BTC rose over 100,000 pounds! Behind the scenes, the strongest promoter is it, explaining the borrowing strategy of Micro-Strategy Cryptocurrency Speculation.

1. Definition of Convertible High-grade Notes

Convertible senior notes are a hybrid debt instrument that allows companies to raise funds without immediately diluting equity, while also providing investors with the opportunity to convert the debt into stock under favorable conditions.

Simply put, convertible bonds are a type of debt securities (loans) that investors can convert into common stock of the issuing company. So what does 'convertible' mean?

'Senior' means that in the event of the company's bankruptcy, holders of such notes have priority over other creditors (such as holders of subordinated notes or unsecured debt).

The following are key terms related to convertible high-level notes:

Principal amount: The amount of money initially borrowed by the company.

Interest Rate: fixed or floating Interest Rate paid on the principal amount.

Maturity Date: The date on which the principal is due to be repaid.

Conversion Price: The predetermined price per share at which a convertible note is convertible into common stock of the company.

Conversion rate: the number of common stock shares that can be converted for each note.

Why would a company issue convertible senior notes?

There are multiple reasons for the issuance of company bonds, including:

Flexible Financing: Such tools allow companies to raise funds in the early stages of startups or uncertain periods.

Avoid Dilution: Unlike traditional equity financing (such as selling stocks), convertible notes do not immediately dilute the ownership market share of existing shareholders.

Tax incentives: In some cases, the Interest payment of convertible notes may have tax deduction effects for companies.

Why do investors buy convertible bonds?

Convertible bonds holders can participate in the company's growth by converting into stocks, making them more attractive than traditional debt. In addition, as debt instruments with fixed Interest Rate and maturity dates, they provide investors with some loss protection.

2. How to use convertible notes for Bitcoin investment

Convertible notes are a hybrid financing instrument used in multiple scenarios, including Bitcoin investment.

MicroStrategy is a typical case of using convertible notes to purchase BTC in large quantities.

Here is a simplified explanation of this process:

Company issuance bills: Companies engaged in BTC Mining or related businesses may issue convertible notes to raise funds.

Investors buying bills: Investors buying these bills is equivalent to lending money to the company.

Interest and conversion options: These notes typically have a fixed Interest Rate and maturity date. Additionally, they provide investors with the option to convert the notes into company stock at a predetermined conversion price.

BTC exposure: If a company's business model is highly related to BTC, its stock value may Fluctuation with the price of BTC.

Potential returns: If the price of BTC rises and the company performs well, the value of the stock may increase, and investors who hold the notes and convert them into stocks may receive substantial returns.

Downside Protection: The bill itself is a debt instrument that provides investors with a certain level of downside protection. If the company fails, investors may still recover their principal (depending on the company's financial condition).

Image source: Data Driven Investing

Fun fact: MARA Holdings raised $1 billion through the issuance of zero-coupon convertible notes, allowing them to purchase BTC without paying interest before maturity.

3. How MicroStrategy uses convertible senior notes to fund BTC purchases

MicroStrategy co-founder Michael Saylor has adopted a strategic approach to fund its large-scale Bitcoin purchases through the issuance of convertible senior notes.

The following is the process by which the company purchases BTC through convertible senior notes:

issuance convertible notes: The company has issued convertible senior notes multiple times to raise funds. These notes typically have a fixed maturity date and a zero Interest structure, meaning no regular Interest payments are made. MicroStrategy invested $250 million in cash when it first purchased Bitcoin in 2020, and has since raised over $3 billion through convertible notes.

Using profits to buy BTC: The funds raised through these notes are mainly used to purchase Bitcoin, significantly increasing MicroStrategy's BTC holdings. As of December 3, 2024, the company holds approximately 402,100 BTC, accounting for 1.915% of the total supply of 21 million BTC.

Harnessing the potential of Bit: MicroStrategy aims to seize the long-term appreciation opportunities of Crypto Assets by heavily investing in Bit. For example, if the price of Bit rises, the value of the company's Bit holdings will increase, potentially boosting the stock price of MicroStrategy (MSTR).

