Transcription
Hello everybody! Welcome to Bitcoin.Crypto. My name is Forest Stevens, and in today's video, I'm going to be talking about MicroStrategy's convertible bonds and why they haven't really issued them. They've done a lot more of the at-the-market strategy. This is all just speculation; this is all just what I think is happening, as well as I'll be touching on some points from other people who have looked into this as well.
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A big part of the story right now with MicroStrategy is the at-the-market strategy. A lot of people just getting into this trade are complaining about the share price not going up. If you look at it over the month, it's gone up like crazy since the beginning of November. Yeah, it's midway through December right now, but it's kind of wild to think about how shortsighted some people might be in this trade because the price appreciation of this stock has just been bonkers. There's nothing else this year that you could have gotten into that has performed as well as MicroStrategy; that's basically universally true.
The big reason why the share price has not accrued a lot of price action in recent history is because the team at MicroStrategy that's responsible for their two-prong strategy of issuing new shares to the market and doing the convertible bond has done a lot of the first strategy, which is just issuing new shares directly to the market. The market is buying it, so any buyers on the exchanges, on your platforms, or your brokerages, if you're buying shares, you might be buying brand new, freshly minted shares. MicroStrategy is taking that money they get and buying Bitcoin, putting that on their balance sheet. So you can think instead of the price appreciating, you can think about the balance sheet appreciating. So that's where the value is accruing: on the balance sheet.
Now, why is this important? Well, if we think about the other strategy, the leverage part of the strategy, right? The at-the-market creates no leverage; it just creates instant cash for MicroStrategy to do something with. Now, in the usual case, if a company were to issue shares at the market, that's going to create a lot of sell pressure that the market couldn't handle, and that's going to drive the price down. We've seen the price stay pretty stable, and I think there's a limit to what they can do, but they are finding where that limit is. They haven't done this strategy this aggressively before, and they are finding where the line is of how much they can push the holders of MicroStrategy—the price, the buyers, the sellers, the market—how many new shares can they issue, and how quickly can they do it? They started off really quickly, issuing a lot, getting a lot of cash, and they've slowed down. Is that because of volume slowing down? Maybe, but it's also just maybe more sellers. The price appreciated really rapidly, so then there's a cool-off phase; they can only sell so much into that. They're really balancing that, and they're thinking that right now there's more value in acquiring Bitcoin than there is in price appreciation happening in the share price.
Now, the reason for that could be a lot of different things. It's hard to say which of these reasons are more important, but one of the reasons is that Saylor has talked about this on podcasts, where he thinks a strategic Bitcoin reserve in the U.S. is going to happen. He's basically betting that this is happening, and if this does happen, there's going to be a buyer who is pretty price agnostic; they don't care what price it is because if they print a bunch of money to buy this Bitcoin, that Bitcoin isn't going into the market. So it doesn't have the inflationary kind of consequence that printing money and giving it to people does. It does have an effect, but it doesn't have an effect necessarily on direct consumer inflation. The U.S. has a lot of power to be able to buy Bitcoin, and so Michael Saylor is front-running this. He's thinking that other nations, maybe not even just the U.S., other corporations—he sees this as the gold rush. He is rushing to the Yukon; he has his pickaxe in hand, he's got his pan, and he's going into the river; he's finding the gold, and he is mining it. Except in this case, it's something much more valuable than gold: it is Bitcoin.
The other reason here is because of the second part of the strategy: its effectiveness and the amount of risk that it creates on the stock is directly connected to the assets on the balance sheet. This was a point that Jeff Walton made; he's one of the kid analysts on True North. He made this point in a tweet, and I'm just going to kind of read it verbatim and expand on it with my own knowledge here. He said there are many benefits to utilizing the ATM as soon as possible, providing a base balance sheet capable of issuing $21 billion in debt while also front-running nation-states and mass corporate adoption. I mentioned those first ones already; Saylor really thinks that he is front-running nation-states and corporate adoption. We have seen more corporate adoption, and we think that nation-states are in the running already. But let's talk about that other one: the base balance sheet.
So the base balance sheet, right? The Bitcoin that they hold is their base capital, and the net assets that they have—$21 billion of debt for a company like MicroStrategy, whose market cap is hovering around $100 billion—means their net asset values are going to be a fraction of that because they are currently trading their market cap at a premium to their net asset values. So $21 billion of debt is a significant amount of debt, right? And you don't want to—if you only had $21 billion of capital on your balance sheet, if that's all you were worth, if that's all your market cap was, if that's all your net asset values were—if you did that, your assets to liabilities would be one to one; you would have as much debt as your assets.
So right now, doing at-the-market isn't creating any debt; all it's doing is reducing the share price, not letting the price run, but it's increasing their asset base. So then when they do have debt, that debt leverage is less than if they didn't acquire those assets. So it's allowing them; it's giving them this strong foundation. The more Bitcoin they can hold, the stronger foundation they have for when they start applying debt instruments to be able to buy Bitcoin. Now, they do already have some, and they've kind of issued them over time, but I think what we're going to see coming soon is a lot more of this convertible debt because it's very effective for them to be able to acquire Bitcoin, and frankly, they are running low on the at-the-market that they can do. They've said they were going to do $21 billion in new shares basically over three years; they've been doing it a lot faster than that. It's estimated that they have around $6 billion left, so they've done already more than two-thirds of the amount of this, and it hasn't even been a year. It's been like, I don't know, I think they started talking about this in October. So they're doing this rapidly, and I think that's part of where the disgruntled feeling can happen from some of the newer adopters of MicroStrategy.
