Miggraf

This post was seen by ~1M people yesterday. A few more thoughts on the topic... A. "Steady lads, deploying more capital" This is the infamous meme that comes from the Terra/Luna implosion. Crypto people have scar tissue from the May 2022 implosion of this algorithmic stablecoin. Terra was designed to maintain a $1 peg by using a BTC treasury (Luna) to bid if the price went below $1, and sell if it went above $1. This works great, except in a panic. 4 years ago, panic happened. People wanted out of Terra, so the Luna treasury was automatically drawn down to protect the peg. But this depleted the system's resources and deteriorated its capacity to keep defending the peg, which stoked more fear and exacerbated the exit pressure. Eventually the BTC treasury was depleted, the defense system was exhausted, the peg broke and Terra went to zero. People who lived through that are wary of STRC and other Digital Credit instruments. But, STRC is the opposite fundamental design of this. B. Architected systems vs. free markets Terra/Luna was an architected system that actively used its treasury resources to defend a peg. STRC relies on free-market price discovery to find price equilibrium, and does not promise to maintain a peg. And that is at the heart of why Strategy will be fine, and STRC along with it. Strategy will not expend resources to try to maintain anything. Instead, the free market will find equilibrium on its own. C. How to kill STRC The health of STRC depends on the health of Strategy's balance sheet, because that determines whether STRC holders continue to receive dividends. STRC's market price can depeg and trade at a serious discount... but Strategy's balance sheet is completely unaffected. To attack Terra/Luna, you just needed to create a confidence wobble that forced the system to expend BTC treasury resources to defend the price of Terra. To attack STRC, you need to deplete Strategy's balance sheet. Since they're not actively expending it to defend anything, you would need to send Bitcoin's price to ~$0 and keep it there. Good luck! D. How STRC heals itself STRC trades down in this leverage wipeout to $82. Strategy does nothing; expends no resources. Strategy keeps paying STRC dividends with its unaffected balance sheet strength. Now, investors are getting ~14% effective yield w/ the potential for a ~20% capital gain. STRC is more attractive than it previously was! This attracts more investors. Price is bid up. Strategy will likely increase dividend rate on June 30 to 11.75% or 12%. This makes STRC more attractive still. Price is bid up. STRC dividends keep being paid. Market realizes that Strategy is unimpacted, it was just a leverage wipeout. Confidence in STRC dividends returns. Price is bid up. Back to $100 par. It will take weeks or maybe months, but that is how the free market (and the variable rate dividend mechanic) will restore STRC to $100. And that's why this is the opposite of Terra/Luna's design.

STRC down to $82.6 today. Here's my read: 1. Strategy is fine. If everything stays as is, they can pay STRC dividends for 32 years. If BTC appreciates at ~2% CAGR, they can pay dividends indefinitely. 2. Why the sell-off? This appears to be a liquidation cascade. Over the last 6 months, the narrative became that STRC volatility was reducing, and price began to spend all its time in $99-100 range. This invites leverage. If you expect the price to always be north of $95, you can take on 20x leverage with your portfolio to buy more STRC and dramatically increase the yield on your portfolio. This works great, until it doesn't. STRC is designed as a free-market asset. When attention shifted to SATA and STRC price flagged, it may have raised the attention of opportunistic short-selling hedge funds. By shorting aggressively, they could push the price down and start triggering margin calls and liquidations from folks who aggressively levered up their STRC positions. The price action today is a clear liquidation cascade, rapidly pushing prices lower, in turn triggering additional liquidations. 3. What happens now? The market will heal itself. Opportunistic hedge funds will recognize that this is a firesale and the fundamentals are unchanged for STRC and step in as buyers. Shorts will close, becoming buyers. Individuals are getting a tremendous entry price for long-term holding STRC shares. Buyers at this level will get ~13.7% effective yield. If STRC trades back to $100 and they sell, they get an easy +18% return. 4. What will Strategy do? Strategy will likely increase the dividend rate on June 30 - maybe to 11.75% but possibly to 12%. Buyers at the current price level then would get 14.2% effective yield from that point forward. Strategy may also step in to buy STRC shares back. They could do this by issuing new shares of MSTR (currently at 1.14 mNAV) or by taking on traditional debt and deploying those funds to buy discounted STRC shares on the market. If/when STRC trades back to $100, Strategy could then re-issue those STRC shares. The ~$15 delta per share could be used to buy BTC as pure accretion to MSTR holders, with no net change to amplification. No doubt that Saylor has already at least considered this, and it wouldn't surprise me if they're currently doing this. 5. In summary... The market is freaked out that this depeg is like Terra/Luna... but this is not an asset like that. Strategy's balance sheet determines whether STRC continues to receive dividend payments... and Strategy's balance sheet is completely unchanged. This is a leverage wipeout. From this, the market will learn that Digital Credit is mostly very low volatility. But because it is a free market asset, the longer that a Digital Credit instrument trades within a tight range to par... the more leverage will inevitably pile up as people get greedy. And that creates the conditions for a leverage wipeout depeg. Following that, the instrument will make its way back to par value as the market heals itself and recognizes that the dividend payments will continue uninterrupted because the issuer's balance sheet is unaffected.