How MicroStrategy and Others Are Taking on Billions in Debt to Buy More Bitcoin

2024-12-19 11:02:36 Primitive Reading

From coindesk by Tom Carreras

Have Michael Saylor and MicroStrategy (MSTR) stumbled onto an infinite money glitch?

It would be hard to blame anyone for thinking so. While the Saylor-led company began buying bitcoin (BTC) more than four years ago, over the past 10 months MicroStrategy has used a unique strategy to raise over $6 billion for the express purpose of adding more bitcoin to its balance sheet, which as of Dec. 15 footed to 439,000 tokens worth $46 billion at the current price of about $106,000.

MicroStrategy did not raise these funds by taking out loans or by issuing more company shares (though it has separately issued billions of dollars worth of equity). Rather, the firm sold convertible notes — debt securities which can be converted into equity on specified dates or under special conditions. And it's not done yet: Saylor and company intend to raise at least another $18 billion through such bonds over the course of the next three years, according to a plan laid out in October.

Demand for this convertible paper has been so high that other companies, bitcoin miner MARA Holdings (MARA) among them, have adopted a similar playbook to raise billions to add to their own stacks.

But that raises a question: Could issuing so much debt eventually become dangerous for these firms, and for the crypto market at large?

"If bitcoin faces a prolonged period of low/declining prices, [the companies] could have to issue more equity and dilute shareholders at an inopportune time … [or] sell the bitcoin for less than they bought," Quinn Thompson, founder of crypto hedge fund Lekker Capital, told CoinDesk. Thompson added, though, that he doesn't expect the companies to become insolvent.

How convertible notes work

Convertible notes are a financial tool that allows companies to quickly raise funds without needing to provide collateral (as they would for a loan) or to immediately dilute their stock. These bonds are priced based on the interest rate baked into them, the firm’s underlying stock, the volatility of that stock and the firm’s credit worthiness.

For example, in November bitcoin mining firm Bitdeer (BTDR) raised $360 million by issuing convertible notes with an interest rate of 5.25%. These will mature on Dec. 1, 2029 at a price of $15.95 per share — which is approximately 42.5% higher than what these shares were trading for on Nov. 21 when the convertible notes were priced.

In other words, instead of simply buying the company’s shares on the open market, investors can earn a solid yield by holding these notes while also benefitting if the stock surges. Even better, convertible notes come with downside protection. On specific dates, such bonds can be redeemed in cash for an amount equal to the original investment plus interest payments. Put differently, investors are almost guaranteed to get their money back even if the stock plunges before the note matures.

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