Written by: Sankalp Shangari
Translated by: Blockchain in Plain Language
1. From dull bonds to a spectacular comeback with Bitcoin
If you find traditional finance boring, you're not alone. However, cryptocurrency is different; it is destined to change how financial markets and fiat currency systems operate.
Sometimes, there will always be a character who breaks the mold and brings about a new change. Michael Saylor is such a person—he has transformed a seemingly ordinary financial instrument—convertible bonds—into a powerful Bitcoin acquisition machine. This could be seen as the "Ocean's Eleven" of finance, but Saylor isn't robbing banks; he's successfully combining market volatility, debt, and Bitcoin into a heist of the entire market.
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 a bond and stock combined—that's a convertible bond. It acts as both a loan and has the characteristics of a stock option. Companies raise funds by issuing these bonds, and investors buy them because they are flexible: you can hold them like a bond to earn stable interest or convert them into stocks if the stock price soars.
The key is: convertible bonds have a "conversion option," which means they can be converted into company stock at a specific condition in the future. This provides investors with more options and gives companies like MicroStrategy creative space.
Four factors affecting the price of convertible bonds:
1) Interest rates: If interest rates are high, bond prices are expensive.
2) Company credit: The riskier the company, the higher the return demanded by bondholders.
3) Stock prices: Since bonds can be converted into stocks, fluctuations in stock prices are important.
4) Volatility: The greater the stock's volatility, the higher the value of the conversion option.
The volatility is the most interesting part—Michael Saylor's strategy is to seize this point and quickly capitalize on fluctuations like riding 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 a hybrid vehicle, Saylor has found a way to turn it into an F1 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 persuade investors to lend him money, and at zero interest! How does he do it? He promises investors that they can convert the bonds into MicroStrategy's stock in the future, and the conversion price is far higher than 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 as much as 50%. This means investors have to wait for the stock price to surge to convert the bonds into stocks. This also gives Saylor a buffer period to avoid equity dilution until the stock price skyrockets.
C. Obtain cash and purchase Bitcoin
Saylor's core strategy is to use the cash obtained from selling bonds to buy Bitcoin. In other words, he is exchanging debt for digital gold. This is not just a bet on Bitcoin's future but also leverages stock price volatility to acquire more Bitcoin. If this sounds like a financial version of judo, it indeed is.
D. Achieve long-term profits through "value dilution"
Typically, issuing more stock dilutes existing shareholders' equity. But Saylor does it differently: by buying and holding Bitcoin, he increases MicroStrategy's net asset value (NAV) while increasing the amount of Bitcoin per share. It's like buying a pizza and cutting it into more slices, but you end up with more pizza in the end.
Here’s a concise breakdown of the "magic" steps:
Assuming the initial state of MSTR:
Market capitalization = $1 million
Bitcoin holdings = $300,000
Bitcoin to stock ratio = $300,000 / $1 million = 0.3
Stock issuance:
MSTR issues $2 million in stocks, bringing the total market capitalization to $3 million ($1 million + $2 million).
Use this $2 million to purchase an equivalent value 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 stocks to increase the company's market value and then using that capital to buy more Bitcoin, MicroStrategy increases the Bitcoin per share ratio without directly diluting existing shareholders' equity. This enhances the attractiveness of the company's stock price when Bitcoin prices rise.
This mechanism can continue to function as long as the market is willing to give MSTR a premium based on its Bitcoin holdings. If market confidence decreases, this premium may disappear (or even reverse), leading to a sharp decline in stock prices.
In simple terms, it’s like exchanging "cheap paper" (stocks) for "hard currency" (Bitcoin). This strategy can work until the market no longer values this "paper."
"Magic, isn't it?" Of course—but only if the market continues to cooperate.
Wait, who would buy these things? (Hint: not grandma)
You're right—this is a classic hedge fund operation. Let’s take a closer 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 grandmother's retirement fund.
Why? Because hedge funds don’t care about interest payments. What they are looking for is something more profitable: volatility.
These zero-coupon bonds (which do not pay interest) come with an additional stock purchase option (like MSTR's stock). Hedge funds buy these bonds not to hold them long-term like traditional fixed-income investors, but to exploit stock market volatility using 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 (e.g., shorting/selling some stock to maintain market neutrality).
Gamma scalping: Profiting from the speed of stock price fluctuations. When stock prices are volatile, gamma strategies can help them earn profits from these fluctuations, with gains every time they adjust their hedges.
In simple terms, these hedge funds do not care about the "up or down direction" of MSTR stock; they are more focused on stock price volatility.
3. How do hedge funds make money from these bonds?
Buy low: When Michael Saylor issues these convertible bonds, he typically "leaves some value," meaning the bonds' initial prices are below their actual value (ensuring the bonds can be successfully issued). For example, if the "implied volatility" (IV) is set at 60, but the market later trades it to 70, hedge funds make 10 points (which is a significant 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 constantly adjust, buying and selling stocks as needed. The greater the volatility, the more adjustments are made, leading to potentially greater profits. If implied volatility (IV) rises, the bond prices will also increase. Hedge funds can sell bonds for quick profits.
