Is it now popular for companies to add “cryptocurrency” to their financial reports to make big profits?
Hello!
Newton is famous for discovering gravity, but in his time, he was more interested in another field: the alchemy of finance, or the pursuit of turning lead into gold. This pursuit even led him into theological studies. Modern finance seems to echo his interests—through financial engineering, we are in an era of “turning lead into gold,” simply by combining the right elements.
In today’s article, Saurabh provides a detailed analysis of how companies achieve a premium on their actual value by adding cryptocurrency to their balance sheets. Take MicroStrategy as an example: the company’s quarterly revenue is just over $100 million, yet it holds nearly $10.9 billion in Bitcoin. Currently, 80 companies worldwide are exploring how to incorporate cryptocurrency into their balance sheets. Traditional financial institutions show great interest and are paying a premium for the volatility and potential returns of these stocks.
Saurabh also analyzes the rise of convertible bonds, a financial instrument that has helped create this prosperous ecosystem, while exploring the risks involved and those companies attempting to incorporate other cryptocurrencies into their balance sheets.
Let’s get to the point!
A software/business intelligence company with a quarterly revenue of only $111 million has a market capitalization of up to $109 billion. How is this achieved? The answer is: it used other people’s money to buy Bitcoin. The market currently values its Bitcoin holdings at a premium of up to 73%. What kind of “alchemy” is behind this?
MicroStrategy (now called Strategy) has created a financial mechanism that allows it to borrow money at almost zero cost to purchase Bitcoin. Taking its $3 billion convertible bond issued in November 2024 as an example, here’s how it works:
The company issued a convertible bond with a 0% coupon, which means that bondholders will not receive regular interest payments. Instead, each $1,000 bond can be converted into 1.4872 shares of Strategy stock, provided that the stock price rises to $672.40 or higher before expiration.
When these bonds were issued, Strategy’s stock price was $433.80, so the stock price needs to increase by 55% to be profitable for conversion. If the stock price never reaches this level, bondholders will get back their $1,000 after five years. However, if Strategy’s stock price skyrockets (which usually happens when Bitcoin prices rise), bondholders can convert their bonds into stocks and capture all the upside gains.
The cleverness of this mechanism lies in the fact that bondholders are effectively betting on Bitcoin’s performance while enjoying downside protection that direct Bitcoin holders do not have. If Bitcoin crashes, they still get back their principal because bonds have priority over stocks in bankruptcy liquidation. Meanwhile, Strategy can borrow $3 billion at zero cost and immediately use those funds to buy more Bitcoin.
However, the key trigger point of this mechanism is: starting from December 2026 (just two years after issuance), if Strategy’s stock price exceeds $874.12 (130% of the conversion price) for a certain period, the company can force an early redemption of these bonds. This “redemption clause” means that if Bitcoin drives the stock price high enough, Strategy can compel bondholders to convert their bonds into stocks or redeem funds early, facilitating refinancing on better terms.
This strategy works because Bitcoin has achieved an average annual growth rate of about 85% over the past 13 years, with an average annual growth rate of 58% over the past five years. The company bets that Bitcoin’s growth rate will far exceed the necessary 55% stock price increase to trigger bond conversion. They have already demonstrated the success of this strategy by successfully redeeming early issued bonds ahead of schedule, saving millions of dollars in interest expenses.
At the core of this structure are three different series of perpetual preferred shares: STRF, STRK, and STRD, each tailored to different types of investors.
STRF:
Perpetual preferred shares that offer a 10% cumulative dividend and have the highest priority. If Strategy fails to pay dividends, the company must pay all unpaid STRF dividends before paying any dividends to other shareholders. Additionally, as a penalty, the dividend rate will increase.
STRK:
Perpetual preferred shares that offer an 8% cumulative dividend, with medium priority. Unpaid dividends accumulate and must be fully paid before any earnings are distributed to common stock shareholders. Furthermore, STRK includes the right to convert into common stock.
STRD:
Perpetual preferred shares that offer a 10% non-cumulative dividend and have the lowest priority. The higher dividend rate compensates for the greater risk—if Strategy skips a payment, those dividends will be permanently lost with no requirement for compensation.
Perpetual preferred shares enable Strategy to raise capital similar to equity while paying perpetual dividends akin to bonds. Each series is custom-designed based on investors’ risk preferences. The cumulative dividend feature protects holders of STRF and STRK, ensuring they ultimately receive all unpaid dividends, while STRD provides higher current returns without a safeguard for unpaid dividends.
Performance of Strategy
MicroStrategy has been raising funds to purchase Bitcoin since August 2020. Since then, the price of Bitcoin has skyrocketed from $11,500 to $108,000, an increase of approximately nine times. At the same time, MicroStrategy’s stock price has risen from $13 to $370, nearly a 30-fold increase.
It is noteworthy that MicroStrategy’s regular business has shown no growth. Their quarterly revenue remains consistent at between $100 million and $135 million. The only change is that they borrowed money to buy Bitcoin. Currently, they hold 582,000 Bitcoins, worth approximately $63 billion. Their stock market capitalization is about $109 billion, which is 73% higher than the actual value of their Bitcoin holdings. Investors are willing to pay an additional premium just to indirectly hold Bitcoin through MicroStrategy’s stock.
Image /bitcointreasuries.net
As previously mentioned, MicroStrategy funds its Bitcoin purchases through issuing new shares. Since they began buying Bitcoin, the number of company shares has nearly tripled, increasing from 95.8 million to 279.5 million, a growth of 191%.
