MicroStrategy is continually expanding its Bitcoin holdings and has different strategies for financing purchases. One of them involves the issuance of convertible bonds.
• MicroStrategy is the largest enterprise-level Bitcoin HODLer
• Bitcoin purchases are made possible via various financing models
• Convertible bonds with opportunities and risks
The software company MicroStrategy currently owns 461,000 Bitcoins (January 21, 2025). The company cites the average purchase price as $63,610 – a value well below the current price level.
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How does MicroStrategy finance its Bitcoin strategy?
w The US company acquired the world’s oldest cryptocurrency in numerous steps over a period of several years. In total, the expansion of Bitcoin shares, which has now made MicroStrategy the largest Bitcoin HODLer at the corporate level, cost the company $29.3 billion. An enormous sum that MicroStrategy raised not only from equity capital. Instead, the company used various financing options.
By far the smallest part of the money for Bitcoin purchases comes from the core business. The development of business intelligence software brings in little revenue, as a look at the company’s third quarter figures shows. With revenues of $116 million down by around ten percent, MicroStrategy earned a gross profit of $81.7 million – only a fraction of this money goes into buying Bitcoins.
Additionally, MicroStrategy has also taken out loans in the past that were secured by the Bitcoin holdings that the company had already acquired. This serves as a popular method given the cryptocurrency’s strong appreciation in value.
Issuing shares is also apparently an effective means for MicroStrategy to provide itself with fresh capital. The company recently announced a planned capital increase of up to two billion US dollars at the start of the year. For this purpose, there will be one or more public subscription offers for perpetual preferred shares, the company said. The recently announced capital measure is part of MicroStrategy’s 21/21 plan, under which $21 billion in equity and an additional $21 billion in fixed-interest instruments are to be raised over the next three years.
Issuing corporate bonds is also a way for MicroStrategy to finance its Bitcoin purchases. Stock bonds offer investors higher interest rates than some government bonds.
Convertible bonds: Interest-free money from investors
But there is another way in which MicroStrategy raises capital from investors – and the company doesn’t even have to pay interest: issuing convertible bonds. Using this financial instrument, the Bitcoin HODLer obtains interest-free loans from investors with which to purchase additional Bitcoins.
Unlike traditional corporate bonds, bond investors initially receive nothing for their financing, except for a promise: If MicroStrategy’s shares rise high enough, the convertible bonds can be exchanged for shares in the software company. In this way, MicroStrategy keeps its interest burden low, investors hope for further price gains and are betting on a sustained upward trend in Bitcoin, which should also provide further tailwind for MicroStrategy shares, but without holding onto the cryptocurrency itself.
MicroStrategy last announced the issue of convertible bonds in November 2024. The offer was originally at 1.75 billion US dollars, but was expanded to 2.6 billion US dollars – in addition, the company also granted the initial buyers of the bonds an option to purchase bonds with a total nominal value of up to 400 million US dollars -Dollars, which increased revenues to around three billion US dollars. “Conversion options, available under certain conditions through June 2029, allow holders to convert into cash, shares of the Company’s Class A common stock, or a combination of both. The initial conversion price is set at 1.4872 shares per $1,000 note, which is a conversion price of $672.40 – a 55% premium to the stock’s November 19 price,” MicoStrategy described Terms of the convertible bond are detailed in a press release.
However, convertible bonds are associated with risks – especially for investors. Although a positive price development guarantees bond investors who hold their debt until maturity a return of their investment plus any profits in stocks or cash, they are the main risk bearers in the event of a weaker than expected price development. You will then receive the amount you invested back, although the value may have decreased in the meantime due to inflationary pressure. In particular, the fact that cryptocurrencies are highly volatile and MicroStrategy on the stock exchange is highly dependent on price developments on the crypto market makes convertible bonds a bet with the hope of positive price developments. In addition, convertible bond investors forego higher interest rates – or, in the case of MicoStrategy, interest payments at all.
Meanwhile, another question arises for MicroStrategy: If Bitcoin continues to rise and the share price continues to rise significantly, the company must be able to repay the bonds – if in doubt by selling Bitcoins, which in turn will probably have a negative impact likely to affect the share price. “I keep telling people that this is going to be a Harvard Business School case study,” said James Dinsmore, a portfolio manager at Gabelli Funds focused on convertible bonds, according to MarketWatch. “Either way, we’re going to see this have an interesting ending,” Dinsmore continued.
Editorial team finanzen.net
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