Article by: Sankalp Shangari
Compiled by: Plain Blockchain
1. The exciting comeback from boring bonds to Bitcoin
If you think traditional finance is boring, you're not alone. But cryptocurrency is different; it's destined to change how financial markets and fiat currency systems operate.
Sometimes, there's always an unconventional figure who breaks the norm and brings about change. Michael Saylor is that person—he has turned a seemingly mundane financial instrument—convertible bonds—into a powerful Bitcoin acquisition machine. You can think of it as the "Ocean's Eleven" of finance, but Saylor is not robbing a bank; he is combining market volatility, debt, and Bitcoin to successfully pull off a market "heist."
1) What are convertible bonds (and why should you care)?
Convertible bonds may sound as boring as a tax lecture, but they are actually very interesting tools in finance. Imagine if bonds and stocks were combined; that would be a convertible bond. It is both a loan and has characteristics of a stock option. Companies raise funds by issuing these bonds, while investors buy them because of their flexibility: you can hold them like bonds and earn stable interest, or if the stock price skyrockets, you can convert them into stock.
The key is: convertible bonds come with a "conversion option," meaning they can be converted into company stock at a specific point in the future under certain conditions. This provides investors with more choices and gives companies like MicroStrategy creative space.
Four factors affecting convertible bond prices:
1) Interest rates: If interest rates are high, bond prices are expensive.
2) Corporate credit: The riskier the company, the higher the returns demanded by bondholders.
3) Stock price: Since the bonds can be converted into stocks, stock price fluctuations are crucial.
4) Volatility: The greater the stock's volatility, the higher the value of the conversion option.
Among them, volatility is the most interesting part—Michael Saylor's strategy is to seize this point and quickly leverage volatility like a roller coaster.
2) Saylor's secret weapon: The "black technology" of convertible bonds and how to turn volatility into wealth
If convertible bonds are like a hybrid car, then Saylor has found a way to turn it into an F1 racing car. Here are four "simple" steps on how it works (of course, provided you've been in finance for 20 years):
A) Issue zero-coupon convertible bonds
Saylor's latest move is to convince investors to lend him money at zero interest! How does he do it? He promises investors that they can convert the bonds into MicroStrategy stock in the future, with a conversion price far above the current stock price. Investors find this "conversion option" particularly enticing and are willing to lend money at zero interest.
B) Earn huge premiums
The "conversion price" of these bonds is set significantly higher than the current stock price, sometimes by as much as 50%. This means investors must wait for the stock price to skyrocket before they can convert the bonds into stock. This also gives Saylor a buffer period to avoid equity dilution until the stock price shoots up like a rocket.
C) Get cash, purchase Bitcoin
Saylor's core strategy is to use cash obtained from selling bonds to purchase Bitcoin. In other words, he is exchanging debt for digital gold. This is not just betting on the future of Bitcoin; it also leverages stock price volatility to acquire more Bitcoin. If this sounds like financial judo, that's exactly what it is.
D) Achieving long-term profit through "value dilution"
Typically, issuing more stock dilutes existing shareholders' stakes. But Saylor does it differently: he enhances MicroStrategy's net asset value (NAV) by purchasing and holding Bitcoin, while also increasing the amount of Bitcoin per share. It's like buying a pizza and slicing it into more pieces, but in the end, you get more pizza.
This is a concise explanation of the "magic" steps:
Assuming MSTR's initial state:
Market capitalization = $1 million
Bitcoin holdings = $300,000
Bitcoin to stock ratio = $300,000 / $1,000,000 = 0.3
Stock issuance:
MSTR reissues $2 million in stock, raising the total market capitalization to $3 million ($1 million + $2 million).
Use this $2 million to purchase an equivalent amount of Bitcoin.
New Bitcoin holdings = $300,000 + $2 million = $2.3 million
New Bitcoin to stock ratio = $2.3 million / $3 million = 0.7667 (approximately 0.77).
This is the essence of "financial engineering." By issuing stock, increasing the company's market value, and then using those funds to buy more Bitcoin, MicroStrategy has increased the proportion of Bitcoin per share without directly diluting existing shareholders' stakes. This can enhance the attractiveness of the company's stock price when Bitcoin prices rise.
This mechanism can continue to operate as long as the market is willing to give it a premium based on MSTR's Bitcoin holdings. If market confidence declines, this premium could disappear (or even reverse), leading to a significant drop in stock prices.
