Is Strategy's Bitcoin-Backed Credit Innovation a Sustainable Path to Value Creation in a Downturn?

In the wake of Bitcoin's 2025 correction, Strategy Inc. (MSTR) has emerged as a focal point for debates about the viability of Bitcoin-backed credit models. The company's dual-reserve strategy-combining a $2.19 billion U.S. Dollar (USD) Reserve with a 671,268 BTC holding-represents a bold attempt to balance liquidity needs with long-term value creation. Yet, as Bitcoin's price volatility intensifies and institutional investors recalibrate risk appetites, the sustainability of this approach remains under scrutiny. This analysis evaluates whether Strategy's capital structure and yield products can withstand bearish conditions, while addressing the risks posed by accounting standards, index delistings, and shifting market dynamics.

Capital Structure: A Dual-Reserve Buffer or a Double-Edged Sword?

Strategy's USD Reserve, initially announced at $1.44 billion in December 2025, was designed to cover 24 months of preferred stock dividends and debt obligations. By mid-2025, this reserve had grown to $2.19 billion, reflecting a strategic pivot toward liquidity management. This buffer theoretically insulates the company from short-term Bitcoin price swings, allowing it to meet financial obligations even during downturns. However, the reserve's reliance on equity financing-via at-the-market offerings-has diluted shareholder value, raising concerns about long-term capital efficiency.

The company's Bitcoin holdings, meanwhile, remain a double-edged sword. While 671,268 BTC (3.1% of the total supply) positions Strategy as a major player in the digital asset space, the average cost basis of $74,972 per BTC exposes it to significant unrealized losses when prices fall below this threshold. Under ASU 2023-08, these losses are directly recorded in net income, amplifying earnings volatility. This accounting treatment limits the company's ability to hedge effectively, as crypto assets are ineligible for hedge accounting under ASC 815-20-25-43(c)(3) per Deloitte guidance.

Yield Products: High Targets, High Risks

Strategy's FY2025 Bitcoin yield targets of 22-26% hinge on a mix of lending, staking, and DeFi strategies. Lending BTC as collateral for USD loans or unsecured BTC loans generates interest income, while staking on Layer 2 networks like Starknet and Babylon offers 5-12% APY. However, these mechanisms face headwinds during downturns. For instance, reduced liquidity in DeFi markets and tighter collateral requirements during bear markets could shrink yield opportunities.

The company's leverage-heavy approach-issuing preferred shares to acquire BTC-further complicates matters. While this strategy amplified returns during bull markets, it now threatens solvency as Bitcoin's price dips below $90,000. Strategy's CEO, Phong Le, has acknowledged that selling BTC may become necessary if the company's mNAV (enterprise value relative to Bitcoin holdings) falls below 1, a scenario that could trigger fire-sales and accelerate losses.

Risk Mitigation: Hedging Limitations and Index Delisting Threats
Despite Bitcoin's role as a diversification tool during crises, Strategy's exposure remains unmitigated by derivatives or diversification. The company's reliance on dollar cost averaging and index-based ETFs (e.g., Grayscale CoinDesk Crypto 5 ETF) has not offset the risks of concentrated BTC holdings. Moreover, the inability to hedge under ASU 2023-08 means that every 10% drop in Bitcoin's price directly reduces net income by $671 million.

Compounding these challenges is the risk of index delistings. Strategy's share price has fallen 65% from its November 2024 peak, raising the possibility of exclusion from major indexes like MSCI. Such a delisting could trigger passive fund outflows, further straining liquidity. The company's leveraged balance sheet-funded by costly equity and preferred shares-leaves little room for error in this environment.

Institutional Adoption and Regulatory Tailwinds

A silver lining lies in institutional adoption and regulatory progress. The U.S. government's establishment of a Strategic Bitcoin Reserve and Digital Asset Stockpile signals growing acceptance of BTC as a strategic reserve asset. Similarly, the maturation of regulatory frameworks like the EU's MiCA and the U.S. GENIUS Act has bolstered investor confidence. These developments could stabilize Bitcoin's role in diversified portfolios, indirectly benefiting Strategy's yield products.

However, institutional demand alone cannot offset the company's structural vulnerabilities. As the 2025 correction demonstrates, even well-capitalized entities struggle when Bitcoin's price diverges from optimistic assumptions. Strategy's FY2025 guidance, which assumed BTC prices between $85,000 and $110,000, now appears overly optimistic, highlighting the risks of overreliance on price forecasts.

Conclusion: A Model in Transition

Strategy's Bitcoin-backed credit innovation represents a pioneering but precarious approach to value creation. While its dual-reserve structure and yield strategies offer short-term resilience, the company's exposure to Bitcoin's volatility, coupled with accounting constraints and index delisting risks, raises doubts about long-term sustainability. For income-focused investors, the high-yield allure of preferred shares must be weighed against the potential for dividend cuts and capital erosion.

As the crypto market matures, Strategy's success will depend on its ability to adapt. This includes diversifying yield sources beyond BTC, leveraging regulatory tailwinds, and rethinking capital structure to reduce reliance on dilutive financing. Until then, the company's path remains a high-stakes bet on Bitcoin's eventual rebound-a gamble that may not pay off for all stakeholders.