STRF ATM Program with 1,881,542 shares of 10.00% Series A Perpetual Strife Preferred Stock as detailed in its financial disclosures. These instruments offer high yields but come with significant obligations. For instance, the 8.00% Series A preferred stock includes redemption features tied to Bitcoin's market value: MicroStrategy can redeem shares if the aggregate liquidation preference of outstanding preferred stock falls below 25% of the initial offering, or if tax events occur as specified in the offering documents.

Index Exclusion Risks and Liquidity Pressures

The company's heavy Bitcoin allocation-approximately 3.1% of all Bitcoin in existence according to independent analysis-has drawn regulatory scrutiny. MSCI's proposed rule to exclude companies with over 50% of assets in digital assets threatens MicroStrategy's inclusion in major indices like the MSCI USA Index as reported by financial analysts. JPMorgan estimates that index exclusion could trigger $2.8 billion in outflows from passive funds, with potential losses rising to $8.8 billion if other providers follow suit according to market research. While the stock has already priced in this risk down 60.64% year-to-date, such outflows could exacerbate liquidity challenges, particularly for preferred shares, which trade at a discount to their liquidation preference as noted by market observers.

The redemption terms of MicroStrategy's preferred stock further complicate matters. Holders can demand repurchase in the event of a "fundamental change," defined as a change in control or other corporate actions as per the company's prospectus. In a bearish Bitcoin market, where the company's equity value is volatile, such events could force MicroStrategy to redeem shares at unfavorable prices. This creates a self-reinforcing cycle: falling Bitcoin prices reduce the company's asset base, increasing the cost of servicing preferred dividends and redemption obligations as described in financial analysis.

Bear Market Vulnerabilities

Analysts have raised concerns about the sustainability of MicroStrategy's leverage. The company's capital structure includes $8.2 billion in convertible debt and $6.6 billion in preferred equity according to market data, creating a debt-to-equity ratio that strains traditional metrics. In a prolonged bear market, where Bitcoin falls to $40,000-a level that would erase nearly 60% of its current market value-MicroStrategy's stock could drop to $150–$200 per share as projected by financial models. This would not only erode shareholder equity but also jeopardize the company's ability to meet $700 million in annual preferred dividend payments as highlighted in analyst reports.

The preferred stock's high yields (8–10% according to market analysis) mask a critical flaw: dividends are funded by Bitcoin appreciation, not operational cash flow. If Bitcoin stagnates or declines, MicroStrategy may be forced to sell its holdings to service obligations-a move that could trigger a downward spiral in both Bitcoin and its stock price as warned by independent researchers. Independent researchers have warned that this model is inherently unstable, as it conflates asset appreciation with financial sustainability as documented in financial analysis.

Strategic Defenses and Counterarguments

MicroStrategy's leadership, including CEO Michael Saylor, argues that Bitcoin's long-term value justifies the risk. The company projects Bitcoin reaching $150,000 by year-end 2025, a 36% increase from current levels. It also contends that its Bitcoin holdings provide "71 years of dividend coverage" assuming a flat price a claim critics dismiss as unrealistic, given Bitcoin's volatility.

The firm has also pushed back against MSCI's exclusion proposal, arguing that digital asset treasury companies like itself are conventional businesses with productive capital, not passive investment vehicles as stated in company communications. However, this argument ignores the fact that MicroStrategy's core operations-business intelligence software-have seen declining revenue (down 3.6% year-over-year in Q1 2025 according to financial reports). The company's identity as a "Bitcoin treasury" has effectively overshadowed its traditional business, creating a dependency that heightens systemic risk.

Conclusion: A Model at the Edge of Viability

MicroStrategy's preferred stock financing model is a high-stakes gamble. While the company has capitalized on Bitcoin's bull run to generate extraordinary returns, its reliance on leveraged capital and index inclusion creates vulnerabilities in a downturn. The redemption terms of its preferred stock, coupled with index exclusion risks, expose it to liquidity shocks that could force asset sales or debt restructuring.

For investors, the key question is whether Bitcoin's long-term appreciation will offset these risks. If the cryptocurrency continues to rise, MicroStrategy's model could remain viable. But in a bear market, the company's financial structure-built on the premise of perpetual Bitcoin gains-may prove unsustainable. As JPMorgan notes, the risk of index exclusion is already priced in as reported in financial analysis, but the broader market's tolerance for leveraged Bitcoin bets remains untested.

[1] Strategy Announces Third Quarter 2025 Financial Results [https://www.strategy.com/press/strategy-announces-third-quarter-2025-financial-results_10-30-2025]
[3] MicroStrategy retains place in key index despite delisting ... [https://finance.yahoo.com/news/microstrategy-retains-place-key-index-171510986.html]
[4] Strategy's (MSTR) Preferred Shares Decline Amid Bitcoin ... [https://www.gurufocus.com/news/3220648/strategys-mstr-preferred-shares-decline-amid-bitcoin-pressure]
[6] MicroStrategy stock faces index exclusion risk, JPMorgan ... [https://www.investing.com/news/analyst-ratings/microstrategy-stock-faces-index-exclusion-risk-jpmorgan-warns-93CH-4371553]
[8] MicroStrategy Announces Pricing of Strike Preferred Stock Offering [https://www.strategy.com/press/microstrategy-announces-pricing-of-strike-preferred-stock-offering-strk_01-31-2025]
[9] bitcoin-focused stock builds yield curve amid expansion [https://ca.investing.com/news/swot-analysis/microstrategys-swot-analysis-bitcoinfocused-stock-builds-yield-curve-amid-expansion-93CH-4321996]
[10] Independent Researcher Flags Risks in Strategy's (MSTR) ... [https://www.tipranks.com/news/strategys-mstr-bitcoin-bet-independent-researcher-raises-sustainability-concerns]
[12] Strategy Pushes Back on MSCI's Digital Asset Exclusion ... [https://www.coindesk.com/markets/2025/12/10/strategy-pushes-back-on-msci-s-digital-asset-exclusion-proposal]
[13] 71 Years of Bitcoin-Funded Dividends - Yet S&P 500 ... [https://www.ccn.com/education/crypto/strategy-71-years-bitcoin-dividends-sp500-snub-msci-risk/]