Why is Wall Street collectively shorting the leading crypto strategy?

Title: “The Most Shorted Company on Wall Street Turns Out to Be a Cryptocurrency Leader”

Author: Eric

Source:

Repost: Mars Finance

The Financial Times’ Alphaville column published an article on February 24 titled “Mirror mirror on the wall, what is the most shorted stock of them all?” which provides some very interesting data.

The article shows that the median short position among S&P 500 component stocks has risen to 2.7%, reaching one of the highest levels in nearly a decade. Among all the components, Strategy’s short positions account for 14% of its market value, ranking first, while Coinbase holds 11%, ranking fourth. This means that, among all companies with a market cap over $2.5 billion, Strategy is the least favored.

The article in Alphaville does not represent the views of the Financial Times. Its characteristic is sharp language and no holds barred. Today, as cryptocurrencies gradually become mainstream, Alphaville’s articles still relentlessly criticize cryptocurrencies. Whether Bitcoin is $10 or $100,000, they always believe cryptocurrencies are meaningless.

On February 2, Craig Coben, a veteran investment banker who was Vice Chairman of Global Capital Markets at Merrill Lynch and head of Global Equity Capital Markets, also published an article criticizing the Strategy model on Alphaville.

Coben’s views are not extreme; he also believes that Strategy currently does not face a “bank run” risk and there is no liquidity crisis. However, he points out some core issues, such as the fact that accumulating Bitcoin does not generate cash flow, so continuous financing is needed, which dilutes common shareholders’ equity. Additionally, Strategy tends to buy when market sentiment is high and Bitcoin prices are elevated, which is a systemic problem with no solution.

Some analysts believe that not all short positions on Strategy are “naked shorts,” and some may be used by hedge funds to hedge their Bitcoin spot holdings. Nonetheless, it indicates that many people are bearish on Strategy; at least, everyone agrees that if Bitcoin falls, Strategy cannot remain unaffected.

In Coben’s article, he mentions that Strategy calls its issuance of five types of perpetual preferred stocks “Digital Credit,” a concept Michael Saylor has been emphasizing since the end of last year.

In this framework, the first layer, “Digital Capital,” is Bitcoin. The second layer, “Digital Credit (or Digital Lending),” consists of various perpetual preferred stocks issued by Strategy. These preferred stocks offer high yields, and Strategy must pay interest to holders annually.

The third layer is “Digital Currency,” which refers to currencies issued based on the financial products of the second layer, including stablecoins used for trading. The Saturn project plans to issue a stablecoin called USDat, backed by STRC and U.S. Treasuries, and has received investment from YZi Labs.

If you don’t understand this logic, you can think of the U.S. as an analogy. The U.S. issues U.S. Treasuries based on its influence, simply paying interest before maturity and rolling over new debt to pay off old debt. As long as America’s international influence and the dollar’s status remain strong, this game can go on indefinitely. For Strategy, Bitcoin is like America’s influence; digital credit is like U.S. debt. Strategy needs to borrow new debt each year to pay interest on its preferred stocks, but as long as Bitcoin’s price trends upward in the long run and drives Strategy’s stock price higher, the company can keep issuing new shares to raise funds, buy more Bitcoin, and pay interest—an endless cycle.

Michael Saylor firmly believes that Bitcoin will change everything. To him, Bitcoin’s infinite rise is more reliable than the U.S. always winning, so he prefers to issue currency based on an asset that is “destined” to appreciate continuously, similar to how the dollar was initially anchored to gold.

Strategy’s approach isn’t new; it only needs to ensure enough cash flow to pay interest to keep borrowing to buy Bitcoin. Like U.S. Treasuries, it’s a game everyone knows will eventually end, but no one can say how long it will last. Currently, Strategy has ample reserves, and its CEO stated that only if Bitcoin stays below $8,000 for four to five years would Strategy be forced to sell its holdings.

If this extreme scenario ever occurs, not only Strategy but the entire Web3 industry could disappear.

Even Craig Coben, a traditional old-school banker, must admit that Strategy won’t face financial problems in the short term. However, for hedge funds, Strategy is a good tool to hedge against Bitcoin’s decline; for short sellers, during a crypto downturn, shorting a system that relies on Bitcoin’s appreciation makes sense. At least for now, there are few reasons to be bullish on Strategy.

Michael Saylor’s plan to use Bitcoin to launch a new currency is also quite interesting. He uses dollars to buy Bitcoin, pays interest in dollars, and builds a system with hundreds of billions of dollars in cash, yet the ultimate goal is to destroy the very foundation of that system. Perhaps Wall Street elites are secretly laughing—they’re not interested in whether Strategy can become a century-old company; they only care about when your stock price will go up or down.

Saylor believes Bitcoin will keep reaching new highs, making it the foundation of everything. Meanwhile, dollar holders and users believe the U.S. will remain strong, tolerating the continuous increase of the debt ceiling. Both are beliefs—so who is more advanced?