Author: Sankalp Shangari Compiled by: Vernacular Blockchain

1. A wonderful counterattack from boring bonds to Bitcoin

If you find traditional finance boring, you're not alone. However, cryptocurrency is different. It is destined to change the way financial markets and legal currency systems operate.

Sometimes, there will always be a character who does not follow common sense, breaks the rules and brings new changes. Michael Saylor is one such person who turned a seemingly mundane financial instrument, a convertible bond, into a powerful Bitcoin-acquisition machine. Think of this as the "Ocean's Eleven" of the financial world, but instead of robbing banks, Thaler combined market volatility, debt and Bitcoin to successfully "rob" the entire market. .

1) What are convertible bonds (and why should you care)?

Convertible bonds may sound like a boring tax lecture, but they are actually a very interesting tool in finance. Imagine if bonds and stocks were combined, and you had a convertible bond. It is both a loan and a stock option. Companies raise money by issuing these bonds, and investors buy them because they're flexible: You can hold them like bonds, earn steady interest, or convert them into stocks if the stock price surges.

The key is this: Convertible bonds have a "conversion option," meaning they can be converted into company stock under certain conditions at some point in the future. This gives investors more options and gives companies like MicroStrategy room to get creative.

Four factors that affect the price of convertible bonds:

1) Interest rate: If the interest rate If it is high, the bond price will be expensive.

2) Corporate credit: The riskier the company, the higher the return required by bondholders.

3) Stock price: Since bonds can be converted into stocks, stock price changes are important.

4) Volatility: The more volatile a stock is, the higher the value of the conversion option.

Among them, volatility is the most interesting part - and Michael Saylor's strategy is to seize this point and quickly take advantage of the volatility like a roller coaster ride.

2) Saylor's Secret Weapon: The "Black Technology" of Convertible Bonds and How to Turn Volatility into Wealth

If convertible bonds are a hybrid, then Thaler has found it Way to turn it into an F1 car. Here are four "simple" steps on how it works (assuming, of course, that you have been in the financial world for 20 years):

A. Issuing zero-coupon convertible bonds

Saylor's latest operation is: convincing investors to lend him money, and at zero interest! How? He promised that investors could convert the bonds into MicroStrategy stock in the future at a price well above the current share price. Investors find this "conversion option" particularly attractive and are willing to borrow money at zero interest rates.

B. Earn huge premiums

The "conversion price" of these bonds is set A substantial premium over the current stock price, sometimes as much as 50%. In other words, investors must wait for stock prices to rise sharply before they can convert bonds into stocks. This also gives Thaler a buffer period to avoid dilution of equity until the stock price soars like a rocket.

C. Get cash and buy Bitcoin

Saylor’s core strategy is: Use the cash you get from selling bonds to buy Bitcoin. In other words, he is exchanging debt for digital gold. This is not only betting on the future of Bitcoin, but also using stock price fluctuations as leverage to obtain more Bitcoins. If this sounds like a financial version of judo, it is.

D. Achieve long-term profits through "value-added dilution"

Usually, issue more Stocks dilute existing shareholders. But Thaler did it in a different way: By buying and holding Bitcoin, he boosted MicroStrategy's net asset value (NAV) while increasing the amount of Bitcoin per share. It's like buying a pizza and cutting it into more slices, but you end up with more pizza.

This is a concise analysis of the "magic" steps:

Assume the initial state of MSTR:

Market value = $1 million

Bitcoin holdings = $300,000

Bitcoin to stock ratio = $300,000 / $1 million = 0.3

Stock issuance:

MSTR issues another $2 million of stock, bringing the total market value to $3 million (1 million + 2 million).

Use the $2 million to buy Bitcoins of the same value.

New Bitcoin holdings = $300,000 + $2 million = $2.3 million

New Bitcoin to Stocks Ratio = $2.3M / $3M = 0.7667 (approximately 0.77).

This is the core of "financial engineering". By issuing stock, increasing the company's market capitalization, and then using the funds to purchase more Bitcoin, MicroStrategy increases its ratio of Bitcoin per share without directly diluting existing shareholders. Doing so can make the company's stock price more attractive when Bitcoin prices rise.

This mechanism can continue to operate, provided that the market is willing to give MSTR a premium based on its Bitcoin holdings. If market confidence declines, this premium may disappear (or even reverse), causing the stock price to plummet.

Simply put, this is like exchanging "cheap paper" (stocks) for "hard currency" (Bitcoin). This strategy works until the market no longer values ​​the paper.

