MicroStrategy: Are Crypto Bros Stupid?

Well... But are they THAT stupid?

I had a different article all planned, about a criminal enterprise and their love for gold, like an Austin Powers movie. It would also talk about GST and how people use it to con the government out of taxes, unlike an Austin Powers movie.

But I had to publish this one first, because it took up my entire week trying to puzzle out, assuming that the biggest news story in crypto right now isn’t just people being mindless… despite 90% of stories coming out of the crypto space being about people being mindless.

The story is about MicroStrategy.

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MicroStrategy is a company that currently is worth over $90 billion US dollars, putting it in the top 200 companies in the world in terms of size. This is, despite the fact that the company doesn’t really produce much (it makes software, but good luck telling me what that software does), and the only thing the company was famous for, before the last 5 years, was being caught for fraud during the dot com bubble.

I’m sure that is in no way connected to the rest of this story. In fact, forget I said anything.

Investors don’t care about MicroStrategy’s products, and MOST aren’t dumb enough to mistake it for Microsoft. They care because the company owns, as of 12 December 2024, 423,650 Bitcoins.

That’s a lot of Bitcoin, and since the price of Bitcoin has skyrocketed recently, it makes sense that a company that owns a lot of them would be worth a lot.

Case closed, go home.

Except, I did the math, and at Bitcoins current price 423,650 Bitcoin is worth about $43 billion US. That’s enough money to buy a Kawasaki Teryx KRX 1000 quad bike and not have to wait for it to go on sale.

Its also a damn sight smaller than $90 billion.

So, I went back to the first question. Are people stupid? Why are they buying shares that are twice as expensive as the assets the company owned? Why don’t they just buy bitcoin and skip the middleman?

That’s when I learnt that MicroStrategy has sold the most convertible bonds of any company globally.

Convertible bond arbitrage is probably the most esoteric bullshit you will hear about all day, but it has created nearly $50 billion in additional ‘value’ (I use that term as loosely as HR use the word ‘supportive’) in the last 300 days. That’s probably worth knowing about.

Convertible Bonds

Let’s start small. A bond is not the same as a share.

A share is portion of ownership of a company. You buy a share so that you are technically one 0.000000004^th the boss of the local Coffee Guru and can tell Samantha off for using almond milk instead of oat, again.

A bond is just a fancy name for a loan. If you buy a company bond, you are just lending them cash to spend on the agreement that they pay you back over time. You don’t own shit.

Bonds are seen as safer than shares, because if a company ever goes bankrupt, they have to pay back all the bonds first, and the shareholders get the scraps. On the flip side, bonds usually pay much worse than shares.

Bonds are the beta-move of putting all your money into a low-yielding bank account, whilst shares are the Alpha, dropping all his money of the horse track before calling mum to be picked up because he can’t afford an Uber home.

A convertible bond is the middle child, often forgotten and statistically loved the least. This joke was written by a middle child.

Convertible bonds act like normal bonds, taking on little risk for little reward, but they include a clause that means, provided the share price reaches a certain level, you can swap the bond for shares.

So, the $100 convertible bond might have a clause that swaps it to shares if the share price reaches $150.
If the company does well, you can profit with the high-reward shares. If the company does poorly, you can stick with a bond and take on less risk. It’s the Miley Cyrus of financial products.

Arbitrage

Look, there are all sorts of fancy definitions for arbitrage that I’m not going to go into because A) they are too nuanced for me to explain right now and B) they’re French.

Point is, when there is a temporary discrepancy in the prices of two things that you can take advantage of, we call that arbitrage.

Imagine betting on both NSW and QLD for State of Origin

but getting 3-to-1 odds both ways.

You wouldn’t care which team won (NSW obviously), because you paid twice and got 3 times back.

This is what is happening with MicroStrategy stock right now.

Since the price of a convertible bond, and the price of the stock is not the same, you can make a bet that the convertible bond’s price will go up, and at the same time make a bet that the share price will go down.

Example

Imagine the convertible bond is worth $90 and will switch to a share if share prices get to 150. The share price is currently worth $100.

Scenario 1: The share price goes up to $150.

You can convert your bond, which now means your $90 purchase is worth $150. You just made $60.

Since you also bet that the share price would go down, and it instead went up by $50, you lost $50.

$60-$50= $10. Congratulations big spender.

Scenario 2: The share price goes down to $50.

You can’t convert your bond, because the share price never got high enough, but you still have a bond worth $90. You can’t find anyone willing to buy it for $90, but you can probably sell it for $50. You lost $40.

Since you bet that the share price would go down and it did, you made $50.

$50-$40 = $10. Congratulations big spender.

Scenario 3. The share price doesn’t move.

You’re screwed.

In this overly simple explanation, you can make money when the stock price moves a lot. In finance, they call this volatility. The more volatile a stock is, the less likely it won’t move, the less likely Scenario 3 happens.

MicroStrategy A) offers billions in convertible bonds which they use to buy more bitcoin. This B) increases the share price of the company which C) leads to convertible bonds converting to shares, which D) causes investors to make a profit and likely buy up more convertible shares, pushing the company’s share price even higher.

They aren’t a company; they are a bond market for bitcoin.

It’s the perfect system, as long as people are willing to keep buying the company’s shares. What could possibly go wrong?

… did I mention the history of fraud?