Michael Saylor, co-founder of MicroStrategy Inc. (MSTR), has transformed the company into the largest corporate holder of Bitcoin (BTC-USD), leveraging both retail and institutional investor interest to fuel this strategy. With Bitcoin now valued at around $40 billion in its holdings, MicroStrategy, as of last check, has seen its stock surge more than 540% this year, attracting investors who are captivated by this performance regardless of the stock’s volatility.
Saylor’s approach involves raising capital through an innovative mix of equity and fixed-income securities, with plans announced in October to gather $42 billion over three years. This strategy has already seen MicroStrategy issue over $7 billion in low-interest, zero-coupon convertible notes this year. These securities offer investors the option to convert to equity if the stock price exceeds certain thresholds, providing an attractive proposition for arbitrage.
According to a Bloomberg report, hedge funds, including Calamos Advisors LLC, have been significant buyers of these notes, employing convertible arbitrage strategies to capitalize on the stock’s volatility. Eli Pars, co-Chief Investment Officer at Calamos, told Bberg that MicroStrategy’s shares are an “extreme example” in the convertible bond market due to their high volatility, which averages a 5.2% daily move compared to the S&P 500’s 0.6%. This volatility not only draws arbitrageurs but also amplifies the potential for profit through the notes’ conversion features.
The allure for these investors lies in the discrepancy between the implied volatility of the convertible bonds and the realized or option-implied volatility of MicroStrategy’s stock. Pars describes this scenario as a “very rare opportunity,” particularly because of the scale and frequency of MicroStrategy’s bond issuances. Other notable investors in these bonds include Linden Advisors, Context Capital, Graham Capital, and Millennium Management.
However, this strategy is not without its risks. Critics like David Trainer of New Constructs LLC caution that MicroStrategy’s approach resembles a “giant house of cards” that could crumble if Bitcoin’s value plummets, potentially leading to significant losses for shareholders. The company’s reliance on continuous market demand to fund its Bitcoin acquisitions could be unsustainable if market sentiment shifts.
Moreover, while arbitrage strategies might insulate investors from some market swings due to hedging, the underlying credit risk tied to MicroStrategy’s aggressive Bitcoin strategy remains a concern. David Clott from Wellesley Asset Management warns that any significant correction in Bitcoin’s price could pressure the credit profile of these convertible notes.
Despite these risks, as long as Bitcoin, last trading at $102,813.25, up 7.63% intraday, maintains high volatility and a favorable price range, the arbitrage strategy around MicroStrategy’s convertible bonds could continue to attract investors looking for unique opportunities in the market. This dynamic interplay between stock volatility, bond pricing, and Bitcoin’s market performance underscores the complex financial maneuvers MicroStrategy is navigating under Saylor’s leadership.
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