MicroStrategy bets on BTC! Convertible bonds attract leveraged speculation, is it a new wave or another bubble

MicroStrategy founder Michael Saylor has become one of the most outspoken supporters of BTC, boldly claiming, 'There is no second best choice.'

Since 2020, Saylor has cumulatively purchased over $30 billion worth of BTC through his listed company, with a book profit of over $14 billion, making MicroStrategy the company with the most BTC holdings. This strategy has won the appreciation of bitcoin maximalists, while also attracting the skepticism of traditional investors.

However, as MicroStrategy continues to raise billions of dollars in funds - planning to add $42 billion in financing over the next three years - with a fourfold bet on BTC, concerns from the outside are also intensifying. Will this brew another huge bubble? What will be the outcome of MicroStrategy's bold move if the BTC price falls?

1. The Echo of Trading Ghost

MicroStrategy's BTC strategy shares similarities with one of the most notorious transactions in the encryption industry, the 'GBTC premium trading.' During the peak of this Arbitrage trading, investors obtained BTC exposure through the Grayscale BTC Trust (GBTC) as its trading price was higher than the value of the underlying BTC Holdings. They acquired GBTC shares through loans and earned premium returns after the lock-up period ended.

This kind of transaction experienced a dramatic collapse in 2021, when the GBTC premium turned into a discount. Companies like Three Arrows Capital and BlockFi, which were overly leveraged or associated with leveraged clients, collapsed one after another. The subsequent wave of bankruptcies, including Genesis' bankruptcy, highlighted the risks of financial strategies built on a fragile market imbalance.

Critics now warn that MicroStrategy is walking a similar tightrope, but instead of using GBTC premium, MicroStrategy has paved a new path for leveraged BTC trading through its own stocks and bonds, effectively turning the company into a leveraged BTC proxy.

Image source: PANews during certain periods, MicroStrategy's BTC purchase behavior

2. The Magic of Convertible Bonds

MicroStrategy's core strategy is to raise funds through issuance convertible bonds and stocks, which operates as follows:

MicroStrategy provides bonds with extremely low or even zero interest rates to bond holders through low-interest borrowing (0%).

As a reward for providing the potential for appreciation in stock prices, bond holders can convert their bonds into MicroStrategy stocks when the stock price rises. This potential return has attracted many institutional investors, including Allianz, Germany's largest insurance company.

Buying more funds raised by BTC is immediately used to buy more BTC, thereby driving the stock price further up.

This feedback loop has led to an astonishing performance of MicroStrategy's stock, which surged nearly 500% in just 2024. The strategy has been so successful that bond investors are willing to lend the company billions of dollars at a 0% Intrerest Rate, attracted by the potential appreciation of the stock price.

Here's an intriguing proposition: why settle for low interest rates on bonds when MicroStrategy can offer you the opportunity to double or even quintuple your investment? As Saylor mentioned in a recent investor conference call, bond holders are fleeing the world of 'negative real rates of return' in pursuit of the potential gains brought by BTC.

Currently, MicroStrategy's strategy is operating very well, and the rise in Bitcoin price has created a virtuous cycle. But what will happen if the trend of Bitcoin reverses?

MicroStrategy owns nearly 387,000 BTC, worth about $37 billion, but its stock market valuation has exceeded $100 billion. This high valuation largely depends on the assumption of continued rise in BTC price. If BTC falls, the company's stock price, essentially a leveraged bet on BTC, could plummet significantly.

It should also be noted that double-leveraged ETFs like MSTU and MSTX, which focus on MicroStrategy, further exacerbate market speculation based on MicroStrategy's BTC speculation.

All of this has driven huge BTC purchases. According to Fundstrat's research, in fact, MicroStrategy's buying volume far exceeded the total inflow of all BTC ETFs earlier this month. If the market begins to doubt whether MicroStrategy can achieve its $42 billion financing target, the BTC price may fall, further jeopardizing MicroStrategy's financing ability. Once this situation changes, the situation could deteriorate rapidly. Similar situations have occurred in FTX's financing attempts when it needed the most funding, and in Terra's $40 billion collapse.

Despite Saylor's repeated emphasis that the company will never sell its BTC, this position may be difficult to maintain if debt pressures increase and BTC prices fall.

3. Historical Lessons

The cautionary tale of GBTC premium trading is still vivid. When market conditions change, this bubble bursts, exposing the fragility of the leverage strategy. Although MicroStrategy's approach avoids some pitfalls of GBTC trading—such as not relying on an inefficient fund structure—it still faces a core risk: if the BTC price falls, leverage may amplify losses.

Saylor's firm belief in BTC may inspire confidence, but history has shown that the market cannot rise indefinitely. Just like the collapse of Terra in 2023, overconfidence in a 'self-sustaining system' led to a loss of 40 billion USD. If the BTC price falls, MicroStrategy's stock price may also face a similar liquidation moment.

However, for BTC supporters who believe that the US government will follow suit and include BTC in its strategic reserves, MicroStrategy's bet has the potential to become one of the greatest investments in history - either renowned as a 'genius move' or notorious as a 'disastrous failure'.

【Disclaimer】There are risks in the market, and investment needs to be cautious. This article does not constitute investment advice. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk.

This article is authorized for reproduction from: "PANews"

Original author: Zack Guzman

'MicroStrategy bets on BTC! Convertible bonds attract leveraged speculation, is it a new wave or another bubble?' This article was first published in 'encryption city'.