Strategy’s income-producing preferred stock product STRC is being sold as a bitcoin-based safe asset, but critics say it is closer to unsecured, subordinated securities carrying high credit risk.

Bitcoin Magazine reported on June 18 that about $15 billion has been invested in bitcoin-linked preferred products issued by Strategy, including STRC and SATA. Of that, STRC has about $10.7 billion outstanding, and an estimated $8.8 billion is held by individual bitcoin investors.

At the heart of the controversy is a gap between the product description and its actual structure. STRC was issued as a perpetual preferred stock with no maturity and does not provide investors with a direct security interest in, or claim on, Strategy’s bitcoin holdings. Dividends are also not guaranteed and are decided at the board’s discretion.

In an op-ed carried by Bitcoin Magazine, Glen Cameron said STRC is presented as if it is backed by bitcoin, but investors have no legal right to even a single bitcoin.

Scrutiny has also fallen on marketing that described it as a product similar to a money market. The op-ed argued that STRC is far from conservative cash-like assets because it is structured as a perpetual preferred issued by a B- rated issuer, four notches below investment grade.

Questions have also been raised about the sustainability of the dividend payout structure. Strategy’s software business generates about $477 million in annual revenue, but annual dividend obligations to preferred investors were analysed to exceed $1.2 billion.

The op-ed argued the gap is being filled not by operating profits but by fundraising through new STRC issuance or additional issuance of MSTR common stock. It said the structure uses new investor funds to pay dividends to existing investors.

The problem, the op-ed said, is that this mechanism works smoothly only as long as STRC’s price stays at or above par. If there is a credit-rating downgrade, a dividend suspension, a sharp drop in the bitcoin price or tightening in capital markets, new inflows could shrink and the dividend structure itself could be destabilised. The op-ed said there is no Plan B, adding there is no security interest that can seize bitcoin and insufficient operating cash flow to replace it.

Dividend burdens are also continuing to rise. STRC’s dividend rate has recently increased from about 9 percent a year to as high as 11.5 percent. As a result, an additional annual dividend obligation of about $268 million was newly reflected in the structure, according to the analysis. The assessment said high dividend rates draw new investors but also increase the issuer’s financial burden.

A counterargument has also been raised that expectations for institutional demand were exaggerated. In the market, there are expectations that insurers, pension funds and bond managers will use products like STRC as a way to invest in bitcoin indirectly.

But the op-ed argued that institutions capable of sufficiently analysing bitcoin risk are more likely to choose holding spot bitcoin directly rather than an indirect product with added credit risk. A significant portion of STRC investors is estimated to be individual investors. The op-ed analysed investor concentration at 82.7 percent.

Simulation results also supported the concerns. In a model assuming 5,000 scenarios in which bitcoin rises at an average annual compounded rate of 10 percent, STRC posted a default probability of 12.3 percent, a dividend deferral probability of 21.9 percent, and a 50.7 percent probability that Strategy would be forced to sell bitcoin within 8 years. Even if the annual bitcoin increase is raised to 15 percent, the analysis found a 44.6 percent probability that STRC would close below $85 in scenarios where bitcoin sets new record highs.

The op-ed said the risk structures for bitcoin holders and STRC investors are fundamentally different. It said bitcoin investors focus on whether the final price rises, while STRC investors remain exposed to market shocks during the rise and deterioration in the funding structure. Cameron warned that the market would ultimately reflect in prices the difference between what investors think they bought and what they actually hold.

The controversy is drawing attention as a case showing how bitcoin-linked income securities, which have been surging recently, are being sold to individual investors and how sensitive dividend and funding structures are to changes in market conditions.