Fidelity Digital Assets has reported that the issuance of perpetual preferred stock has facilitated the acquisition of 135,979 Bitcoin, highlighting this funding method utilized by treasury firms as an emerging source of demand for the cryptocurrency.
Summary
- As of October 5, the issuance of preferred stock has financed the purchase of 135,979 BTC, according to Fidelity.
- This funding strategy hinges on Bitcoin appreciating more than the costs of its dividend payouts.
- Shareholders of these preferred stocks face various risks, including issuer-specific, liquidity, and interest rate risks, in addition to Bitcoin market fluctuations.
A report published on October 20 by research analyst Zack Wainwright indicates that these acquisitions accounted for over 0.5% of Bitcoin’s total supply as of October 5. The report, drawing on Strive’s filings, emphasizes strategic insights.
Companies are issuing preferred shares that pay dividends, using the capital raised to invest in Bitcoin. Fidelity connects this method to an investment rationale suggesting that Bitcoin’s finite supply may serve to protect against the diminishing value of fiat currencies.
The report also clarifies a fundamental assumption behind this funding model.
“This strategy is effective for issuers only if the asset’s value growth surpasses the yield cost.”
Between March and May, the issuance of preferred stock facilitated purchases of over 95,000 BTC, generating upwards of $7 billion. Fidelity contrasts this with the 888,185 BTC amassed by exchange-traded products focused on spot Bitcoin in their inaugural year.
Investors in preferred shares encounter distinct risks compared to direct Bitcoin holders. Fidelity provides separate investor guidelines clarifying that preferred securities encompass features of both equity and debt, with specifics varying for each offering.
These perpetual securities lack a designated maturity date, while some preferred stocks allow issuers the option to postpone or defer dividend payouts. Holders generally hold a higher claim than common shareholders but rank below bondholders in the event of a company’s insolvency.
Furthermore, Fidelity highlights the inflation risk that preferred shareholders face, as rising prices could erode the purchasing power of forthcoming dividends. Increasing market interest rates typically lead to a decline in the value of existing preferred securities, and low trading liquidity might compel investors to sell at a loss.
Consequently, the report connects the effectiveness of the preferred stock model to both the continued growth of Bitcoin and the financial health of the firms issuing these securities.