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HOW MICROSTRATEGY AND OTHERS ARE TAKING ON BILLIONS IN DEBT TO BUY MORE BITCOIN


MICHAEL SAYLOR HAS RAISED $6 BILLION IN CONVERTIBLE BONDS, WITH $18 BILLION MORE
TO COME. HIS STRATEGY IS UNPRECEDENTED — HERE’S HOW IT WORKS.

By Tom Carreras, James Van Straten|Edited by Stephen Alpher
Updated Dec 18, 2024, 9:20 a.m. UTCPublished Dec 17, 2024, 5:30 p.m. UTC
Exploring the business of taking on debt to buy bitcoin (Alice Pasqual/Unsplash)

WHAT TO KNOW:

 * MicroStrategy is using convertible notes in a unique way to raise funds and
   buy more bitcoin.
 * Sophisticated investors love these bonds because of the volatility allows for
   profitable trading strategies.
 * Companies copying MicroStrategy could be compelled to sell their bitcoin
   holdings or company assets if the crypto experiences another prolonged
   downturn.



The analyst who co-wrote this piece owns shares of MicroStrategy (MSTR) and
Semler Scientific (SMLR).

Have Michael Saylor and MicroStrategy (MSTR) stumbled onto an infinite money
glitch?

It would be hard to blame anyone for thinking so. While the Saylor-led company
began buying bitcoin (BTC) more than four years ago, over the past 10 months
MicroStrategy has used a unique strategy to raise over $6 billion for the
express purpose of adding more bitcoin to its balance sheet, which as of Dec. 15
footed to 439,000 tokens worth $46 billion at the current price of about
$106,000.

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MicroStrategy did not raise these funds by taking out loans or by issuing more
company shares (though it has separately issued billions of dollars worth of
equity). Rather, the firm sold convertible notes — debt securities which can be
converted into equity on specified dates or under special conditions. And it's
not done yet: Saylor and company intend to raise at least another $18 billion
through such bonds over the course of the next three years, according to a plan
laid out in October.

Demand for this convertible paper has been so high that other companies, bitcoin
miner MARA Holdings (MARA) among them, have adopted a similar playbook to raise
billions to add to their own stacks.



But that raises a question: Could issuing so much debt eventually become
dangerous for these firms, and for the crypto market at large?

"If bitcoin faces a prolonged period of low/declining prices, [the companies]
could have to issue more equity and dilute shareholders at an inopportune time …
[or] sell the bitcoin for less than they bought," Quinn Thompson, founder of
crypto hedge fund Lekker Capital, told CoinDesk. Thompson added, though, that he
doesn't expect the companies to become insolvent.


HOW CONVERTIBLE NOTES WORK

Convertible notes are a financial tool that allows companies to quickly raise
funds without needing to provide collateral (as they would for a loan) or to
immediately dilute their stock. These bonds are priced based on the interest
rate baked into them, the firm’s underlying stock, the volatility of that stock
and the firm’s credit worthiness.

For example, in November bitcoin mining firm Bitdeer (BTDR) raised $360 million
by issuing convertible notes with an interest rate of 5.25%. These will mature
on Dec. 1, 2029 at a price of $15.95 per share — which is approximately 42.5%
higher than what these shares were trading for on Nov. 21 when the convertible
notes were priced.

In other words, instead of simply buying the company’s shares on the open
market, investors can earn a solid yield by holding these notes while also
benefitting if the stock surges. Even better, convertible notes come with
downside protection. On specific dates, such bonds can be redeemed in cash for
an amount equal to the original investment plus interest payments. Put
differently, investors are almost guaranteed to get their money back even if the
stock plunges before the note matures.



But MicroStrategy’s situation is rather unheard of in that the firm has found
demand for convertible bonds at a 0% interest rate even though benchmark U.S.
interest rates are closer to 5%. Why? Volatility. Being essentially a leveraged
play on bitcoin, MicroStrategy common stock most recently has been trading with
a 30-day average implied volatility of 106 and prior to that even higher. For
comparison, the S&P 500 usually trades at roughly 15 in implied volatility, and
bitcoin at 60.

The stock volatility affects price action in MSTR's convertible bonds and
sophisticated market participants are able to score sizable profits by trading
that volatility in a market neutral fashion. “I was on the phone with a
convertible note [arbitrage] trader… just to sort of understand what he’s going
through with all of this,” Richard Byworth, a convertible bond expert and
managing partner at asset management firm Syz Capital, told the On The Margin
podcast. “He said ‘Rich, I’ve become a degen crypto trader. … It’s insane. I go
to the bathroom, if I haven’t tightened up all my deltas and at least left some
limits, I can come back and have millions of dollars of exposure.’ This stuff is
whipping around like crazy.”

