### 1. From Dull Bonds to Bitcoin’s Spectacular Comeback
If you think traditional finance is boring, you’re not alone. However, cryptocurrencies are different, and they are destined to change the way financial markets and fiat systems operate.
Sometimes, there’s always someone who doesn’t play by the rules, someone who breaks conventions and brings about a whole new change. Michael Saylor is one such person—he turned a seemingly mundane financial instrument—a convertible bond—into a powerful Bitcoin acquisition machine. This can be seen as a “Ocean’s Eleven” for the financial world, except that Saylor is not robbing a bank; instead, he combined market volatility, debt, and Bitcoin to successfully “rob” the entire market.
#### 1) What is a Convertible Bond (and Why Should You Care)?
A convertible bond sounds as dull as a tax seminar, but it’s actually a very interesting tool in the financial world.
Imagine a bond and a stock combined into one—that’s a convertible bond. It is both a loan and has stock options. Companies issue these bonds to raise funds, and investors buy them because they offer flexibility: You can hold them like a bond, earning steady interest, or if the stock price surges, you can convert them into stocks.
The key point is: convertible bonds have a “conversion option,” meaning they can be converted into company stock at a specific time in the future, under certain conditions. This gives investors more choices, while also offering creative space for companies like MicroStrategy.
**Four Factors Influencing Convertible Bond Prices**:
1. **Interest Rates**: When interest rates are high, bond prices are expensive.
2. **Company Credit**: The riskier the company, the higher the return bondholders demand.
3. **Stock Prices**: Since the bond can be converted into stock, stock price fluctuations are important.
4. **Volatility**: The greater the volatility in the stock, the higher the value of the conversion option.
Among these, **volatility** is the most interesting part—and Michael Saylor’s strategy capitalized on this point, quickly taking advantage of market volatility like riding a rollercoaster.
#### 2) Saylor’s Secret Weapon: The “Black Technology” of Convertible Bonds and How to Turn Volatility into Wealth
If convertible bonds were a hybrid car, Saylor figured out how to turn it into an F1 race car. Here are the four “simple” steps of how it works (assuming, of course, you’ve been in the finance industry for 20 years):
**A. Issuing Zero-Coupon Convertible Bonds**
Saylor’s latest move was to convince investors to lend him money with zero interest! How did he do it? He promised that investors could convert these bonds into MicroStrategy stock in the future, at a conversion price much higher than the current stock price. Investors found the “conversion option” so enticing that they were willing to lend money at zero interest.
**B. Earning Huge Premiums**
The “conversion price” of these bonds is set much higher than the current stock price, sometimes as much as 50% higher. In other words, investors need the stock price to skyrocket before they can convert the bond into stock. This gives Saylor a buffer, preventing dilution of equity until the stock price rockets upwards.
**C. Getting Cash and Buying Bitcoin**
Saylor’s core strategy is to use the cash raised from selling bonds to buy Bitcoin. In other words, he’s using debt to acquire digital gold. This is not just a bet on Bitcoin’s future, but also uses stock price volatility as leverage to acquire more Bitcoin. If this sounds like a financial version of judo, that’s because it is.
**D. Achieving Long-Term Profits through “Appreciation Dilution”**
Normally, issuing more stock dilutes the ownership of existing shareholders. But Saylor does it differently: he enhances MicroStrategy’s net asset value (NAV) by purchasing and holding Bitcoin, thereby increasing the Bitcoin content per share. It’s like buying a pizza and cutting it into more slices, but ending up with more pizza in the end.
Here’s a simplified breakdown of the “magic” step:
Assume MicroStrategy’s initial situation:
– Market Value = $1,000,000
– Bitcoin Holdings = $300,000
– Bitcoin-to-Stock Ratio = $300,000 / $1,000,000 = 0.3
Issuing Stock:
– MicroStrategy issues an additional $2,000,000 worth of stock, raising the total market value to $3,000,000 ($1,000,000 + $2,000,000).
– They use the $2,000,000 to buy an equivalent amount of Bitcoin.
– New Bitcoin Holdings = $300,000 + $2,000,000 = $2,300,000
– New Bitcoin-to-Stock Ratio = $2,300,000 / $3,000,000 = 0.7667 (about 0.77).
This is the core of “financial engineering.” By issuing more stock to increase the company’s market value, and then using those funds to buy more Bitcoin, MicroStrategy increases the Bitcoin content per share while avoiding direct dilution of existing shareholders. This strategy boosts the attractiveness of the company’s stock price when Bitcoin’s price rises.