"Magic, isn't it?" Of course - but only if the market continues to cooperate.

Wait, who would buy these things? (Hint: not milkMilk)

You are right - this is completely a classic hedge fund operation. Let’s take a detailed look at how these operations work to help those who don’t know much about them understand the principles.

2. Who will buy these zero-coupon convertible bonds?

The answer is: hedge funds, not your grandma’s retirement fund.

Why? Because hedge funds don't care about interest payments. What they are looking for is something more profitable: volatility.

These zero-coupon bonds (pay no interest) come with an attached stock purchase option (like MSTR stock). Hedge funds buy these bonds, not by holding them for long periods of time like traditional fixed-income investors, but by taking advantage of the volatility of the stock market and using complex strategies such as "delta hedging" and "gamma scalping."

Delta hedging: adjusts sensitivity to changes in stock price. If MSTR's stock price rises by 10%, they need to adjust their positions and maintain a "neutral" state (such as shorting/selling some stocks to maintain market neutrality).

Gamma scalping: Profit from the speed of stock price movements. When stock prices fluctuate wildly, a gamma strategy can help them earn profits from these movements, with gains every time they adjust their hedges.

Simply put, these hedge funds do not care about the "up or down direction" of MSTR stocks. What they care more about is the volatility of the stock price.

3. How do hedge funds make money from these bonds?

Buy low: When Michael Saylor issues these convertible bonds, he typically "leave some value behind," that is, the bond's The initial price is lower than its actual value (this ensures that the bond will be issued successfully). For example, if "implied volatility" (IV) is set at 60, but the market later trades it to 70, the hedge fund makes 10 points (which is a large profit in the bond market).

Volatility arbitrage: Hedge funds buy bonds (long volatility) and then short MSTR stock to hedge. As MSTR's share price fluctuates, they continually adjust, buying and selling shares as needed. The greater the volatility, the more adjustments there are and the greater the potential profit. If implied volatility (IV) rises, the price of the bond will rise accordingly. Hedge funds can sell bonds and make quick profits.

First-day increase: These bonds typically increase in price on the first day after they are issued. This is because they are initially priced lower (to ensure market demand) and then repriced once the market realizes the bond's "true" value. Hedge funds can resell bonds at higher prices within a short period of time, earning quick returns.

4. Why did Michael Thaler do this?

The answer is simple: he needs cash to buy Bitcoin. By issuing convertible debt, he was able to raise cash without issuing stock, thus avoiding shareholder dilution (at least for now). The bonds will only convert into shares if MSTR's share price rises significantly. This means he can raise capital at a lower cost and only dilute his equity if the share price rises.

Hedge funds are very fond of this operation. They buy convertible bonds at low prices, profit from the initial pricing difference (equivalent to making "free money"), and can also make money from the fluctuations in the stock market. This is basically a "win-win" situation for hedge funds and MSTR (at least for now).

1) Why is this "free money"?

Hedge funds are basically harvesting "mispricing" in the market.

They buy bonds at low prices,

See the bond price on the first day rise,

Then hedge the swings with MSTR stock and make a little money every time the stock price moves.

If MSTR's stock price surges, they can still profit from options on the bonds.

The reason why hedge funds like this kind of operation is that they can take on huge positions (hundreds of millions of dollars) with relatively low risk. For Thaler, it's about raising billions of dollars in a way that doesn't directly dilute shareholders. Everyone benefits…until the market stops cooperating.

It's called "free money"—but only if you're a deep-pocketed hedge fund with a Bloomberg terminal and a coffee addiction.

2) MicroStrategy is a Bitcoin ETF? (Short answer: no)

Some critics believe MicroStrategy is just a "luxury Bitcoin ETF." But that's like calling Batman "just another rich guy in a suit." While both ETFs and MicroStrategy give you exposure to Bitcoin, there's one big difference: ETFs charge fees, while Thaler gives you a growing number of Bitcoins each year for your share of the stock.

Why? Unlike those ETFs that charge management fees, MicroStrategy's Bitcoin holdings have grown each time Thaler completes a convertible bond operation. So, if you hold MicroStrategy stock, you're actually getting a larger share of Bitcoin every year. It's like when you got a free medium pizza and suddenly it got a large pizza just because the manager was in a good mood.

3) Why does this strategy work, and when does "the music stops"?

Michael Thaler's strategy has great potential, but it also comes with considerable risks. Let’s break it down step by step to see how he walks that tightrope and when he might face a big challenge.