On November 20, 2024, MicroStrategy announced the pricing of a $2.6 billion 0% convertible senior notes, with key details of the notes including:

Zero-coupon structure: the bill does not pay regular Interest.

Conversion option: The holder can convert the notes into MicroStrategy common stock at a conversion price of $672.40 per share.

Due date: The due date of the bill is December 2029.

Redemption option: MicroStrategy may redeem the notes starting in December 2026 under certain conditions, especially when its stock price reaches 130% of the conversion price during a certain period. If redeemed, investors will receive 100% of the principal plus accrued interest.

This strategy has greatly benefited MicroStrategy. From 2020 to 2024, the company's annualized return rate reached 80%, outperforming BTC itself. Since mid-2020, MicroStrategy has outperformed all major US stocks, including Nvidia. This strategy has caused its stock to rise by more than 2500% since August 2020, while BTC has risen by 660% during the same period.

However, investors need to be aware that the high volatility and risks of the company's strategy are closely related to the long-term growth potential of BTC.

Image source: Coinmarketcap, Yahoo Finance

Fun fact: Uber raised $1.5 billion through the issuance of its expanded convertible senior notes for financing due in 2028, which is also part of its overall strategy for managing debt and capital structure.

4. The advantages of convertible high-grade notes

Convertible senior notes are attractive to companies that want to efficiently raise capital while maintaining flexibility and minimizing dilution of equity.

For companies like MicroStrategy, convertible senior notes provide the following advantages:

dropInterest cost: The zero-interest structure of the bill does not require regular payment of Interest, reducing the company's financing cost.

dropissuance Cost: The upfront costs of convertible senior notes are usually lower compared to traditional debt or equity issuance, especially compared to the issuance of ordinary debt or equity, which often involves more underwriting expenses.

Capital acquisition: This tool provides MicroStrategy with a flexible way to raise funds without immediately diluting existing shareholder equity.

Attracting Investors: Convertible notes can attract investors who wish to engage with the company's traditional business and BTC assets.

5. The Risks of Convertible High-Level Notes

Despite MicroStrategy managing financial risks through this hybrid debt-equity instrument, its investment approach is not without risks.

Here are some potential risks to consider:

BTC price Fluctuation: MicroStrategy's BTC holdings value is affected by significant price Fluctuation, thereby impacting its financial performance.

Regulatory Uncertainty: The cryptocurrency regulatory environment is constantly changing, which may bring additional risks to companies.

Conversion risk: If the price of MSTR is lower than the conversion price, investors may not choose to convert the notes into stock, which may result in potential dilution of existing shareholders.

Market Timing and Hedging Risks: MicroStrategy bets on the long-term appreciation of Bitcoin. If Bitcoin encounters a long-term Bear Market, this strategy may fail, and the company may face tremendous debt pressure and the shrinkage of BTC asset value.

Intrerest Raterise: Especially in the environment of Intrerest Raterise, the rise in borrowing costs may increase the financial pressure borne by companies issuing issuance hybrid instruments.

Overall, MicroStrategy's bold strategy of purchasing BTC on a large scale through convertible senior notes is dependent on financial principles and the broader economic environment.

For investors who may not understand or agree to include such volatile assets on the balance sheet, this risk is particularly significant. In order to ensure long-term sustainability, the company must adopt a balanced strategy that integrates market analysis, Risk Management, and flexible capital planning.

Disclaimer: This article does not constitute investment advice. Users should consider whether any opinions, views, or conclusions in this article are in line with their specific circumstances and comply with applicable laws and regulations in their country and region.

This article is authorized to be reprinted from: "MarsBit"

Original author: Onkar Singh

Bitcoin soared over $100,000! The strongest pusher behind it, explaining the art of borrowing money for Cryptocurrency Speculation in detail, was first published in 'encryption city'.