This mechanism can continue to operate, as long as the market is willing to value MicroStrategy based on its Bitcoin holdings. If market confidence wanes, this premium may disappear (or even reverse), leading to a sharp drop in stock price.
In simple terms, this is like using “cheap paper” (stocks) to exchange for “hard currency” (Bitcoin). This strategy can work until the market no longer values the “paper.”
“Magic, right?” Of course—but only if the market keeps cooperating.
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### Who Would Buy These? (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 less familiar with the concepts understand the principles behind them.
#### 2) Who Would Buy These Zero-Coupon Convertible Bonds?
The answer is: Hedge funds, not your grandma’s retirement fund.
Why? Because hedge funds don’t care about interest payments. What they focus on is something more profitable: volatility.
These zero-coupon bonds (which don’t pay interest) come with an added stock purchase option (like MicroStrategy stock). Hedge funds buy these bonds, not to hold them long-term like traditional fixed-income investors, but to leverage stock market volatility, employing complex strategies like “delta hedging” and “gamma scalping.”
– **Delta Hedging**: Adjusting sensitivity to changes in stock prices. If the MSTR stock price rises by 10%, they need to adjust their positions to maintain a “neutral” state (e.g., shorting or selling some stock to stay market-neutral).
– **Gamma Scalping**: Profiting from the speed of stock price movements. When stock prices are highly volatile, the gamma strategy helps hedge funds profit from these fluctuations, earning profits every time they adjust their hedges.
In simple terms, these hedge funds are not concerned with the “direction” of MSTR stock price movements; they care more about the volatility of the stock price.
#### 3) How Do Hedge Funds Make Money from These Bonds?
– **Buying Low**: When Michael Saylor issues these convertible bonds, he usually “leaves some value on the table,” meaning the initial price of the bonds is set lower than their actual value (ensuring successful issuance). For example, if the “implied volatility” (IV) is set to 60, but the market later trades it at 70, the hedge fund earns a 10-point profit (which is significant in the bond market).
– **Volatility Arbitrage**: Hedge funds buy the bonds (going long on volatility) and then short MSTR stock to hedge. As MSTR stock fluctuates, they adjust their positions, buying and selling stock as needed. The greater the volatility, the more adjustments, and the larger the potential profits. If implied volatility (IV) rises, the bond price increases, and hedge funds can sell the bonds for a quick profit.
– **Day-One Gains**: These bonds typically rise in price on the first day after issuance. This is because they are initially priced lower (to ensure market demand), and once the market realizes the bonds’ “true” value, they get repriced. Hedge funds can then resell the bonds at a higher price in a short period.**Bonds: Achieving Rapid Returns**
4. **Why is Michael Saylor doing this?**
The answer is simple: he needs cash to buy Bitcoin. By issuing convertible bonds, he is able to raise cash without issuing stock, thereby avoiding shareholder dilution (at least for now). These bonds only convert into stock when the stock price of MSTR rises significantly. This means he can raise funds at a lower cost and only dilute equity when the stock price appreciates.
Hedge funds are particularly fond of this move. They buy convertible bonds at a low price, profiting from the initial pricing difference (which is effectively “free money”), and they can also make money from stock market fluctuations. For both hedge funds and MSTR, this is basically a “win-win” situation (at least for now).
1) **Why is this “free money”?**
Hedge funds are essentially capitalizing on “pricing errors” in the market.
They buy bonds at a low price,
See the bond price rise on the first day,
And then hedge stock volatility with MSTR stock, making small profits with each stock price fluctuation.
If MSTR’s stock price rises significantly, they can still profit from the options embedded in the bonds.
Hedge funds love this operation because it allows them to take on large positions (hundreds of millions) with relatively low risk. For Saylor, this is a way to raise billions without directly diluting shareholders. Everyone benefits… until the market stops cooperating.
This is what is called “free money”—but only if you’re a well-capitalized hedge fund with access to a Bloomberg Terminal and a coffee addiction.
2) **Is MicroStrategy just a Bitcoin ETF?** (Short answer: No)
Some critics argue that MicroStrategy is just a “luxury Bitcoin ETF.” But that’s like calling Batman “just another rich guy in a suit.” While both an ETF and MicroStrategy give you exposure to Bitcoin, there’s a key difference: ETFs charge fees, while Saylor continuously increases the amount of Bitcoin represented by the shares you hold each year.
Why? Unlike ETFs, which charge management fees, MicroStrategy’s Bitcoin holdings grow as Saylor completes convertible bond transactions. So, if you hold MicroStrategy stock, you’re actually getting more Bitcoin exposure each year. It’s like receiving a free medium pizza and suddenly getting a large, just because the manager is in a good mood.
