From Boring Bonds to Bitcoin’s Exciting Comeback
If you find traditional finance boring, you are not alone. However, cryptocurrencies are different, destined to change the operation of financial markets and fiat currency systems.
Sometimes, there is always a figure who goes against the norm, breaking conventions and bringing about new changes. Michael Saylor is one such person – he has turned a seemingly ordinary financial tool – convertible bonds, into a powerful Bitcoin acquisition machine. This can be seen as the financial world’s “Ocean’s Eleven”, but Saylor is not robbing banks, instead, he combines market volatility, debt, and Bitcoin to successfully conduct a “robbery” 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 the financial field.
Imagine if bonds and stocks are combined, you get convertible bonds. They are both loans and have characteristics of stock options. Companies raise funds by issuing these bonds, and investors buy them because of their flexibility: you can hold them like bonds, earn stable interest, or convert them into stocks if the stock price soars.
The key is: convertible bonds have a “conversion option”, meaning they can be converted into company stocks at a specific time in the future under certain conditions. This gives investors more choices and provides creative space for companies like MicroStrategy.
Four factors that influence convertible bond prices:
– Interest rates: if interest rates are high, bond prices are expensive.
– Company credit: the riskier the company, the higher the return bondholders demand.
– Stock price: since bonds can be converted into stocks, stock price changes are crucial.
– Volatility: the greater the stock volatility, the higher the value of the conversion option.
Among these, volatility is the most interesting part – and Michael Saylor’s strategy is to seize this point, rapidly utilizing volatility.
2) Saylor’s Secret Weapon: Convertible Bonds “Black Technology” and Turning Volatility into Wealth
If convertible bonds are a hybrid car, Saylor has found a way to turn it into an F1 race car. Here is how it works in four “simple” steps (of course, assuming you have been in the financial industry for 20 years):
A. Issue zero-coupon convertible bonds
Saylor’s latest operation is: convincing investors to lend him money at zero interest! How does he do it? He promises investors the option to convert the bonds into MicroStrategy stock in the future, at a price far above the current stock price. Investors are attracted to this “conversion option” and are willing to lend money at zero interest.
B. Earn huge premiums
The “conversion price” of these bonds is set much higher than the current stock price, sometimes up to 50%. This means investors have to wait for a significant stock price increase to convert the bonds into stocks. This also gives Saylor a buffer period to avoid stock dilution until the stock price skyrockets.
C. Get cash, buy Bitcoin
Saylor’s core strategy is: use the cash from selling bonds to buy Bitcoin. In other words, he is exchanging debt for digital gold. This not only bets on the future of Bitcoin but also leverages stock price volatility to acquire more Bitcoin. If this sounds like financial judo, it is.
D. Achieve long-term profits through “value dilution”
Usually, issuing more stocks dilutes existing shareholders’ shares. But Saylor does it differently: by buying and holding Bitcoin, he increases MicroStrategy’s net asset value (NAV) and increases the content of Bitcoin per share. It’s like buying a pizza, cutting it into more slices, but ending up with more pizza.
This is a concise analysis of the “magic” steps:
Assuming MSTR’s initial state:
Market value = $1 million
Bitcoin holdings = $300,000
Bitcoin-to-stock ratio = $300,000 / $1 million = 0.3
Stock issuance:
MSTR issues an additional $2 million of stocks, total market value becomes $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 core of “financial engineering”. By issuing stocks to increase the company’s market value, then using these funds to buy more Bitcoin, MicroStrategy increases the ratio of Bitcoin per share while not directly diluting existing shareholders’ shares. This can make the company’s stock more attractive as Bitcoin prices rise.
This mechanism can continue as long as the market is willing to give MicroStrategy a premium based on its Bitcoin holdings. If market confidence falls, this premium may disappear (or even reverse), leading to a significant drop in stock prices.
In simple terms, this is like exchanging “cheap paper” (stocks) for “hard currency” (Bitcoin). This strategy works until the market no longer values these “papers”.
“Magic, isn’t it?” Of course – but only if the market continues to cooperate.
