In March, I wrote crypto, mania, and reflexivity. I wanted to do an update because I think what we’re seeing in the space is so astronomically insane that I can’t believe it, and while plenty of people have pointed out how bubble like the behavior is I don’t think anyone’s fully connected the dots on how insane it is.
Great post. On how this all plays out, I’ve also been pondering a scenario 2b (for MSTR in particular) where BTC moons but the premium to NAV narrows closer to 1x. In that scenario even a BTC price of $250K would warrant only a small price appreciation from the current price, leaving the converts out of the money and MSTR looking for refi options.
A couple notes - first, while the bitcoin yield metric is undoubtedly insane, it's not the conversion assumption that makes it so - in fact assuming all the equity converts is actually the conservative assumption. You say convertible debt isn't free money - that's what they're accounting for by assuming conversion.
I also think that yes, while selling equity to buy bitcoin at ATH is pretty wild capital allocation, it's also perfectly rational if the market is valuing you above NAV as a bitcoin proxy. And selling 0% convertible debt, which if bitcoin doesn't moon is essentially free money and where if bitcoin does moon, they'll make more on the BTC than they'll "lose" on the conversion, is also pretty rational.
From what I've heard, certain institutions like the convertible bonds because they get exposure to BTC without a downside except the opportunity cost of 0% interest. What I don't understand is what they expect to happen if bitcoin goes down - what money they expect to be paid back with. Maybe I'm missing something.
You frame the issue well. A lot of ink has been spilled, but here's another way to frame it:
V = B + A
where V = MSTR's value, B = the value of MSTR's BTC, and A = the value that MSTR can extract from counterparties though capital markets arbitrage, including by issuing stock and converts above fair value.
Taking the limit of both sides as t -> the next risk off event, V -> B as A -> 0.
In plain English, capital markets arbitrage is not a sustainable source of value. It's important to let this really sink in before getting too flustered about how and when it ends.
A couple of reasons why MSTR's capital markets arbitrage isn't a sustainable source of value:
1. You can't do capital markets arbitrate when capital markets close; which they do, regularly
2. MSTR doesn't have a monopoly on selling BTC derivatives, including leveraged equity and BTC-linked convertibles/warrants. Capital markets are very competitive, and other participants will compete away the arbitrage; including other publicly traded companies, by issuing stock and converts, as well as prop desks and hedge funds, by manufacturing competing products.
The arbitrage ends if BTC enters a bear market or if MSTR's vol flatlines, but neither is a necessary condition. It wouldn't surprise me if it's already ended, but we'll only know that in retrospect.
“If Something Cannot Go on Forever, It Will Stop“ -Herb Stein
Great post. On how this all plays out, I’ve also been pondering a scenario 2b (for MSTR in particular) where BTC moons but the premium to NAV narrows closer to 1x. In that scenario even a BTC price of $250K would warrant only a small price appreciation from the current price, leaving the converts out of the money and MSTR looking for refi options.
Maybe I am too old fashioned, but you lose me when you say you are long (or neutral) all this ponzi stuff
The bigger issue is that MSTR will soon be part of the NASDAQ. I highlighted why this is a huge mistake: https://rockandturner.substack.com/p/microstrategy-in-the-nasdaq-100
Among other things, all those passive QQQ investors are now seeing their hard earned cash pumped into a ponzi style scam.
A couple notes - first, while the bitcoin yield metric is undoubtedly insane, it's not the conversion assumption that makes it so - in fact assuming all the equity converts is actually the conservative assumption. You say convertible debt isn't free money - that's what they're accounting for by assuming conversion.
I also think that yes, while selling equity to buy bitcoin at ATH is pretty wild capital allocation, it's also perfectly rational if the market is valuing you above NAV as a bitcoin proxy. And selling 0% convertible debt, which if bitcoin doesn't moon is essentially free money and where if bitcoin does moon, they'll make more on the BTC than they'll "lose" on the conversion, is also pretty rational.
From what I've heard, certain institutions like the convertible bonds because they get exposure to BTC without a downside except the opportunity cost of 0% interest. What I don't understand is what they expect to happen if bitcoin goes down - what money they expect to be paid back with. Maybe I'm missing something.
You frame the issue well. A lot of ink has been spilled, but here's another way to frame it:
V = B + A
where V = MSTR's value, B = the value of MSTR's BTC, and A = the value that MSTR can extract from counterparties though capital markets arbitrage, including by issuing stock and converts above fair value.
Taking the limit of both sides as t -> the next risk off event, V -> B as A -> 0.
In plain English, capital markets arbitrage is not a sustainable source of value. It's important to let this really sink in before getting too flustered about how and when it ends.
A couple of reasons why MSTR's capital markets arbitrage isn't a sustainable source of value:
1. You can't do capital markets arbitrate when capital markets close; which they do, regularly
2. MSTR doesn't have a monopoly on selling BTC derivatives, including leveraged equity and BTC-linked convertibles/warrants. Capital markets are very competitive, and other participants will compete away the arbitrage; including other publicly traded companies, by issuing stock and converts, as well as prop desks and hedge funds, by manufacturing competing products.
The arbitrage ends if BTC enters a bear market or if MSTR's vol flatlines, but neither is a necessary condition. It wouldn't surprise me if it's already ended, but we'll only know that in retrospect.
99% sure someday andrew wonders how he could have possibly wasted brain cells here.
That was awesome and cheers on actually reading the filings!!! You might also compare the day SMCI was put in the NAZ it was only 5 mos ago!
One of the better posts I have read about Bitcoin.