Michael Saylor and MicroStrategy (MSTR) are making an impact in the financial world with an unprecedented bet on Bitcoin (BTC-USD). Once a software company, MicroStrategy has transformed into a Bitcoin powerhouse, amassing around $48 billion in cryptocurrency holdings.
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MSTR Is Betting Big on Convertible Bonds
Interestingly, the company’s strategy has been funded largely through convertible bonds. Convertible bonds are debt instruments that can be converted into stock if certain conditions are met. According to a Wall Street Journal report, citing Bank of America, the company issued $6.2 billion of convertible debt last year, a record for any single issuer. This is despite the company’s most recent bonds offering zero interest and requiring the stock to surge by 55% before converting to stock.
Why Is Investing in MSTR Bonds Appealing to Investors?
Investors, including entities like Allianz Global Investors, Calamos Investments, and State Street, are big holders of these bonds. The appeal of these bonds lies in their potential for high returns, with some outperforming broader markets by generating gains exceeding 100%. Some investors view these bonds as a safer way to gain exposure to Bitcoin compared to directly buying the cryptocurrency or MicroStrategy’s shares.
This is because in the event of a company’s bankruptcy, debtholders rank higher in the capital structure compared to equity holders and are entitled to repayment from the company’s remaining assets before shareholders receive anything.
Moreover, some investors are using these bonds in complex trading strategies to capitalize on the stock’s volatility.
Crypto Bonds Are Reshaping the Market
According to the WSJ report, this trend is reshaping the convertible bond market, with other crypto-linked companies following MicroStrategy’s playbook. The report cited Michael Youngworth from BofA Securities, who stated that in 2024 alone, over $14 billion of such bonds were issued by firms like Marathon Digital (MARA).
However, skeptics warn of risks associated with these bonds. These risks include Bitcoin’s notorious volatility and draw comparisons to other big issuers of convertible bonds including failed giants like Enron and WorldCom that raise concerns.
Despite these challenges, MSTR plans to raise an additional $18 billion of debt for the purchase of Bitcoin as a part of its plan to raise $42 billion to fund these purchases over the next three years. Meanwhile, the company’s shareholders have voted in favor of increasing the company’s authorized Class A common shares from 330 million to 10.3 billion. This move aims to raise $2 billion through a preferred stock offering to fund its aggressive Bitcoin acquisition strategy.
Is MSTR Stock a Good Buy?
Analysts remain bullish about MSTR stock, with a Strong Buy consensus rating based on unanimous eight Buys. Over the past year, MSTR has skyrocketed by more than 700%, and the average MSTR price target of $529.57 implies an upside potential of 41.9% from current levels.
