The Hundred-Billion Leverage King: A Deep Dive into How MicroStrategy Masterfully Plays the Convertible Bond Game
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The Hundred-Billion Leverage King: A Deep Dive into How MicroStrategy Masterfully Plays the Convertible Bond Game
When it comes to borrowing money to buy Bitcoin, MicroStrategy is a seasoned veteran, while newcomers such as Bitcoin miners and Semler may find themselves facing greater risks.
Navigating Web3 tides with focused insightsAuthors: Tom Carreras, James Van Straten, Stephen Alpher
Translation: BitpushNews
Has Michael Saylor and MicroStrategy (MSTR) discovered some kind of financial "loophole" for making money from money?
It's hard to blame people for thinking so.
While the company led by Saylor began buying bitcoin (BTC) over four years ago, in the past 10 months alone, MicroStrategy has raised more than $6 billion through a unique strategy explicitly aimed at adding more bitcoin to its balance sheet—reaching 439,000 BTC valued at $46 billion as of December 15, with BTC priced around $106,000.
MicroStrategy hasn't raised these funds through loans or issuing additional company stock (although it has separately issued billions of dollars worth of shares). Instead, the company sold convertible notes—debt securities that can be converted into shares on specific dates or under special conditions. And it doesn’t stop there: Under a plan laid out in October, Saylor and the company intend to raise at least another $18 billion over the next three years via such bonds.
Demand for these convertible notes has been so high that other companies—including bitcoin miner MARA Holdings (MARA)—have followed suit, raising billions to bolster their own balance sheets.
But this raises a question: Could issuing so much debt ultimately pose risks to these companies and the broader cryptocurrency market?
Quinn Thompson, founder of crypto hedge fund Lekker Capital, told CoinDesk: "If bitcoin prices remain low or fall over the long term, [these companies] might have to issue more shares to raise capital, diluting existing shareholders... or sell bitcoin below their purchase price." However, Thompson believes these companies won't go bankrupt.
How Convertible Notes Work
Convertible bonds are financial instruments that help companies raise capital quickly without posting collateral (like loans) or immediately diluting their equity. The pricing of these bonds depends on factors such as the interest rate offered, the underlying company stock, the stock’s volatility, and the firm's creditworthiness.
For example, in November, bitcoin mining company Bitdeer (BTDR) raised $360 million by issuing convertible notes with a 5.25% interest rate. These bonds mature on December 1, 2029, with a conversion price of $15.95 per share—about 42.5% higher than the trading price of the stock when the notes were issued on November 21.
In other words, instead of simply buying the company’s stock on the open market, investors gain exposure to potentially significant upside while holding these notes. Even better, convertible notes offer downside protection. On a specified date, such bonds can be redeemed in cash for the original investment plus interest. That means even if the stock crashes before maturity, investors are almost guaranteed to get their money back.
But MicroStrategy's case is particularly unique because the company found demand for zero-interest convertible bonds despite U.S. benchmark rates hovering near 5%. Why? Volatility. MicroStrategy’s common stock is effectively a leveraged bet on bitcoin, recently showing a 30-day average implied volatility of 106—and even higher previously. By comparison, the S&P 500 typically has an implied volatility of around 15, while bitcoin’s sits at about 60.
This stock volatility influences the price movements of MSTR’s convertible bonds, allowing experienced market participants to profit handsomely by trading this volatility in a market-neutral way.
Richard Byworth, a convertible bond expert and managing partner at asset management firm Syz Capital, shared in an interview on the On The Margin podcast that he had spoken with a convertible note arbitrage trader.
The trader described his current intense workload: “Richard, I’ve turned into a ‘Degen’ crypto trader… It’s insane. If I don’t adjust all my deltas—the Greek letter used to describe how sensitive an option’s price is to external factors—before going to the bathroom, I could come back facing millions in risk. The market moves too fast.”
As a result, demand for MicroStrategy’s convertible bonds is enormous, enabling the company to issue large volumes—five times within a single year—an unprecedented pace.
To date, the company has six outstanding convertible bonds maturing between 2027 and 2032. Two carry 0% interest rates, two others are at 0.625%, a fifth at 0.875%, and the final one at 2.25%. With such low rates, MicroStrategy can sell shares at prices far above the current market level while paying only an average debt rate of 0.811%, amounting to $35 million annually—a cost easily covered by company revenues.
Greg Magadini, head of derivatives at crypto data firm Amberdata, told CoinDesk: “If implied volatility stays elevated, I’d bet MSTR will keep selling more and more convertible bonds… which means they’ll buy more and more bitcoin. For me, the first sign of a bitcoin top will coincide with a drop in MSTR’s implied volatility.”
The Convertible Bond Boom
Beyond the aforementioned bitcoin miners, medical device company Semler Scientific (SMLR) also announced its bitcoin treasury strategy at the end of May. While the company has so far used only balance sheet cash and proceeds from stock sales to buy bitcoin, its shares began trading options on Tuesday, making future bond issuance more attractive to investors and traders seeking debt-like returns similar to MicroStrategy.
According to MinerMag, from June to December 5 alone, bitcoin miners took on approximately $5.2 billion in debt. Some, like MARA and Core Scientific, issued convertible notes at 0% interest, while others—including Bitdeer, IREN (IREN), and TeraWulf (WULF)—issued them at rates ranging from 2.75% to 8.5%.
However, not all companies adopted this strategy for the same reasons. MARA and Riot Platforms (RIOT) are emulating MicroStrategy by using proceeds from convertible notes to accumulate more bitcoin on their balance sheets. But firms like Core Scientific aim to use the funds for operating expenses, capital expenditures, and potential acquisitions. Meanwhile, Bitdeer says its goal is to further develop its mining equipment manufacturing business.
There’s Always a Maturity Date
Nonetheless, convertible bonds aren’t free money. As noted earlier, once the bonds mature, holders can choose to convert them into shares at the agreed-upon price per share—or redeem them for cash if the stock underperforms.
The danger lies in the possibility that these companies' stock prices could fall sharply for an extended period, incentivizing holders to redeem the notes for cash rather than converting to shares. In MicroStrategy’s case, this could force the company to sell part of its bitcoin holdings to repay investors; bitcoin mining firms might have to offload various mining assets. In the worst-case scenario, these companies could eventually face bankruptcy.
Forced bitcoin sales aren’t necessarily catastrophic—as long as the company’s average purchase price remains below the sale price. For instance, MicroStrategy acquired its holdings at an average cost of $61,725 per bitcoin, giving it some breathing room. The problem is that bitcoin is known to plunge up to 80% every few years. Even this year—during a bull market—prices一度 dropped nearly 40%, meaning there’s no guarantee BTC will never fall below MicroStrategy’s average acquisition cost.
Still, MicroStrategy’s bonds are staggered, meaning they mature at different times. This reduces the company’s risk, as it doesn’t need to repay all debts at once. In other words, both bitcoin and MSTR would need to remain depressed for a prolonged period before the company’s situation becomes truly precarious. Most of MicroStrategy’s bonds already meet conversion requirements, which is another advantage. Moreover, the company can always choose to refinance its debt by issuing new convertible bonds—even if on less favorable terms.
In a sense, MicroStrategy is a seasoned veteran in leveraging debt to buy bitcoin, while newcomers like bitcoin miners and Semler (if it chooses to issue bonds) may find themselves exposed to greater risks, having taken on massive debt near what could be the peak of a market cycle.
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