Michael Saylor and his company MicroStrategy are making a massive bet on bitcoin. Their biggest backers include an unlikely group of insurance companies, mutual funds and other usually conservative bond investors.
The software company turned itself into a bitcoin whale and now owns about $48 billion of the cryptocurrency. It funded those purchases partly by selling convertible bonds—debt that can eventually be converted into shares, if the stock price rises to a specified level.
Last year alone, MicroStrategy issued $6.2 billion of convertible debt—the most ever issued by a single company in a calendar year, according to Bank of America.
Perhaps most surprising: MicroStrategy’s most recent convertible bonds promise investors no interest and require the stock to climb 55% before converting into shares. Yet demand from investors has been rabid.
Allianz Global Investors, the investment-management arm of German insurance company Allianz, and its strategic partner, Voya Investment Management, own about a quarter of a recent MicroStrategy convertible-bond issuance. Calamos Investments and State Street also are big holders of the convertible bonds. None of the four firms are known for their big bitcoin bets or other risky wagers.
Michael Saylor leads MicroStrategy, which plans to raise $42 billion to buy bitcoin over three years. - MARCO BELLO/REUTERS
So why are they gobbling up MicroStrategy’s zero-coupon, unsecured bonds?
For some, the answer is found in the bonds’ performance and promise. For others, it is part of a complex trading strategy that benefits from the stock’s volatility.
But many other investors explain their purchases of MicroStrategy’s convertible bonds simply: They believe in bitcoin, and these investments are slightly safer than buying the coin or MicroStrategy shares because debtholders would stand to make some recovery even if MicroStrategy failed.
“You can look at it as a chicken way to play bitcoin,” said Eli Pars, co-chief investment officer of Calamos Investments, which owns roughly $456 million of MicroStrategy’s convertible bonds based on current prices and recent filings.
“But if you don’t think bitcoin has got a chance to go up, then you probably don’t want to be in any of MicroStrategy’s capital structure,” he says.
More crypto companies have begun to adopt MicroStrategy’s playbook. Crypto-linked companies issued more than $14 billion of convertible bonds globally last year, according to Michael Youngworth, head of global convertibles strategy at BofA Securities. Bitcoin-mining company MARA, for one, raised more than $2 billion.
Wall Street firms are already searching for different ways to capitalize on the popularity of what they have dubbed bitcoin bonds. Strive, a money manager co-founded by entrepreneur Vivek Ramaswamy, filed in late December for an exchange-traded fund that would hold convertible debt securities issued by MicroStrategy and companies with similar strategies.
Thanks to bitcoin’s monster rally over the past two years, the convertible bonds have mostly outperformed the broader market, with some generating returns of more than 100% since issuance. Competition is vicious among traders in the bond market, where even a few hundredths of a percentage point can be the difference between a big bonus and a pink slip.
Bitcoin prices have soared 145% since the end of 2023. MicroStrategy shares have climbed even faster, rising about 450%. The stock is trading at roughly twice the value of the bitcoin it holds.
Bitcoin skeptics say MicroStrategy is playing with fire and its stunning run is part of a broader investor euphoria for speculative assets that will inevitably collapse.
Beyond betting big on bitcoin—a notoriously volatile asset prone to furious rallies and spectacular crashes—they caution that other big convertible-bond issuers, including Enron and WorldCom, have ended up in bankruptcy.
MicroStrategy isn’t done yet. The company is expected to issue an additional $18 billion of debt as part of its plan to raise $42 billion to fund its bitcoin purchases over three years.
Some investors, including Allianz, were buyers of MicroStrategy’s convertible bonds years ago and scored big profits. Others have been buying the bonds simply because MicroStrategy makes up 3.6% of the ICE BofA All US Convertibles Index that they are judged against.
Hedge funds like MicroStrategy debt because it allows them to execute complex trading strategies, such as buying the company’s convertible bonds while betting against its stock, a tactic that benefits from volatility.
A crypto exchange in Barcelona. Bitcoin prices have staged a monster rally over the past two years. - Angel Garcia/Bloomberg News
MicroStrategy’s volatility lends itself well to the hedging strategy, known as convertible arbitrage. In such trades, investors buy the bonds and sell the shares short, betting that the underlying stock remains volatile. The more the stock sways, the more profitable the strategy becomes. That is because a convertible bond is a hybrid security composed of a bond and a call option that confers the right to convert the bond into stock at a specific price.
“The owner of a convertible bond is long the option, so they are always selling when the stock goes higher and buying when the stock goes lower to stay hedged,” said James Buckham, co-chief investment officer at Wellesley Asset Management, of the arbitrage strategy.
His firm, which specializes in convertible-debt investing, doesn’t own any MicroStrategy bonds because of the high risks they carry.
Some bankers and advisers say the convertible-bond market is experiencing crypto indigestion after a flurry of deals last year. Bitcoin’s volatility has declined as its price has moved higher. Prices of MicroStrategy’s most recent $3 billion convertible bonds due in 2029 have fallen sharply over the past two months, while the company’s shares have fallen about 20% from their record high in November.
“The market is still digesting the crypto-converts wave that came in the fourth quarter,” said Bryan Goldstein, who runs the convertible practice at the advisory firm Matthews South. “I don’t think that it will continue with the same intensity, but there is definitely still a bid in the market for appropriately priced deals.”