Wait, who would buy these things? (Hint: not grandma)
You are right – these are classic operations for hedge funds. Let’s take a closer look at how these operations work, helping those who are not familiar understand the principles behind them.
2. Who buys 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. What they care about is a more profitable thing: volatility.
These zero-interest bonds (not paying interest) come with an additional stock purchase option (like MSTR’s stock). Hedge funds buy these bonds, not like traditional fixed-income investors who hold for the long term, but utilize the volatility of the stock market, employing complex strategies like “delta hedging” and “gamma scalping”.
Delta Hedging: Adjusting the sensitivity to stock price changes. If MSTR’s stock price rises by 10%, they need to adjust their position to maintain a “neutral” state (for example, short-selling / selling some stocks to maintain market neutrality).
Gamma Scalping: Profiting from the speed of stock price volatility. When stock prices fluctuate dramatically, gamma strategies can help them profit from these fluctuations, making profits every time they adjust their hedges.
In simple terms, these hedge funds are not concerned about the “direction” of MSTR’s stock price, but rather focus on the volatility of the stock price.
3. How do hedge funds make money from these bonds?
Low-price purchases: When Michael Saylor issues these convertible bonds, he usually “leaves some value behind”, meaning the initial price of the bond is lower than its actual value (to ensure smooth issuance). For example, if the “implied volatility” (IV) is set at 60, but the market later trades it at 70, hedge funds make a profit of 10 points (which is a significant profit in the bond market).
Volatility arbitrage: Hedge funds buy bonds (long volatility) and then short sell MSTR stocks to hedge. As MSTR’s stock price fluctuates, they continuously adjust, buying and selling stocks as needed. The greater the volatility, the more adjustments are made, and the potential profit increases. If the implied volatility (IV) rises, the bond price also rises. Hedge funds can sell the bonds quickly to make a profit.
First-day price increase: These bonds usually increase in price on the first day after issuance. This is because their initial pricing is lower (to ensure market demand), and once the market realizes the “true” value of the bond, it will reprice. Hedge funds can resell them at a higher price in a short time.Bonds, Getting Quick Returns
4. Why did Michael Saylor do this?
The answer is simple: he needed cash to buy Bitcoin. By issuing convertible bonds, he could raise cash without issuing stock, thus avoiding dilution of shareholders (at least for now). These bonds only convert to stock when MSTR’s stock price rises significantly. This means he can raise funds at a lower cost and only dilute the stock when the price goes up.
Hedge funds are very fond of this operation. They buy convertible bonds at a low price, profit from the initial pricing difference (essentially earning “free money”), and can also make money from stock market fluctuations. This is basically a “win-win” situation for hedge funds and MSTR (at least for now).
1) Why is this “free money”?
Hedge funds are essentially harvesting “pricing errors” in the market.
They buy bonds at a low price,
See the bond price rise on the first day,
And make money from stock price hedging through MSTR every time the stock price fluctuates.
If MSTR’s stock price soars, they can still profit from the options in the bonds.
Hedge funds like this operation because they can take on huge positions (up to tens of millions of dollars) with relatively low risk. For Saylor, this is a way to raise billions of dollars without directly diluting shareholders’ stakes. Everyone can benefit from it… until the market no longer cooperates.
This is the so-called “free money” – but only if you are a well-funded, Bloomberg-terminal-wielding, coffee-addicted hedge fund.
2) Is MicroStrategy just a Bitcoin ETF? (Short answer: No)
Some critics think MicroStrategy is just a “luxury version of a Bitcoin ETF.” But this is like calling Batman “just another rich man in a suit.” While ETFs and MicroStrategy both give you exposure to Bitcoin, they have one major difference: ETFs charge fees, while Saylor increases the amount of Bitcoin per share of stock you hold every year without charging fees.
Why is that? Unlike ETFs that charge management fees, MicroStrategy’s Bitcoin holdings increase with each convertible bond operation that Saylor completes. So, if you hold MicroStrategy stock, you actually get more Bitcoin per share 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 enormous potential, but it 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 significant challenges.