Michael Saylor has been pretty good to his word about a lot of things, but I would say that they said they were going to do one thing, which is issue this at-the-market over three years, and they're doing it a lot faster. So they haven't been really honest with that; they've kind of done something different than what they said they were going to do. But I think that the only reason they did that was because they realized basically it's now, and they acquire a lot more SATs, or it's later, and they get a lot less SATs. So they're doing it again for the best strategy that they can do for the long term.
So again, this is the MicroStrategy long-term hold, in my opinion. What I'm doing personally with it: I'm holding it for a very long time. I have no price target that it reaches that I'm going to sell it. This is all just going to be on sentiment and the strategy they've been implementing, the broader market of Bitcoin, all these different things—that's what I'm considering. I don't think, "Okay, MicroStrategy is going to hit $10,000." I don't know what's going to happen to the share price; I haven't done the math, and in fact, I don't think that that's something that's helpful to me, but that's a little bit besides the point.
So basically, they're doing all this at-the-market, which is suppressing the share price but allowing them to accrue a lot more Bitcoin so that when they do the convertible bonds—the $21 billion of them—they will be able to do it for one, and then they'll be able to do it at better rates because they have more capital; they have more underneath those bonds.
So, okay, here are a couple of other things that, again, Jeff pointed out, which I think are really good points to talk about. There might be another reason here for them to have waited to issue more convertible bonds, which is QQQ inclusion. I've talked about this a couple of times, but QQQ inclusion will increase their quality of credit rating. They can actually get rated bonds, and this just gives them better standing in the credit markets. So these bonds that they've issued in the past have had really good rates; some of them have been 0%. I think the average for the convertible bonds right now is like 6-8% interest rate, which is just incredibly low. People have been talking about how they could issue a negative interest rate bond, so the bondholder has to pay them to buy it, which is wild but possible.
The QQQ inclusion, which has happened, is maybe something they were holding off until that did happen or didn't happen, and maybe now they're going to do some convertible bond offerings. The other thing here is tomorrow is December 18th, and there's another Fed meeting. Again, Jeff pointed this out—kudos to him for doing all the research, and I'm just kind of condensing it and adding my own here—but the Fed meeting, I mean, the rest of the nations around the world—Canada has been super aggressive cutting, Europe, the European Union has been as well. There's a lot of cutting going on; quantitative easing is coming back; debt is getting cheaper.
With that, the overnight lending rate is what the Fed is deciding tomorrow. If they cut it by 0.25 or maybe they'll even cut it by 0.5, I'm not sure. I think it'll probably just end up being a 0.25 cut, but regardless, if they do cut it in any amount, that will affect all of the interest rates for bonds and all of the value of bonds. It's a big deal what the Fed does in traffic. So in this way, if they wait until after tomorrow, when there's probably going to be a cut, and then they start issuing some convertible bonds—sometime after that, I'm not saying they're going to do it immediately—but if they do it after this cut, they're going to again get better rates for their offering, which allows them to buy more Bitcoin with less leverage and potentially issue even more of these convertible bonds and get rid of that $21 billion mark that they have or reach that mark.
So all of these reasons, I think, are why they haven't done these convertibles. I think a lot of the fear and a lot of the misunderstanding about MicroStrategy is around these convertibles because people are afraid of debt; they're afraid of basically cornering markets. I think a future video I'm going to be doing is comparing what Michael Saylor is doing to what the Hunt Brothers did in the '70s and '80s. They cornered, with a lot of investment, a lot of debt, a lot of margin, a third of the silver market. A lot of people have compared what Saylor is doing here. It's just very funny to compare the two; there are slight similarities, and that's why people compare it, and then there are vast differences that make it a completely different story and a completely different outcome.
But anyway, the convertible bonds, the debt, the leverage—this is what people are scared of when they look at MicroStrategy, and I think that's reasonable, right? It's reasonable to be scared of leverage; it's reasonable to be scared of debt because this is inherently risky. So I think what Saylor has done by doing a lot of the ATM ahead of time is actually de-risked a lot of the risk that would have been in the convertible bonds. So these convertible bonds will be less risky, have better percentage rates, higher conversion prices, and they'll be able to over-subscribe them, sell them a lot, and basically put less debt on their balance sheet than had they done this earlier.
So this is my theory, as well as obviously some of the other analysts out there that are covering MicroStrategy. If any of this has been unclear, if you feel like I haven't explained something clearly, comment your question in the comment section. I'll answer it there or in a future video. Check out Bitcoin Well if you want to hold some of the soundest money ever made and hold it in real cold storage. You can do that directly through Bitcoin Well. Thanks, everyone, for watching. We'll see you on the next one!