Michael Saylor’s MicroStrategy, a business-intelligence software company turned Bitcoin behemoth, has placed an enormous bet on cryptocurrency.
The company owns approximately $48 billion worth of Bitcoin, funded in part by issuing $6.2 billion of convertible bonds in 2024—marking the largest single-company convertible debt issuance in history.
Surprisingly, the backers of these risky financial instruments include conservative institutions like Allianz Global Investors, State Street, and Calamos Investments.
According to a report by the The Wall Street Journal, this has raised eyebrows, as such firms are not traditionally known for embracing high-risk assets like Bitcoin.
Why are MicroStrategy’s convertible bonds in demand?
MicroStrategy’s convertible bonds have been a hot ticket due to Bitcoin’s meteoric rise.
Bitcoin prices have surged 145% since the end of 2023, while MicroStrategy’s shares have skyrocketed by 450%, trading at twice the value of the Bitcoin it holds.
The demand for these bonds stems from their unique features.
Some offer no interest but require MicroStrategy’s stock to climb by 55% before converting into equity.
For conservative investors, these bonds present a way to gain exposure to Bitcoin while limiting downside risks.
“You can look at it as a chicken way to play Bitcoin,” Eli Pars, co-chief investment officer of Calamos Investments, which owns roughly $456 million of MicroStrategy’s convertible bonds based on current prices and recent filings, said in the WSJ report.
“But if you don’t think Bitcoin has got a chance to go up, then you probably don’t want to be in any of MicroStrategy’s capital structure,” he says.
Convertible arbitrage: Hedge funds’ playbook for volatility
MicroStrategy’s bonds have also attracted hedge funds using a strategy known as convertible arbitrage.
This involves buying the convertible bonds while shorting the company’s stock to profit from price volatility.
“The owner of a convertible bond is long the option, so they are always selling when the stock goes higher and buying when the stock goes lower to stay hedged,” said James Buckham, co-chief investment officer at Wellesley Asset Management, of the arbitrage strategy.
However, his firm, which specializes in convertible-debt investing, doesn’t own any MicroStrategy bonds because of the high risks they carry.
Valuation concerns and debt load headwinds for MicroStrategy
While Bitcoin’s rally has fuelled enthusiasm, critics argue MicroStrategy is “playing with fire.”
Detractors liken the company’s trajectory to that of failed firms like Enron and WorldCom, both of which issued significant convertible debt before collapsing.
Beyond Bitcoin’s infamous volatility, MicroStrategy faces additional headwinds like valuation concerns and debt load.
At its peak, the stock traded at a price-to-earnings (P/E) ratio of 133.7x FY25 earnings—an unsustainable level, according to analysts.
Further, the company plans to issue an additional $18 billion in debt over three years to fund Bitcoin purchases, which could strain its financial health.
Bitcoin-linked convertible bonds issued by crypto companies, including MicroStrategy, have flooded the market.
However, prices of MicroStrategy’s most recent $3 billion bond issuance have dropped sharply, reflecting waning demand.
“The market is still digesting the crypto-converts wave that came in the fourth quarter,” said Bryan Goldstein, who runs the convertible practice at the advisory firm Matthews South.
“I don’t think that it will continue with the same intensity, but there is definitely still a bid in the market for appropriately priced deals.”
A trendsetter for crypto-linked bonds
Despite these risks, MicroStrategy’s bold move has inspired other crypto firms to adopt a similar playbook.
Crypto-linked companies issued over $14 billion in convertible bonds globally in 2024, according to Bank of America.
Bitcoin-mining company Marathon Digital (MARA) alone raised more than $2 billion.
Wall Street is also jumping on the bandwagon. Strive Asset Management, co-founded by Vivek Ramaswamy, recently filed for an exchange-traded fund (ETF) focused on convertible debt securities issued by MicroStrategy and similar firms.
As Bitcoin continues its volatile journey, the fate of MicroStrategy’s bonds hangs in the balance.
While some analysts remain optimistic about the company’s long-term potential, others warn that its strategy is overly reliant on Bitcoin’s sustained growth.
For now, MicroStrategy’s convertible bonds remain a high-stakes gamble for investors willing to bet big on the future of cryptocurrency.
Whether this gamble pays off or becomes a cautionary tale for the ages remains to be seen.
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