Digital Credit Products Suffer Worst Day Ever Amidst Leverage Unwind, Strive CEO Says

In brief

Strive CEO Matt Cole called Thursday's preferred equity performance the "most difficult day ever" for digital credit products.

Strive's SATA and Strategy's STRC fell further from their par values, potentially as a result of unwinding leverage positions.

The assets are designed to trade around $100, but closed the day below their marks at $97.71 and $88.59, respectively.

“Digital credit” preferred share offerings from Bitcoin treasury firms suffered their worst day ever on Thursday, according to Strive CEO Matt Cole, who called out leveraged positions as the culprit behind price plunges while defending the quality of the underlying credit instruments.

Cole’s comments follow the Thursday price plunges for SATA and STRC, the respective preferred equity and digital credit products from his firm and Bitcoin treasury giant Strategy, falling well below their par values, or the price they are designed to trade near.

“Today was the most difficult day in the history of digital credit,” Cole posted on X on Thursday afternoon. “What happened today was a leverage liquidation event, not a deterioration in underlying credit quality.”

According to Cole, when investors see an attractive yield opportunity with limited volatility, they often seek to lever up, or increase their position with borrowed capital.

“Many eventually decide that owning it is not enough. They borrow against it. They lever it,” he wrote. “That works until it doesn't.”

Both SATA and STRC saw outsized trading volumes on Thursday, notching their second- and fourth-largest trading days with $153 million and $941 million respectively, according to data shared by Strive’s Chief Risk Officer Jeff Walton.

Walton suggested those figures, when compared to the much smaller daily trading volumes from larger preferred equity instruments like JPMorgan’s JPM.PD and Blackrock’s PFF make a leverage unwind more likely.

“Leverage appears to have been flushed, fundamentals intact, and the instruments absorbed the flow and found bids throughout the day,” he posted on X.

When asked on X for more info on where SATA leverage had been concentrated, Walton replied that Strive is “aware of a couple anecdotal sources” and working on a “deeper postmortem analysis” that it plans to share.

Both SATA and STRC are designed to trade around $100 per share, but during Thursday’s trading period, SATA sank as low as $92.88 while STRC dipped even further, finding a daily bottom of $82.53 before closing at $88.59.

And while it's typical for STRC to trade below its par value after its dividend date, analysts told Decrypt on Thursday that it appears that uncertainty around how the firm intends to pay its dividends is causing “continued weakness.”

The digital credit products, which are designed to help Strive and Strategy add funds for Bitcoin accumulation, have attracted more everyday investors seeking dividends and less volatility than the firm’s common equities or exposure to BTC itself provide.

But questions about how dividend obligations will be met has led to some skepticism about the financial engineering behind the products. Last month, Strategy sold 32 BTC for $2.5 million after Michael Saylor telegraphed the move, proving his firm could break from its “never sell” mindset if needed.

However, despite bolstering its cash reserves alongside the firm’s relentless messaging about its ability to pay, Strategy’s common shares and preferred equity continue to underperform.

At the close of trading on Thursday, MSTR had fallen a further 3.46% to $112.53, now down more than 32% in the last month of trading. Shares in Strive (ASST) fell 3.8% to $14.85, moving its monthly losses to nearly 6%. U.S. markets are closed Friday for the Juneteenth federal holiday.