
Michael Saylor’s MicroStrategy, a business-intelligence software company turned Bitcoin giant, has bet heavily on the cryptocurrency.
company holds approximately $48 billion worth of BitcoinPartially financed by the issuance of $6.2 billion of convertible bonds due in 2024 – the largest single-company convertible debt issuance in history.
Surprisingly, supporters of these risky financial instruments include conservative institutions such as Allianz Global Investors, State Street and Calamos Investments.
according to a Wall Street Journal reportThis has raised eyebrows, as such companies are traditionally not 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 increased by 145% since the end of 2023, while MicroStrategy Shares have skyrocketed Up 450%, trading at double the value of the bitcoins he holds.
The demand for these bonds arises due to their specific characteristics.
Some pay no interest but require MicroStrategy’s stock to climb 55% before it can be converted into equity.
For conservative investors, these bonds offer a way to gain exposure to Bitcoin while limiting downside risks.
“You can look at this as a sleek way to play Bitcoin,” Eli Parse, co-chief investment officer at Kalamos Investments, which owns MicroStrategy’s convertible bonds based on current prices and recent filings, said in a WSJ report. Owns $456 million.
“But if you don’t think Bitcoin has a chance to go up, you probably don’t want to be in any of MicroStrategy’s capital structures,” he says.
Convertible Arbitrage: The Hedge Fund’s Playbook for Volatility
MicroStrategy’s bonds have also attracted hedge funds using a strategy called convertible arbitrage.
This involves buying convertible bonds while shorting a company’s stock to profit from price fluctuations.
James Buckham, co-chief investment officer at Wellesley Asset Management, said, “Convertible bond owners have the option to go long, so they’re always selling when the stock goes high and buying when the stock goes low. ” Mediation strategy.
However, his company, which specializes in convertible-debt investments, does not own any MicroStrategy bonds due to the high risk.
Valuation Concerns and Debt Load Constraints for MicroStrategy
While Bitcoin’s rally has fueled enthusiasm, critics argue that MicroStrategy “play with fire,
Critics compare the company’s trajectory to failed companies such as Enron and WorldCom, which issued significant convertible debt before collapsing.
In addition to Bitcoin’s notorious volatility, MicroStrategy faces additional hurdles such as valuation concerns and debt load.
According to analysts, at its peak, the stock traded at a price-to-earnings (P/E) ratio of 133.7x FY25 earnings – an unsustainable level.
Additionally, the company plans to issue an additional $18 billion of debt over three years to finance Bitcoin purchases, which could put a strain on its financial health.
Bitcoin-linked convertible bonds issued by crypto companies including MicroStrategy have flooded the market.
However, prices for MicroStrategy’s most recent $3 billion bond issuance have fallen sharply, reflecting declining demand.
“The market is still digesting the crypto-convert wave that hit in the fourth quarter,” said Brian Goldstein, who runs the convertible practice at advisory firm Matthews South.
“I don’t think it will continue with the same intensity, but the market is still bid up for fairly 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.
According to Bank of America, crypto-linked companies issued more than $14 billion of convertible bonds globally in 2024.
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 have warned that its strategy is overly dependent on Bitcoin’s continued growth.
For now, MicroStrategy’s convertible bonds remain a high-stakes gamble for investors looking to make a big bet on the future of the cryptocurrency.
It remains to be seen whether this gamble pays off or becomes a wake-up call for the ages.
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