Image /MicroStrategy documents
Typically, issuing such a large number of new shares would harm existing shareholders since everyone’s stake in the company would be diluted. However, despite the 191% increase in the number of shares, the stock price has soared by 2,900%. This means that although shareholders’ proportion of ownership in the company has decreased, the value per share has significantly increased, resulting in overall profits for them.
MicroStrategy’s successful model gains popularity
Many companies have begun to emulate MicroStrategy’s successful model by holding Bitcoin as a corporate asset. One recent example is Twenty One (XXI). This is a special purpose acquisition company (SPAC) led by Jack Mallers, supported by Cantor Fitzgerald, Tether, and SoftBank, with Brandon Lutnick (son of the U.S. Secretary of Commerce) behind it. Unlike MicroStrategy, Twenty One is not publicly traded. The only way to participate in the public market is through Cantor Equity Partners (CEP), which exchanged $100 million for a 2.7% stake in XXI.
Twenty One holds 37,230 Bitcoins. Since CEP owns 2.7% of Twenty One, this effectively means CEP controls approximately 1,005 Bitcoins (valued at about $108 million, with each Bitcoin priced at $108,000).
However, the market capitalization of CEP’s shares is as high as $486 million, which is 4.8 times the actual value of its Bitcoin! After the announcement of its Bitcoin correlation, CEP’s stock price surged from $10 to about $60.
This enormous premium means that investors paid $433 million for an exposure of $92 million to Bitcoin. As more companies like this emerge and increase their Bitcoin holdings, market forces will eventually drive these premiums back to more reasonable levels, although no one knows when this will occur or what constitutes a “reasonable level.”
An obvious question is: why do these companies have a premium? Why are investors willing to pay a premium to buy these companies’ stocks instead of directly purchasing Bitcoin from the market for exposure? The answer may lie in “optionality.” Who is funding MicroStrategy’s Bitcoin purchases? Primarily those hedge funds seeking “risk-free arbitrage” (delta-neutral strategies).
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Value Chain
Careful consideration reveals that this transaction is very similar to Grayscale’s Bitcoin Trust (GBTC). In the past, Grayscale’s Bitcoin Trust has also traded at a premium to Bitcoin because it is closed-end (investors cannot withdraw Bitcoin until it is converted to an ETF).
Therefore, investors deposit Bitcoin into Grayscale and sell their publicly traded GBTC shares. As mentioned earlier, MicroStrategy’s bondholders can enjoy a compound annual growth rate (CAGR) of over 9%.
But how significant is this risk? MicroStrategy’s annual interest burden totals $34 million, while the gross profit for the fiscal year 2024 is $334 million, enough to repay the debt. MicroStrategy has issued convertible bonds linked to a four-year Bitcoin cycle, with a long enough maturity to mitigate the risk of price declines. Therefore, as long as Bitcoin rises by more than 30% within four years, the new stock issuance can easily cover redemption costs.
When redeeming these convertible bonds, MicroStrategy can simply issue new shares to bondholders. Bondholders will be paid based on the reference stock price at the time of issuance, which is about 30-50% higher than the stock price at the time of bond issuance. This only becomes an issue if the stock price falls below the conversion price. In that case, MicroStrategy must repay in cash, which can be done by raising new debt under more favorable terms to repay early debts or by selling Bitcoin to raise cash.
When the Music Stops
These convertible bonds are primarily targeted at hedge funds seeking asymmetric risk-return opportunities and institutional bond traders, rather than retail investors or traditional stock funds.
From their perspective, these financial instruments offer a choice of “win big if you win, lose limited if you lose,” which fits very well with their risk management framework. If Bitcoin achieves the expected 30%-50% increase within two to three years, they can choose to convert the bonds; if the market performs poorly, they can still recover 100% of their principal, although they may lose some value due to inflation.
The advantages of this structure lie in solving the practical problems of institutional investors. Many hedge funds and pension funds lack the infrastructure to hold cryptocurrencies directly or cannot purchase Bitcoin directly due to investment restrictions. These convertible bonds provide them with a compliant “back door” entry into the crypto market while maintaining the downside protection required for fixed-income assets.
However, these advantages are likely to be temporary. As regulations become clearer and more direct crypto investment tools (such as custody solutions, regulated exchanges, and clearer accounting standards) emerge, the demand for these complex detour methods will gradually diminish. The 73% premium investors paid through MicroStrategy to gain Bitcoin exposure may decrease with the emergence of more direct alternative solutions.
We have seen similar situations before. In the past, opportunistic managers took advantage of Grayscale’s Bitcoin Trust (GBTC) premium – buying Bitcoin and depositing it into Grayscale’s trust, then selling GBTC shares on the secondary market at a premium of 20%-50% above the net asset value (NAV). However, as more people began to imitate, by the end of 2022, GBTC’s premium turned into a record 50% discount. This cycle indicates that stock plays supported by cryptocurrencies will eventually be arbitraged away if there is no sustainable income support for repeated financing.
The key question is how long this situation can last and who can stand firm when the premium collapses. Companies with a strong business foundation and conservative leverage ratios may withstand this shift, while those lacking sustainable revenue sources or competitive barriers, only chasing crypto assets, may face sell-offs due to dilution after the speculative fervor fades.
Currently, the music is still playing, and everyone is dancing. Institutional capital is pouring in, premiums are expanding, and more and more companies are announcing Bitcoin and cryptocurrency asset strategies every week. However, smart investors know this is a trade, not a long-term investment logic. The surviving companies will be those that create lasting value beyond their cryptocurrency holdings through this window of opportunity.
The transformation of corporate financial management may be permanent, but the extraordinary premiums we see today are not. The question is, are you ready to profit from this trend, or are you just another player hoping to find a seat when the music stops.
This article is reprinted in collaboration with: Deep Tide