MSTR Balance Sheet - Debt to Bitcoin

Bitcoin holdings : approximately US$45 billion

Convertible debt: approximately US$7.5 billion

Other debt ( interest-bearing debt): about 25 billion (roughly interest debt)

Total debt: approximately $10 billion

Debt Maturity: Approximately $1 billion of debt will mature in 2027-2028.

On paper, MicroStrategy is in good financial shape, with their Bitcoin assets ($45 billion) being greater than their debt ($10 billion). But the risk hidden behind this is volatility risk.

Suppose the price of Bitcoin drops by 80%, falling from the current $25,000 to $20,000, then the $45 billion in Bitcoin held by MicroStrategy will shrink to approximately $10 billion, making the $10 billion debt burden particularly heavy.

But for Thaler to truly face a "margin call" situation, the price of Bitcoin would have to fall to about $20,000. If that happens, MicroStrategy will be in a liquidity crisis and Thaler will have to make some tough decisions.

What happens if Bitcoin drops 80%?

If Bitcoin plummets, the situation could quickly worsen, primarily because of the feedback loop between convertible bonds, stock prices, and Bitcoin prices.

Stock Price Falls: MSTR stock and Bitcoin prices are closely correlated. If Bitcoin falls, MSTR stock will follow suit.

Convertible bond holder's choice: At this point, the bond holder has the right to demand cash rather than converting the bond into stock (because stocks are has no value relative to the face value of the debt).

Forced selling: If bondholders don’t want the shares, Thaler will have to sell Bitcoin to pay off the debt.

Market downward spiral: If Thaler sells Bitcoin, this will further depress the price of Bitcoin, leading to more selling, forming a vicious cycle.

This is equivalent to entering "margin call hell". Thaler may have to sell Bitcoin at low prices to maintain the company's solvency.

Key Takeaway: Thaler is essentially betting that Bitcoin won’t fall below $20,000. If it falls below this price, it will enter a "life or death" mode, and MicroStrategy may be forced to sell Bitcoin to pay off debt.

How does Thaler reduce risk?

Saylor is obviously no fool, and he has drawn up several "lifelines" just in case. Here are some of the strategies he employed:

MicroStrategy's core software business

MicroStrategy still operates a profitable software business with stable cash flow.

The business generates enough cash to pay interest on the smaller debt (roughly $50 million per year) without selling Bitcoin.

This is like a "safety net" for the company, allowing it to remain operational without selling Bitcoin.

ATM (alt-market stock) offering

MicroStrategy quietly launches market share sale Issue shares to the market.

This approach can bring cash to the company while avoiding a large one-time sell-off of stock.

"Soft sell-back" option (forced bond conversion)

If MicroStrategy's stock price At a certain level, Thaler can enable the "soft sell-back" option.

This means he can force bondholders to convert their bonds into stocks instead of requiring cash repayment.

Simply put, he can convert debt into equity according to his wishes.

Deep Bitcoin reserves

Currently, MicroStrategy holds approximately $45 billion in Bitcoin currency.

He has enough room to sell some of his Bitcoins without having to liquidate all his positions.

This option is a last resort, but it still provides the company with a contingency buffer.

5. Conclusion: The "Vulnerability Master" in the financial field

Whether you like him or hate him He, Michael Saylor is playing aA brand new game. He didn’t just hold Bitcoin, he built an entire strategy around it. By using convertible bonds, he cleverly combined debt, equity, and volatility into an almost unstoppable financial flywheel.

Every Bitcoin acquired by MicroStrategy is, in a sense, a "income" for the company. This shift in thinking may lead analysts to suddenly realize that MicroStrategy's true value is far greater than they expected. If that's the case, the company's stock price could rise significantly.

In summary, Michael Thaler has found a way to play four-dimensional chess in a two-dimensional market. He issued zero-coupon bonds and used the raised funds to buy Bitcoin, thereby increasing his holdings of Bitcoin per share. While this strategy is risky, if Bitcoin continues to rise, it could go down as one of the smartest moves in financial history.

More and more companies are also beginning to think about how to combine debt, equity and Bitcoin. As this strategy gains popularity, we may be witnessing the dawn of a new era in corporate finance.

So the next time someone says convertible bonds are boring, tell them the story of Michael Thaler. Watch their eyes widen as they realize this isn't just about bonds, it's about a revolution that is redefining the rules of finance as a whole.