Simply put, this is like using "cheap paper" (stocks) to exchange for "hard currency" (Bitcoin). This strategy can work until the market no longer values these "papers."
"Magic, right?" Of course—but only if the market continues to cooperate.
Wait, who would buy these? (Hint: not grandma)
You're right—this is a classic hedge fund operation. Let's take a detailed look at how these operations work to help those who are less familiar understand the principles.
2. Who would buy these zero-coupon convertible bonds?
The answer is: hedge funds, not your grandma's retirement fund.
Why? Because hedge funds do not care about interest payments. They are focused on something more profitable: volatility.
These zero-coupon bonds (which pay no interest) come with an additional stock purchase option (like MSTR's stock). Hedge funds buy these bonds not like traditional fixed-income investors holding them for long periods, but rather using the stock market's volatility and employing complex strategies like "delta hedging" and "gamma scalping."
Delta hedging: Adjusting sensitivity to stock price changes. If MSTR's stock price rises by 10%, they need to adjust their positions to maintain a "neutral" state (such as shorting/selling some stock to keep market neutrality).
Gamma scalping: Profiting from the speed of stock price fluctuations. When stock prices are highly volatile, gamma strategies can help them earn profits from these fluctuations, gaining benefits with each rebalancing of their hedges.
Simply put, these hedge funds do not care about the "direction" of MSTR stock; they are more concerned with stock price volatility.
3. How do hedge funds make money from these bonds?
Buying at a low price: When Michael Saylor issues these convertible bonds, he usually "leaves some value behind," meaning the initial price of the bonds is lower than their actual value (which ensures the bonds can be issued smoothly). For example, if the "implied volatility" (IV) is set at 60, but the market later trades it at 70, hedge funds earn 10 points (which is a large profit in the bond market).
Volatility arbitrage: Hedge funds buy bonds (going long on volatility) and then short MSTR stock to hedge. As MSTR's stock price fluctuates, they continuously adjust, buying and selling shares as needed. The greater the volatility, the more adjustments occur, and the potential profits increase. If implied volatility (IV) rises, bond prices will also follow suit. Hedge funds can sell bonds for quick profits.
First-day price increase: These bonds usually increase in price on the first day of issuance. This is because their initial pricing is set low (to ensure market demand), and once the market realizes the "true" value of the bonds, they are re-priced. Hedge funds can quickly resell the bonds at a higher price for quick returns.
4. Why is Michael Saylor doing this?
The answer is simple: he needs cash to buy Bitcoin. By issuing convertible bonds, he can raise cash without issuing stock, thus avoiding dilution of shareholder stakes (at least for now). These bonds will only convert into stock when MSTR's stock price rises significantly. This means he can raise funds at a lower cost, and dilution will only occur when stock prices go up.
Hedge funds are very fond of this operation. They buy convertible bonds at low prices, profiting from the initial pricing differentials (equivalent to earning "free money"), and can also profit from the stock market's volatility. This is basically a "win-win" situation for both hedge funds and MSTR (at least for now).
1) Why is this "free money"?
Hedge funds are basically harvesting the "pricing errors" in the market.
They buy bonds at a low price,
Seeing bonds increase in price on the first day,
Then they hedge volatility through MSTR stock, making small profits each time the stock price fluctuates.
If MSTR's stock price rises sharply, they can still profit from the options within the bonds.
Hedge funds like this operation because they can take on large positions (hundreds of millions of dollars) with relatively low risk. For Saylor, this is a way to raise billions without directly diluting shareholders' stakes. Everyone benefits… until the market stops cooperating.
This is what is called "free money"—but only if you are a well-funded hedge fund with a Bloomberg terminal and a coffee addiction.
2) Is MicroStrategy a Bitcoin ETF? (Short answer: No)
Some critics say MicroStrategy is just a "luxury Bitcoin ETF." But that’s like calling Batman "just another rich guy in a suit." While both ETFs and MicroStrategy give you exposure to Bitcoin, they have one major difference: ETFs charge fees, while Saylor increases the amount of Bitcoin corresponding to your stock shares every year.
Why? Unlike ETFs that charge management fees, MicroStrategy's Bitcoin holdings increase every time Saylor completes a convertible bond transaction. So, if you hold shares of MicroStrategy, you actually get more Bitcoin shares every year. It's like you originally got a free medium pizza that suddenly turns into a large, just because the manager is in a good mood.
3) Why is this strategy effective, and when does the "music stop"?