MSTR Balance Sheet – Debt to Bitcoin Ratio
Bitcoin holdings: about $45 billion
Convertible debt: about $7.5 billion
Other debt (interest-bearing debt): about $2.5 billion (roughly interest-bearing debt)
Total debt: about $10 billion
Debt maturity: about $1 billion in debt will come due in 2027-2028.
On paper, MicroStrategy’s financial position looks good, with its Bitcoin assets ($45 billion) exceeding its debt ($10 billion). But the hidden risk behind this is volatility risk.
Assuming the price of Bitcoin falls by 80%, from the current $25,000 to $20,000, MicroStrategy’s $45 billion Bitcoin holdings would shrink to about $10 billion, making the $10 billion debt burden particularly heavy.
But for Saylor to truly face a “margin call” scenario, the price of Bitcoin would have to fall to about $20,000. If that happens, MicroStrategy will be in a liquidity crisis, and Saylor will have to make some tough decisions.
What happens if Bitcoin falls by 80%?
If Bitcoin plummets, the situation could quickly deteriorate, mainly because there is a feedback loop between convertible bonds, stock prices, and Bitcoin prices.
Stock price decline: MSTR’s stock price is closely correlated with the price of Bitcoin. If Bitcoin falls, MSTR’s stock will also plummet.
Convertible bondholder choices: At this point, bondholders have the right to demand cash instead of converting the bonds into stock (because the stock is essentially worthless compared to the debt face value).
Forced selling: If bondholders don’t want stock, Saylor will have to sell Bitcoin to repay the debt.
Market spiral downward: If Saylor sells Bitcoin, this will further depress the price of Bitcoin, leading to more selling pressure, creating a vicious cycle.
This is essentially entering “margin call hell”, where Saylor may have to sell Bitcoin at a low price to maintain the company’s debt repayment ability.
Key point: Saylor is essentially betting that Bitcoin won’t fall below $20,000. If it does, he will enter a “life or death” mode, and MicroStrategy may be forced to sell Bitcoin to repay the debt.
How does Saylor mitigate the risk?
Saylor is clearly not a fool, and he has devised several “life-saving ropes” in case of emergency. Here are some strategies he has taken:
MicroStrategy’s core software business
MicroStrategy still operates a profitable and cash-flow-stable software business.
This business generates enough cash to pay small amounts of debt interest ($50 million a year) without selling Bitcoin.
This is like the company’s “safety net” to keep operations running without selling Bitcoin.
ATM (or market) issuance
MicroStrategy quietly issues shares to the market through ATM stock sales.
This method can bring cash to the company while avoiding a large one-off sale of stock.
“Soft put” options (mandatory bond conversion)
If MicroStrategy’s stock price reaches a certain level, Saylor can activate “soft put” options.
This means he can force bondholders to convert the bonds into stock instead of demanding cash repayment.
In simple terms, he can convert debt into equity according to his own will.
Deep reserves of Bitcoin
Currently, MicroStrategy holds about $45 billion in Bitcoin.
He has enough room to sell some Bitcoin without liquidating all of his holdings.
This option is a last resort, but it still provides the company with emergency buffer space.
5. Conclusion: The “Master of Loopholes” in the Financial Field
Love him or hate him, Michael Saylor is playing a whole new game. He is not just holding Bitcoin, but building a complete strategy around Bitcoin. By using convertible bonds, he cleverly combines debt, stock, and volatility into an almost unstoppable financial flywheel.
Each Bitcoin acquired by MicroStrategy, in a sense, is a “profit” for the company. This shift in mindset may one day make analysts suddenly realize that MicroStrategy’s true value far exceeds their expectations. If that’s the case, the company’s stock price could soar.
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 amount of Bitcoin per share. While this strategy carries significant risks, if Bitcoin continues to rise, it could be one of the smartest moves in financial history.
More and more companies are also beginning to think about how to integrate debt, equity, and Bitcoin. With the proliferation of this strategy, we may be witnessing the advent of a new era in corporate finance.
So the next time someone says convertible bonds are boring, tell them Michael Saylor’s story. Watch as their eyes widen, realizing that this is not just about bonds, but about revolutionizing the entire financial rulebook.