Bitwise Chief Investment Officer Matt Hougan said the sharp sell-off in Strategy's STRC preferred stock is a "painful but necessary" part of the current crypto market cycle and argued it reflects the kind of end-of-cycle deleveraging that typically precedes a market bottom.

Bitcoin fell below $60,000 in late June, its lowest level since 2024, a decline Hougan attributed largely to turmoil around STRC, the perpetual preferred equity instrument Strategy (MSTR) uses to help fund its bitcoin purchases.

A preferred stock under pressure

STRC launched last year, targeting a $100 par value, initially paying a 9% yield.

Strategy said it would raise that yield by 0.25 to 0.50 percentage points whenever the price drifted below $100 to draw buyers back toward par. The mechanism worked for a while, since the rate climbed to 11.5%, the price held near $100, and investors poured $10.5 billion into the instrument, helping to fund Strategy's bitcoin purchases.

As bitcoin and MSTR both fell over the following weeks, investors grew doubtful that Strategy could or would continue paying STRC's dividend, and the price broke from par, falling as low as $75.

Hougan said the concern was reasonable but overstated.

Strategy holds approximately $49.6 billion in bitcoin and $2.6 billion in cash against $6.8 billion in debt and $15.5 billion in preferred equity, enough, he said, to cover 28 years of dividend obligations if it sold its bitcoin today.

The real uncertainty, in Hougan’s view, was whether Strategy would actually keep paying, since it can suspend STRC's dividend at its own discretion.

Strategy's new framework

On June 29, Strategy introduced a new framework allowing it to periodically sell bitcoin to fund dividend payments.

The company said it would stop automatically raising STRC's interest rate to defend the $100 price, instead letting the stock trade at a variable price, and said it may buy STRC on the open market. Both MSTR and STRC rose sharply on the news.

Hougan said raising the rate further wasn't a realistic option.

At $75, STRC's effective yield had already reached 15.4%, and pushing the nominal rate from 11.5% to that level risked spooking investors further about where Strategy would find the cash. He does not expect STRC to trade back to $100 until bitcoin's price rises significantly.

A less dominant Strategy, a new buyer emerging

Hougan said Strategy's run as bitcoin's most dominant, one-way buyer is likely over as well.

Going forward, the firm could buy or sell depending on market conditions, though he doesn't expect large-scale selling, since nothing forces Strategy to sell more than a few billion dollars of bitcoin a year.

He pointed to institutions as the more likely candidate to lead the next phase of bitcoin demand, citing Morgan Stanley's proprietary bitcoin ETFs, Wells Fargo's addition of bitcoin to model portfolios, Texas's strategic bitcoin reserve, and more than $50 billion in cumulative bitcoin ETF inflows since 2024.

Hougan also dismissed liquidation concerns around Strategy as defying the math, arguing that bitcoin would need to fall more than 70% and stay there for years to put the company at risk.

Bitwise's European head of research, Andre Dragosch, offered a similar timeline in a separate post on X, saying July looks likely to mark bitcoin's shift from a bear to a bull regime.

Dragosch said a sharp reversal in semiconductor stocks could prompt a dovish reaction from the Federal Reserve, and that his own base case is for the market to price in a bottom ahead of the broader consensus, which he expects to land on October.

End-of-cycle dynamics

Hougan compared STRC's unwind to Grayscale's GBTC premium collapse in 2021, when institutional investors who created GBTC shares at fair value and sold them into the market at premiums of 20% to 50% pulled large sums into bitcoin before that trade fell apart. He said capital chasing high yield and low volatility was never suited to bitcoin and needed to be cleared out before the market could bottom.

Hougan also named a few signals he's watching for a bottom, including MSTR trading at a discount to its net asset value, the Crypto Fear and Greed Index approaching all-time lows, and bitcoin funding rates turning negative as more retail traders bet on lower prices than higher ones.

Bitwise’s CIO said he expects a new bull market to take hold by fall, though he acknowledged that market bottoms are only obvious after the fact.

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