First-day increase: These bonds usually increase in price on the first day after issuance. This is because they are initially priced low (to ensure market demand), and once the market realizes the "true" value of the bonds, they will be repriced. Hedge funds can resell the bonds at a higher price in a short time, yielding 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 stocks, thus avoiding shareholder dilution (at least for now). These bonds only convert into stock when MSTR's stock price rises significantly. This means he can raise funds at a lower cost and only dilute equity when the stock price goes up.
Hedge funds are very fond of this operation. They buy convertible bonds at low prices, profiting from the initial pricing gap (essentially earning "free money"), and can also profit from stock market volatility. This is essentially a "win-win" situation for both hedge funds and MSTR (at least for now).
1) Why is this "free money"?
Hedge funds are essentially harvesting the "pricing errors" in the market.
They buy bonds at low prices,
Seeing bond prices rise on the first day,
Then hedge against volatility with MSTR stock, making some small profits every time the stock price fluctuates.
If MSTR's stock price surges, they can still profit from the options in the bonds.
Hedge funds like this operation because they can take huge positions (hundreds of millions of dollars) with relatively low risk. For Saylor, this is a way to raise billions of dollars without directly diluting shareholder equity. Everyone can benefit from it…until the market no longer cooperates.
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 claim MicroStrategy is just a "luxury version of a 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 a big difference: ETFs charge fees, while Saylor increases the amount of Bitcoin corresponding to the shares you hold every year.
Why? Unlike those ETFs that charge management fees, MicroStrategy's Bitcoin holdings increase each time Saylor completes a convertible bond operation. So if you hold MicroStrategy stock, you actually receive more Bitcoin shares each year. It’s like getting a free medium pizza that suddenly becomes 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 huge potential but also comes with considerable risks. Let's break it down step by step to see how he walks the tightrope and when he might face significant 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 (mostly interest debts)
Total debt: approximately $10 billion
Debt maturity timeline: About $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). However, the hidden risk is volatility risk.
Assuming Bitcoin prices drop by 80%, from the current $25,000 to $20,000, the $45 billion Bitcoin that MicroStrategy holds would shrink to about $10 billion, making the $10 billion debt burden seem particularly heavy.
But for Saylor to truly face a "margin call" situation, Bitcoin's price would have to drop to around $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 plummets, the situation could deteriorate rapidly, mainly due to the feedback loop between convertible bonds, stock prices, and Bitcoin prices.
Stock prices fall: MSTR stock and Bitcoin prices are closely related. If Bitcoin falls, MSTR's stock will also drop significantly.
Choices for convertible bondholders: At this point, bondholders have the right to demand cash instead of converting their bonds into stocks (since stocks have no value compared to the debt's face value).
Forced selling: If bondholders do not want stocks, Saylor has to sell Bitcoin to repay the debt.
Market downward spiral: If Saylor sells Bitcoin, it will further depress Bitcoin prices, leading to more selling and creating a vicious cycle.
This is akin to entering "margin call hell," where 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 fall below $20,000. If it does, he will enter "survival mode," and MicroStrategy may be forced to sell Bitcoin to repay its debts.
How does Saylor reduce risk?
Saylor is clearly no fool; he has established several "lifelines" just in case. Here are some strategies he has taken:
MicroStrategy's core software business
MicroStrategy continues to run a profitable and cash-flow stable software business.
This business generates enough cash to pay the smaller interest on debts (about $50 million a year) without having to sell Bitcoin.
This is like a company's "safety net," allowing it to continue operations without selling Bitcoin.
ATM (at-the-market) issuance
MicroStrategy quietly issues stocks into the market through direct stock sales.
This approach can bring cash to the company while avoiding a large one-time stock sale.
"Soft put" option (mandatory bond conversion)
If MicroStrategy's stock price reaches a certain level, Saylor can activate the "soft put" option.
This means he can force bondholders to convert their bonds into stocks rather than demanding cash repayment.
In simple terms, he can convert debt to equity at his discretion.
Deep Bitcoin reserves
Currently, MicroStrategy holds approximately $45 billion in Bitcoin.
He has enough room to sell some Bitcoin without having to liquidate all holdings.
This option is a last resort, but it still provides the company with a buffer for emergencies.
5. Conclusion: The "master of loopholes" in 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 financial flywheel that is nearly unstoppable.
Every Bitcoin acquired by MicroStrategy is, in a sense, a form of "profit" for the company. This shift in mindset may lead analysts to suddenly realize that MicroStrategy's true value far exceeds their expectations. If so, the company's stock price could rise significantly.
Overall, Michael Saylor has found a way to play four-dimensional chess in a two-dimensional market. He issues zero-coupon bonds, uses the funds raised to buy Bitcoin, thereby increasing the Bitcoin per share holdings. While this strategy is not without risk, if Bitcoin continues to rise, it could become one of the smartest moves in financial history.
More and more companies are also starting 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 in redefining the entire financial rules.
