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| By Nilus Mattive |
Three weeks ago, I gave you an updated warning on digital asset treasury companies (DATCOs) and the wave of preferred shares they’ve been using as funding vehicles.
I really hope you listened because these investments have been melting down ever since.
In the case of the preferred shares, it’s especially sad.
That’s because millions of everyday investors heard big income promises and piled in for supposedly safe double-digit yields.
Yet based on recent price action, some of the losses have already wiped out a year or two of future income!
For example, here’s a chart of Strategy’s (MSTR) “Stretch” preferred shares.
They were designed to stay around the $100 mark while paying out 11.5% a year.
But since I talked about them three weeks ago, they’ve lost about 20% of their value…
I also said Bitmine Immersion’s (BMNR) new BMNP preferred shares were best avoided.
While they were designed to stay around $88 and offer a 9.5% yield, they’ve already dropped about 7.5% since my warning … wiping out nine or 10 months of future dividends in just two weeks.
I’ve seen the same type of situation play out plenty of times before, across all types of investments.
People chase yields that are too good to be true.
The underlying investment’s price drops further.
And oftentimes, the dividends themselves eventually get cut.
Why does it happen so frequently?
Well, in a lot of cases people simply don’t know any better. Or maybe they’re too trusting.
Let’s take a deeper look under the surface of this DATCO debacle so I can show you what I mean…
Just to recap:
Firms like Strategy and Bitmine Immersionare essentially companies that actively buy and hold cryptocurrencies.
Strategy is the original and the biggest Bitcoin DATCO, while Bitmine Immersion is the largest Ethereum DATCO.
For a while, these DATCOs were trading at big premiums relative to the value of the cryptos in their coffers.
So, they would issue more shares and use the proceeds to buy even more crypto.
Then Strategy’s founder, Michael Saylor, got another bright idea: He decided to start issuing preferred shares to raise even more capital to buy even more Bitcoin.
Preferred shares are basically stocks designed to act more like bonds.
They typically pay big dividends and offer more rights to their holders.
They also tend to be more popular with institutional investors.
But Saylor and company have really targeted retail investors with their STRC offering.1
As I mentioned in my last article, they actually held a big call trying to educate financial advisors on the supposed safety of this investment.
They’ve also been running ads across social media and TV channels like CNBC.
And it’s worked — with about 80% of the shares held by retail investors.
Now those same retail investors are losing big money, and I think the situation could still get worse.
Listen to this …
Saylor actually used ChatGPT to design many elements of Stretch.
As he once explained it, he probed the AI model to come up with novel financial structures and even used it to test the legality of some of his ideas.2
At this point, I should probably note that back in 2000, when Strategy was still called MicroStrategy and operated as a software company, the U.S. Securities and Exchange Commission (SEC) accused it of accounting fraud and improper revenue recognition.
To resolve those charges, Saylor personally paid $8.6 million in penalties and disgorgement.
Anyway, you want to hear what he says the model told him?
“No one in the history of the world has ever done this, but it's totally legal, and it's totally reasonable.”
Well, maybe there’s a reason nobody else in the history of the world has come up with a plan like this before.
Most dividends are supported by cash flows generated by actual business activities.
But Strategy doesn’t really have business activities anymore. It simply buys Bitcoin and holds it. And it can’t generate any money from that Bitcoin unless it sells it.
So really, the only way it can fund these promised dividends is through selling Bitcoin or issuing more shares of MSTR and using the proceeds to pay the preferred investors.
This works fine if Bitcoin is rising quickly and/or MSTR shares are trading at a premium to the value of Strategy’s Bitcoin stash.
If the trends reverse? It gets really hard to make this novel approach work. And a downward spiral starts to ensue.
Bitmine Immersion is in a slightly better position because it is able to generate revenue — as much as several hundred million a year — by staking the Ethereum it holds.
Yet its real growth engine is still just collective belief, investor confidence and the price action of the crypto it holds.
In the end, DATCO preferred shares are highly speculative plays not ultra-safe income vehicles.
Hey, I know a lot of people want to rapidly build their retirement portfolios and get more income.
But chasing pie-in-the-sky yields is not the way to get there.
Which is precisely why Dr. Weiss and I are holding an urgent online event tomorrow at 2 p.m. Eastern.
We will reveal an entirely different way of using highly-rated dividend stocks for maximum income …
One expressly designed to avoid the yield trap dilemma that millions of people just fell into with investments like STRC.
If you haven’t already signed up to learn how it works, all you have to do is click here to claim your free seat now.
Best wishes,
Nilus Mattive
2 https://finance.yahoo.com/markets/stocks/articles/michael-saylor-admits-using-chatgpt-105054359.html
