Bitcoin's Institutional Adoption Accelerates: Strategy's Circular Funding Model and Preferred Shares as a Gateway to Institutional BTC Exposure

The institutionalization of Bitcoin has reached a critical inflection point in 2025, driven by regulatory clarity, infrastructure innovation, and the emergence of novel financial instruments. At the forefront of this shift is Strategy, a company whose circular funding model and Bitcoin-backed preferred shares have become a focal point for institutional capital seeking exposure to the crypto asset class. By leveraging high-yield preferred shares and aggressive Bitcoin accumulation, Strategy has positioned itself as both a beneficiary and a catalyst of Bitcoin's mainstream adoption. However, the sustainability and scalability of its model remain contentious, with risks that could either validate its role as a bridge to institutional BTC exposure or expose the fragility of its leveraged structure.

The Circular Funding Model: A Self-Reinforcing Loop

Strategy's business model is predicated on a circular funding mechanism: it raises capital through the issuance of common stock (MSTR), perpetual preferred shares (STRC, STRK, STRF), and convertible debt, then uses the proceeds to purchase Bitcoin. This process creates a self-reinforcing loop where Bitcoin's price appreciation and treasury growth justify further capital-raising efforts. For instance, in 2025 alone, Strategy raised $21 billion in equity and $2 billion in convertible debt to acquire 672,497 BTC, representing 3.2% of Bitcoin's maximum supply. The company's Bitcoin holdings, now valued at $58–60 billion, serve as a collateralized asset base that supports its stock price and preferred share valuations.

This model is designed to exploit market optimism about Bitcoin's long-term value. By converting Bitcoin's speculative potential into a yield-generating asset via preferred shares, Strategy appeals to traditional investors who lack direct exposure to crypto markets. For example, its Variable Rate Series A Perpetual Stretch Preferred Stock (STRC) offers an 11.00% annual dividend, while STRK and STRF provide 8% and 10% yields, respectively, with varying conversion and cumulative features according to market analysis. These instruments have attracted institutional buyers, including BlackRock's iShares Preferred and Income Securities ETF, which now includes Strategy's preferred shares.

Institutional Adoption and the Rise of ETPs

The broader institutional adoption of Bitcoin in 2025 has been fueled by regulatory developments and product innovation. The repeal of SAB 121 and the passage of the GENIUS Act have normalized digital assets within traditional finance, enabling the launch of spot Bitcoin ETFs. Exchange-traded products (ETPs) now manage over $250 billion in assets globally, offering institutional investors a familiar, compliant pathway to Bitcoin according to market research. Strategy's preferred shares, with their high yields and Bitcoin-backed collateral, fit neatly into this ecosystem, acting as a hybrid between traditional fixed-income instruments and crypto exposure.

Moreover, Bitcoin's scalability solutions-such as OP_CAT and BitVM-have pushed total value locked beyond $10 billion, demonstrating the network's capacity to support institutional-grade activity without compromising the base layer. This infrastructure has encouraged corporations and sovereign wealth funds to treat Bitcoin as a strategic reserve asset, a trend mirrored by Strategy's own treasury strategy.

Sustainability Challenges: Dilution, Valuation, and Funding Costs

Despite its success, Strategy's model faces significant sustainability risks. The company's stock price has declined by 47% year-to-date in 2025, with its market-to-net asset value (mNAV) ratio dropping to 0.78–1.06, compared to historical premiums above 2.0. This contraction reflects growing concerns about shareholder dilution and the long-term viability of its leveraged approach. As Bitcoin's price volatility impacts capital-raising efficiency, the cost of issuing preferred shares has risen, with implied yields increasing to maintain investor interest.

The circular model's dependence on bull market conditions is another vulnerability. A prolonged bear market could erode Bitcoin's price, reducing the company's ability to raise capital and triggering a downward spiral in its stock and preferred share valuations. While Strategy has built a USD reserve covering 21 months of dividend obligations, this buffer may not be sufficient to weather a systemic crypto downturn. Analysts warn that the model's structural risks-such as perpetual share issuance and lack of redemption terms- could lead to a "high-yield credit disaster" if confidence wanes.

Scalability and the Future of Institutional BTC Exposure

The scalability of Strategy's approach hinges on Bitcoin's continued institutional adoption and the evolution of its financial infrastructure. If Bitcoin's role as a reserve asset solidifies, Strategy's preferred shares could become a standard component of yield-seeking portfolios, offering a diversified, high-yield alternative to traditional fixed-income. However, this outcome depends on the development of robust custody solutions, trading platforms, and regulatory frameworks to support large-scale digital asset management according to market analysis.

For institutional investors, the model presents a dual-edged proposition. On one hand, it offers a liquid, Bitcoin-collateralized yield that aligns with long-term bullish theses. On the other, it exposes investors to the same volatility and regulatory uncertainties that have historically plagued crypto markets. The recent inclusion of Strategy's preferred shares in BlackRock's ETF underscores their growing acceptance, but it also highlights the need for rigorous due diligence in assessing their credit risk.

Conclusion: A Bridge or a Bubble?

Strategy's circular funding model and Bitcoin-backed preferred shares represent a bold experiment in financial engineering, one that has accelerated Bitcoin's integration into institutional portfolios. By transforming Bitcoin's speculative potential into a yield-generating asset, the company has created a novel on-ramp for traditional investors. Yet, the model's sustainability remains contingent on Bitcoin's price trajectory, regulatory stability, and the ability to scale without triggering a confidence crisis.

For now, the model appears to be working-albeit with growing cracks. As Bitcoin's institutional adoption continues to evolve, Strategy's preferred shares will likely remain a key battleground for debates about the future of yield, leverage, and the role of crypto in traditional finance. Whether they emerge as a durable innovation or a cautionary tale will depend on how well the company-and the broader market-navigates the next phase of Bitcoin's journey.