3) **Why does this strategy work, and when will the “music stop”?**
Michael Saylor’s strategy holds great potential but also comes with significant risks. Let’s break it down step by step to see how he’s walking a tightrope and when he might face major challenges.
**MSTR Balance Sheet – Debt vs Bitcoin Holdings**
– Bitcoin holdings: Approximately $45 billion
– Convertible debt: Approximately $7.5 billion
– Other debt (interest-bearing): Approximately $2.5 billion (interest debt)
– Total debt: Approximately $10 billion
– Debt maturity: Around $1 billion of debt will mature in 2027-2028.
On paper, MicroStrategy’s financial position looks solid, with Bitcoin assets ($45 billion) outweighing its debt ($10 billion). However, the underlying risk lies in volatility.
Suppose Bitcoin’s price drops by 80%, from $25,000 to $20,000. In that case, MicroStrategy’s $45 billion worth of Bitcoin would shrink to around $10 billion, making its $10 billion debt burden feel extremely heavy.
But for Saylor to face a true “margin call” scenario, Bitcoin’s price would need to fall to around $20,000. If that happens, MicroStrategy could face a liquidity crisis, and Saylor would be forced to make difficult decisions.
**What happens if Bitcoin drops 80%?**
If Bitcoin crashes, the situation could rapidly deteriorate, mainly because of the feedback loop between convertible bonds, stock prices, and Bitcoin prices.
– Stock price drop: MSTR’s stock price is closely tied to Bitcoin’s price. If Bitcoin drops, MSTR’s stock will likely fall too.
– Convertible bondholder choices: At this point, bondholders may opt for cash rather than converting their bonds into stock (since the stock has no value compared to the debt).
– Forced selling: If bondholders refuse to take stock, Saylor would be forced to sell Bitcoin to repay the debt.
– Market downward spiral: If Saylor sells Bitcoin, it would further drive down Bitcoin prices, triggering more sell-offs and creating a vicious cycle.
This would be akin to entering a “margin call hell,” where Saylor might have to sell Bitcoin at a loss to maintain the company’s solvency.
**Key Point:** Saylor is essentially betting that Bitcoin won’t drop below $20,000. If it does, he would enter “life-or-death” mode, and MicroStrategy might be forced to sell Bitcoin to pay off its debt.
**How is Saylor mitigating risk?**
Saylor isn’t a fool—he’s put in place several “lifelines” in case things go wrong. Here are some of the strategies he’s implemented:
**MicroStrategy’s Core Software Business**
MicroStrategy still operates a profitable and cash-flow-positive software business.
This business generates enough cash to cover smaller debt interest payments (about $50 million per year) without having to sell Bitcoin.
It serves as the company’s “safety net,” allowing it to continue operating without selling Bitcoin.
**At-the-Market (ATM) Equity Issuance**
MicroStrategy quietly issues stock through ATM sales, raising cash for the company without a large, one-time dilution of shares.
**”Soft Call” Option (Mandatory Bond Conversion)**
If MicroStrategy’s stock price reaches a certain level, Saylor can activate a “soft call” option.
This means he can force bondholders to convert their bonds into stock rather than demand cash repayment.
In simple terms, he can convert debt into equity at his discretion.
**Deep Bitcoin Reserves**
Currently, MicroStrategy holds around $45 billion worth of Bitcoin.
Saylor has enough room to sell part of its Bitcoin holdings without liquidating the entire position.
This option is a last resort, but it still provides the company with emergency buffer space.
5. **Conclusion: The “Loophole Master” of Finance**
Whether you love or hate him, Michael Saylor is playing a completely new game. He’s not just holding Bitcoin; he’s built a whole strategy around it. By using convertible bonds, he’s cleverly combining debt, equity, and volatility into an almost unstoppable financial flywheel.
Each Bitcoin that MicroStrategy acquires, in a sense, becomes a “profit” for the company. This shift in thinking might one day cause analysts to suddenly realize that MicroStrategy’s true value far exceeds their expectations. If that happens, 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 to buy Bitcoin, and thus increases the Bitcoin per share ratio. While this strategy carries significant risk, if Bitcoin continues to rise, it could become one of the smartest moves in financial history.
More and more companies are starting to think about how to integrate debt, equity, and Bitcoin. As this strategy spreads, we may be witnessing the dawn of a new era in corporate finance.
So, the next time someone says convertible bonds are boring, tell them the story of Michael Saylor. Look them in the eye and make them realize that this isn’t just about bonds; it’s about revolutionizing the entire set of financial rules.
This article is a co-publication from **Shenchao**.
