MicroStrategy's Bold Strategy: How Volatility Drives Its Bitcoin Quest

The MicroStrategy Phenomenon

The saga of MicroStrategy reads like financial fiction brought to life. Its improbable resurrection from near-bankruptcy, its audacious pivot in August 2020 from software vendor to bitcoin maximalist, and its charismatic leader have all contributed to a story that defies belief.

A Unique Financial Strategy

Lay on its issuance of prodigious amounts of stock and convertible debt, and the tsunami of stock selling by insiders, and the story gets even wilder. Just last month, the company wowed Wall Street by rolling out its fifth convertible of the year — a $3 billion, five-year note with zero percent coupon and a 55 percent conversion premium to a share price that was already trading at nearly three times the net asset value of its bitcoin holdings.

The Genius of Financial Engineering

On paper, it’s genius. The plan is simple: borrow for zero interest with a convertible, buy bitcoin, and pay off the debt when the shares convert at nosebleed prices. As long as the share price stays up — and bitcoin is at least hovering around $100,000 — we are talking about one of the most successful feats ever of financial engineering.

Volatility as a Currency

MicroStrategy has essentially created a financial instrument that’s part loan, part lottery ticket. Its stock moves like a hyperactive toddler let loose in a candy store, with a current 252-day historic volatility of 106 percent. The company has effectively engineered its own volatility — and reaped the rewards. This dynamic is self-reinforcing: acquiring more bitcoin amplifies share price volatility, allowing MicroStrategy to issue convertible bonds on increasingly favorable terms.

The Risks Ahead

However, this strategy is not without risks. If the stock calms down, the volatility-driven arbitrage opportunities could vanish, potentially leaving investors nursing losses. Additionally, if bitcoin’s price plummets, the company’s ability to manage up to $6.2 billion in bond repayments could be severely challenged.

Conclusion

MicroStrategy’s bold approach to leveraging volatility has created a seemingly self-perpetuating loop: cheap funding buys bitcoin, which boosts the stock’s volatility, securing even better bond terms for more bitcoin acquisition. As long as the stock keeps zigzagging, the show goes on, but like any high-wire act, there’s always the danger of a fall.