The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Pranav Kiran

TORONTO, Dec 1 (Reuters Breakingviews) - Karl Marx observed that historical events tend to appear first as tragedy, then again as farce. Cryptocurrency hoarders may well reverse the formulation. Michael Saylor, chairman of coin-stacker Strategy MSTR.O, qualifies as a world-historic personage in the digital realm, sparking a $137 billion trend of companies buying up bitcoin, ether and the like. He funded his first run by selling bonds that convert into equity. His second relies on preferred equity, which in turn requires boring old greenbacks to cover dividends, and mainstream investors who are more apt to pull the plug.

The bitcoin-hoarding trade seemed ridiculous from the start. After all, investors can buy cryptocurrency themselves. Yet the market valued $50 billion Strategy at over a 200% premium to the value of its holdings in January. This oddity gave motion to a breakneck financial mechanism. Shares could be issued without wildly diluting equity holders’ ostensible claim on the company’s bitcoin. Since the stock magnified the moves of the ever-volatile currency, convertible notes were attractive to hedge funds, which profit from the trade the more prices gyrate.

Inevitably, this strength on the way up became a weakness on the way down. As bitcoin fell by a third from its October peak, Strategy shares halved. About 80% of so-called digital asset treasury companies were trading below their net asset value recently, according to Altuva Group. Strategy’s valuation as a multiple of its holdings has halved since January.

Saylor, ever the master of reinvention, told investors in July that he will now focus on preferred equity for funding. Dividends owed on a series of oddly-named instruments already totaled over $640 million annually by October 20, according to S&P. Bitcoin generates no cashflow. Nor does Strategy’s aging software business.

Funding those payments therefore requires issuing more shares, just as their comforting premium to asset value erodes. While the company can defer dividends, S&P analysts point out that doing so for four straight quarters would entitle some preferred equity holders to a board seat.

A tragic spiral now seems possible. Strategy has adopted what it calls a “USD Reserve.” To normal people, this means hoarding whatever cash it can generate right now. The bigger problem, though, is that the company’s first act fundamentally made sense: it was selling volatility to eager buyers. Investors seeking fixed income are the exact opposite. Typical issuers are highly-regulated banks and insurers, which account for about three-quarters of preferred equity, according to Cohen & Steers. Saylor may find that his new audience will simply be less interested in paying for him to play a crypto hero’s part.

CONTEXT NEWS

Strategy on December 1 announced that it has established a "USD Reserve" of $1.4 billion funded with proceeds from the sale of shares of class A common stock. The proceeds will support the payment of dividends on its preferred stock and interest on its outstanding debt.

Strategy also said it currently intends to maintain sufficient funds to pay at least 12 months of dividends, with the goal of ultimately covering 24 months or more.

“Establishing a USD Reserve to complement our BTC Reserve marks the next step in our evolution, and we believe it will better position us to navigate short-term market volatility while delivering on our vision of being the world’s leading issuer of Digital Credit,” said Michael Saylor, founder and executive chairman.

(Editing by Jonathan Guilford; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on KIRAN/pranavkiran.t@thomsonreuters.com))