MicroStrategy Death Spiral! Peter Schiff Exposes Preferred Stock Trap, Bitcoin Stocks Are Likely to Crash

Gold advocate Peter Schiff reignited his feud with the Bitcoin world, this time directly targeting Michael Saylor and the capital structure of MicroStrategy (MSTR). He argued that the high-yield preferred shares of this Bitcoin concept stock are severely misunderstood by investors. His warning was straightforward: dividends will only be distributed when MSTR decides to declare them, and undeclared dividends will not accumulate; they will be lost forever.

Fatal Flaw in Preferred Stock Structure

(Source: MicroStrategy)

Schiff argues that the core flaw lies in its structural nature. Many yield-oriented funds have been buying MicroStrategy's preferred shares, believing they will consistently receive stable distributions. Schiff believes this assumption is incorrect. As he wrote: “MSTR's business model relies on yield-oriented funds purchasing its 'high-yield' preferred shares. However, these reported earnings will never actually be paid out.”

He argues that these stocks are more like optional dividends decided by the company itself, rather than traditional cumulative preferred rights. Traditional cumulative preferred shares accumulate unpaid dividends when the company skips payments, which must be made up later. However, MicroStrategy's preferred stock structure is different; unpaid dividends do not accumulate and permanently disappear once skipped. This flexibility may seem harmless today, but Schiff indicates that it conceals a financing model that could quickly unravel.

This structural difference is crucial for investors in Bitcoin concept stocks. Many income-oriented institutional investors buy preferred shares for stable cash flow, and their portfolio strategies and risk models are built on this assumption. If MicroStrategy decides not to distribute dividends, these funds not only lose current income but also cannot recover it in the future. This stands in stark contrast to traditional cumulative preferred shares, which, even if payment is delayed, will eventually fulfill the debt obligations.

Schiff believes that, in his view, once fund managers realize that dividends “will never actually be distributed,” they will “sell off preferred shares,” shutting down MicroStrategy's ability to continue issuing dividends. This shift in perception may stem from multiple triggers: the continued decline in Bitcoin prices, increased financial pressure on MicroStrategy, or simply institutional investors' deeper scrutiny of the terms and conditions.

Self-Reinforcing Mechanism of Death Spiral

This statement is not easily used. Schiff argues that MicroStrategy relies on selling more preferred shares to maintain its strategy, and losing this channel will put the company in trouble. Without reliable revenue buyers, the company's fundraising ability is exhausted, the preferred market collapses, and stocks come under pressure. For Schiff, this is the definition of a self-reinforcing retreat: fewer buyers, declared dividend reductions, and even fewer buyers.

The Four Stages of the Death Spiral

Phase One: Institutional investors realize the structural flaw of non-cumulative dividends and begin to reduce or stop purchasing newly issued preferred shares.

Phase Two: MicroStrategy loses its main financing channel and is forced to reduce or stop dividend distribution to conserve cash.

Stage Three: Investors holding preferred shares begin to sell off, triggering a price drop and market liquidity exhaustion.

Stage Four: Financing ability is completely lost, the company is unable to raise funds for Bitcoin purchasing strategies, stock price crashes.

The terrifying aspect of this spiral lies in its self-reinforcing nature. Each stage exacerbates the severity of the next stage. Once market sentiment turns, it is difficult to find buyers willing to take over during the decline. For Bitcoin concept stocks, this liquidity crisis may occur more quickly and violently than in other industries, due to the inherent volatility of the crypto assets themselves.

MicroStrategy's business model is essentially to leverage long positions in Bitcoin. The company raises funds by issuing bonds, convertible bonds, and preferred stock, and then uses these funds to purchase Bitcoin. This strategy generates significant returns when Bitcoin rises, but also amplifies losses when it falls. As of now, MicroStrategy holds over 500,000 Bitcoins, with a cost basis of about $50,000 per coin. When the price of Bitcoin is above this level, the company's balance sheet looks healthy. However, if Bitcoin falls below this critical price point, the leverage effect will work in reverse.

Bitcoin Decline and Dual Pressure

Schiff will criticize the broader attack on Bitcoin after it fell below $90,000, pointing out that Bitcoin “has dropped 40% priced in gold.” For Schiff, the structure of MicroStrategy and the decline of Bitcoin are two sides of the same argument. As a long-time gold advocate and Bitcoin skeptic, Schiff has always argued that gold is the true store of value, while Bitcoin is a speculative bubble.

Measuring the performance of Bitcoin in terms of gold is a framework commonly used by Schiff. When Bitcoin rises in USD, Schiff points out that gold is also rising, suggesting that Bitcoin may actually be declining relative to gold. Although this argument may seem biased to Bitcoin supporters, it does provide another perspective for traditional asset allocators. If an investor's goal is to hedge against inflation and currency depreciation, then performance relative to gold is indeed an important benchmark.

MicroStrategy, as the most aggressive Bitcoin concept stock, has its fate highly correlated with the price of Bitcoin. When Bitcoin fell from its peak of $69,000 in 2021, MicroStrategy's stock price also experienced significant fluctuations. Although the company has insisted on a “HODL” strategy and has never sold any Bitcoin, the sustainability of this strategy depends on ongoing financing capabilities. If the preferred stock market encounters issues as Schiff stated, MicroStrategy may be forced to change its strategy.

The broader market environment is also deteriorating. The Federal Reserve's ongoing high interest rate policy has decreased the attractiveness of high-yield bonds and preferred stocks, as investors can obtain substantial returns from safer government bonds. In this environment, MicroStrategy needs to offer higher coupons to attract buyers, which further increases the company's financial burden.

What should investors be worried about

Schiff's prediction is quite clear—he believes that MicroStrategy may “ultimately go bankrupt.” Whether or not investors agree, his attack focuses on the details of financing tools that many shareholders have not yet fully examined. If sentiment changes, preferred shares could become the next pressure point in the market. For investors holding MicroStrategy stocks or preferred shares, here are the risk factors that need to be closely monitored:

Key Risk Indicators

Bitcoin Price Trend: If it falls below the $50,000 cost basis, it will trigger unrealized losses and market panic.

Preferred Stock Issuance Frequency and Pricing: If the coupon rate of newly issued preferred stock significantly rises or the issuance volume declines, it indicates weakened market demand.

Dividend Declaration Frequency: Any decision to skip a dividend distribution may trigger the spiral predicted by Schiff.

Institutional Position Changes: Track the position changes of yield-oriented funds, large-scale redemptions are warning signals.

However, there are also viewpoints that believe Schiff's predictions are overly pessimistic. Supporters point out that MicroStrategy's Bitcoin holdings have still yielded considerable returns over time, and the company has the ability to repay its debts when Bitcoin prices recover. In addition, Michael Saylor himself holds a large amount of company stock and Bitcoin, and his personal wealth is closely tied to the company's fate, which provides a certain level of confidence.

As an emerging investment category, Bitcoin concept stocks are still being understood and priced by the market in terms of their risk-return characteristics. MicroStrategy, as the flagship of this category, will have a profound impact on the entire Bitcoin concept stock sector based on its success or failure.