Michael Saylor's strategy has immense potential but also comes with significant risks. Let's break it down step by step to see how he's walking the tightrope and when he might face major challenges.
MSTR balance sheet - Ratio of debt to Bitcoin
Bitcoin holdings: approximately $45 billion
Convertible debt: approximately $7.5 billion
Other debts (interest-bearing debt): approximately $2.5 billion (roughly interest debt)
Total debt: approximately $10 billion
Debt maturity: Approximately $1 billion in debt will mature in 2027-2028.
On paper, MicroStrategy's financial situation looks good, with its Bitcoin assets ($45 billion) exceeding its debts ($10 billion). But the hidden risk behind this is the volatility risk.
Assuming the price of Bitcoin drops by 80%, from the current $25,000 to $20,000, then the $45 billion Bitcoin held by MicroStrategy would shrink to about $10 billion, making the $10 billion debt burden particularly heavy.
But for Saylor to truly face a "margin call" situation, Bitcoin's price must fall to about $20,000. If that happens, MicroStrategy will face a liquidity crisis, and Saylor will have to make some tough decisions.
What happens if Bitcoin drops by 80%?
If Bitcoin tumbles, the situation can deteriorate rapidly, mainly because of the feedback loop between convertible bonds, stock prices, and Bitcoin prices.
Stock price decline: MSTR stock is closely related to Bitcoin prices. If Bitcoin drops, MSTR's stock will also plummet.
Convertible bondholders' choice: At this point, bondholders have the right to demand cash instead of converting the bonds into stock (as the stock has no value compared to the debt's face value).
Forced selling: If bondholders do not want stocks, Saylor will have to sell Bitcoin to repay the debt.
Market downward spiral: If Saylor sells Bitcoin, it will further depress Bitcoin prices, leading to more selling, creating a vicious cycle.
This amounts to entering "margin call hell"; Saylor may have to sell Bitcoin at a low price to maintain the company's solvency.
Key point: Saylor is essentially betting that Bitcoin will not drop below $20,000. If it falls below this price, he will enter "survival mode," and MicroStrategy may be forced to sell Bitcoin to repay debt.
How does Saylor mitigate risks?
Saylor is clearly not a fool; he has set up several "lifelines" just in case. Here are some strategies he has taken:
MicroStrategy's core software business
MicroStrategy continues to operate a profitable and cash-flow-stable software business.
This business generates enough cash to pay off smaller debt interest (about $50 million a year) without needing to sell Bitcoin.
This acts as the company's "safety net," allowing operations to continue without selling Bitcoin.
ATM (at-the-market) issuance
MicroStrategy quietly issues stock into the market through at-the-market stock sales.
This approach can provide cash to the company while avoiding a one-time large stock sale.
"Soft call" option (forced bond conversion)
If MicroStrategy's stock price reaches a certain level, Saylor can activate the "soft call" option.
This means he can force bondholders to convert their bonds into stock instead of demanding cash repayment.
Simply put, he can convert debt into equity at his discretion.
Substantial Bitcoin reserves
Currently, MicroStrategy holds approximately $45 billion in Bitcoin.
He has enough room to sell some Bitcoin without having to liquidate all his holdings.
This option is a last resort, but it still provides the company with emergency buffering.
5) Conclusion: The "loophole master" of finance
Whether you like him or hate him, Michael Saylor is playing a whole new game. He is not just holding Bitcoin; he has built a complete strategy around it. By using convertible bonds, he cleverly combines debt, equity, and volatility into a nearly unstoppable financial flywheel.
Every Bitcoin acquired by MicroStrategy is, in a sense, a form of "revenue" for the company. This shift in mindset may lead analysts to suddenly realize one day that MicroStrategy's true value far exceeds their expectations. If this happens, the company's stock price could surge.
Overall, Michael Saylor has found a way to play four-dimensional chess in a two-dimensional market. He issues zero-coupon bonds, uses the raised funds to buy Bitcoin, thereby increasing the per-share Bitcoin holdings. Although this strategy carries significant risks, if Bitcoin continues to rise, it could become one of the smartest moves in financial history.
More and more companies are also beginning to think about how to combine debt, equity, and Bitcoin. As this strategy becomes more popular, we may be witnessing the dawn of a new era in corporate finance.
So next time someone says convertible bonds are boring, tell them the story of Michael Saylor. Watch their eyes widen as they realize this is not just about bonds but a revolution redefining the entire financial rules.