There’s thus a huge demand for MicroStrategy’s convertible notes, and that has
allowed the firm to sell a ton of them — five issuances in a year, which is
unprecedented. At press time, the company had six outstanding convertible notes,
with maturations between 2027 and 2032. Two of these have 0% interest rates,
while two others yield 0.625%, a fifth 0.875% and the last one 2.25%. Because
these rates are so low, MicroStrategy is managing to sell equity at a massive
premium compared to its current stock price, while only paying a blended 0.811%
interest rate on its debt, or $35 million annually, an amount easily covered by
the firm’s revenue.



“Should implied volatility remain high, I bet MSTR sells more and more
convertible bonds… meaning they buy more and more bitcoin,” Greg Magadini,
director of derivatives at crypto data firm Amberdata, told CoinDesk. “To me the
first sign of a bitcoin rally “TOP” will coincide with a drop in MSTR implied
volatility.”


CONVERTIBLE NOTES MANIA

In addition to the above-mentioned bitcoin miners, there's medical device
company Semler Scientific (SMLR), which made public its bitcoin treasury
strategy in late May. While the firm to date has only purchased bitcoin with
cash already on its balance sheet and capital raised through share sales, its
stock was granted an options market on Tuesday, which will make note offerings
much more attractive to investors and traders looking to profit in similar
fashion to that of MicroStrategy's debt.

Bitcoin miners took on roughly $5.2 billion in debt from June to Dec. 5 alone,
according to the MinerMag. Some of these convertible notes have been issued with
0% interest in the case of MARA and Core Scientific, while others like Bitdeer,
IREN (IREN) and TeraWulf (WULF) have issued them at rates ranging from 2.75% to
8.5%.

Not every company is employing the strategy for the same reasons, however. MARA
and Riot Platforms (RIOT) are walking in MicroStrategy’s footsteps by using the
proceeds from the convertible notes to add more bitcoin to their balance sheet,
but Core Scientific, for example, wants the funds for operating expenses,
capital expenditures, and potential acquisitions. Bitdeer, meanwhile, said it
aimed to further develop its mining rig manufacturing business.




BILL EVENTUALLY COMES DUE

Convertible notes, however, are not free money. As mentioned previously, once
the notes reach full maturity, holders can decide to convert them for equity at
an agreed-upon price per share, or redeem them for cash if the stock has
underperformed expectations.

The danger, then, is that the stock prices of these various firms could drop
significantly over a long period of time, incentivizing holders to redeem their
notes for cash instead of shares. In MicroStrategy’s case, that could compel the
company to sell some of its bitcoin holdings to pay investors back, while
bitcoin mining firms could be forced to sell off various mining assets. In a
worst case scenario, firms could end up facing bankruptcy.

Forced selling of bitcoin isn't necessarily the end of the world, at least as
long as the company’s average purchase price is lower than the price it sells
at. MicroStrategy’s stash, for instance, was acquired for $61,725 per bitcoin on
average, which gives the firm a certain amount of breathing space. The trouble
is bitcoin is well known for plunging 80% every few years. Just this year — in
the middle of a bull market — the price declined nearly 40% at one point, so
there's no guarantee the top cryptocurrency won’t ever sink lower than
MicroStrategy’s average purchase price.

Even so, MicroStrategy’s bonds are staggered, meaning that they all have
different maturation years. That reduces the company’s risk because it won’t
need to repay all of that debt all at once. In other words, bitcoin and MSTR
would need to stay down for a significant number of years for the firm’s
situation to get really dicey. The fact that most of MicroStrategy’s notes
already meet the requirements for conversion is another point in the company’s
favor, and it always has the option of rolling over its debt by issuing new
convertible bonds, even if they wouldn't be on such favorable terms.

In a sense, MicroStrategy is a grizzled veteran of this strategy. It's possible
the newcomers like the bitcoin miners and maybe Semler (if it does choose to
issue debt) — whose average bitcoin purchase prices will be far higher — could
find themselves far more exposed, having taken on large liabilities closer to a
potential cycle top.



MicroStrategymaraCore ScientificSemler ScientificMichael Saylor

TOM CARRERAS

Tom was sucked into crypto in 2020 and is very much enjoying the ride. Now a
markets reporter for CoinDesk, he previously wrote for DL News about bitcoin
ETFs, the Federal Reserve, bitcoin mining and crypto adoption in Latin America.
He has a bachelor's degree in English literature from McGill University and can
usually be found in Costa Rica. He holds BTC, ETH and SOL above CoinDesk's
disclosure threshold of $1,000.

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JAMES VAN STRATEN

As the senior analyst at CoinDesk, specializing in Bitcoin and the macro
environment. Previously, working as a research analyst at Saidler & Co., a Swiss
hedge fund, introduced to on-chain analytics. James specializes in daily
monitoring of ETFs, spot, futures volumes, and flows to understand how Bitcoin
interacts within the financial system. James holds more than $1,000 worth of
bitcoin, MicroStrategy (MSTR) and Semler Scientific (SMLR).

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