(Bloomberg) -- When Michael Saylor’s Strategy raised $2 billion in a convertible debt deal last week, it seemed like another triumph for firms rapidly selling equity-linked notes to fund cryptocurrency purchases. Behind the headline number, Strategy’s move to sweeten the deal’s terms sent a different signal: the market for crypto-related paper is nearing saturation.
Strategy and its copycats have raised billions of dollars over the past four months, accounting for an ever-larger share of the broader US pool. MARA Holdings Inc. has tapped investors for nearly $2 billion while Riot Platforms Inc. and Bitdeer Technologies Group have also been active. That’s on top of Strategy’s nearly $9 billion haul.
The spike in activity means the crypto-tied market accounts for roughly 19% of US equity-linked issuance over the last 14 or so months, according to Bank of America Corp.
“That’s bigger than energy, basic materials, consumer staples — we’re getting to the point where this is a meaningful driver of performance and risk in the convertible space,” Michael Youngworth, the bank’s head of global convertibles and preferreds strategy, said in an interview.
The recent moves by Strategy, which until recently was called MicroStrategy Inc., to juice potential returns for buyers raised some eyebrows. Last week’s convertible note deal saw the conversion premium the firm had offered revised lower, and a three-year put option, while the preferred stock offering in January came with a hefty discount.
The pricing of the deals suggests “that the market is experiencing MSTR/crypto fatigue,” according to Manoj Shivdasani, founder and head of research at GSR Research, which is focused on equity-linked securities.
Since the beginning of 2024, about $17 billion has been raised via equity-linked products by firms whose business relates to digital assets or where the proceeds of the offering is earmarked to buy Bitcoin, calculations by Bank of America show. After hitting a peak in the fall, the terms of the deals have increasingly become investor friendly given the largest cryptocurrency hasn’t hit a record in a month, with issuers either offering higher coupon payments or lower conversion premiums than they had in similar recent offerings.
“You risk saturating the market with crypto paper — at some point the market will get very selective in what they’ll invest in and they’ll only invest in companies that have the lowest cost of Bitcoin acquisition,” said Yan Jin, a senior portfolio manager at Columbia Threadneedle Investments.
Even the companies that trade at a premium to the market value of their Bitcoin holdings, like Strategy, have been forced to offer new deals “at discounts to incentivize investors to participate,” he said.
Strategy’s share price premium to the value of its Bitcoin has compressed, from more than 300% in November to below 200% in recent weeks, data compiled by Bloomberg show — a change that’s also affecting the volatility profile of the underlying stock.
The game plan for Saylor’s company — and those mimicking him — is simple: Sell shares and, in this case, debt instruments to investors who either believe in your vision or want to profit from the stock’s volatility. So long as the company’s shares trade at a premium to its hoard of Bitcoin, it makes sense.
The question is whether Bitcoin can continue powering to records — it’s up just 0.3% this year — and if Strategy and others like MARA can deliver volatility. Strategy’s volatility has slumped nearly 60% from a December peak while Mara’s has essentially mirrored the decline over the same stretch, data compiled by Bloomberg show.
Not everyone is worried about the risk of an over-saturated crypto convertible debt market, at least for now.
“The market has further appetite for crypto convertible bonds so long as pricing is attractive,” said Michael Gunner, a portfolio manager with Acasta Partners. “The market has a preference for shorter dated structures, lower conversion premiums, cash coupons and longer lock-up periods.”
Those dynamics showed up in the latest Strategy deal last week. The offering featured a three-year put option, which gives holders the option to redeem the bond before it matures. When the notes priced, the conversion premium was set at 35%, below the roughly 55% premium on a similar issue in November.
As Bitcoin hits resistance after a roughly 50% surge in less than six months, the path forward for Strategy and others selling convertible notes to bet on the token may prove uneven if investors shun risky assets.
Bitcoin’s history is fraught with volatility. While Strategy has weathered the token’s sharp swings in the wake of the FTX blowup, with the company’s market value topping $105 billion back in November, its current iteration as a turbo-charged bet on the cryptocurrency has not been tested by a sharp correction.
“They rely on the underlying shares and Bitcoin itself remaining at these lofty levels,” said Bank of America’s Youngworth. “If there’s a meaningful selloff then the convertible bonds could draw down quite a bit and investors could feel the pain, and even the hedge funds may not perform.”
