And I often ignore it expect when I feel as though it directly applies to crypto. Convertible bonds are what Microstrategy is offering to the market and then using the proceeds to buy Bitcoin, so understanding them is quite relevant to the space at this point so I'm trying to get to know them better. Here's what Grok, the Xitter AI has to say:
A convertible bond is a type of corporate bond that can be converted into a predetermined amount of the company's equity (usually common stock) at certain times during its life, according to its terms. Here's a breakdown of how it works:
Key Features:
Fixed Income Security: Like any bond, it pays interest (coupon payments) at a fixed rate until maturity. This provides the bondholder with a predictable income stream.
Conversion Option: The bondholder has the right, but not the obligation, to convert the bond into a set number of shares of the issuing company's stock. The conversion ratio (the number of shares per bond) is set when the bond is issued.
Conversion Price: This is the price at which the bond converts into stock. If the stock's market price exceeds this conversion price, it becomes beneficial for the bondholder to convert the bond into shares.
Maturity: If not converted, the bond will mature, and the issuer will repay the bond's par value to the bondholder.
Lower Coupon Rate: Convertible bonds typically offer a lower coupon rate compared to similar non-convertible bonds because of the conversion feature's value. This lower interest rate is a trade-off for the potential upside if the stock price increases.
Benefits for Investors:
Income and Capital Appreciation: Investors get regular income from interest payments and the potential for capital gains if they convert their bonds into stock at a profit.
Downside Protection: If the company's stock doesn't perform well, the investor still has the bond's value, which might be more than the stock's current market price.
Benefits for Issuers:
Lower Interest Costs: Companies can issue debt at a lower interest rate due to the conversion feature.
Potential to Reduce Debt: If many bonds are converted into stock, it reduces the company's debt load.
Risks:
Interest Rate Risk: Like all bonds, convertibles are subject to interest rate changes. If rates rise, the bond's value might decrease.
Equity Risk: The conversion feature ties the bond's value somewhat to the stock's performance, introducing equity-like risk.
Call Risk: Many convertible bonds are callable, meaning the issuer can force conversion or redemption under certain conditions, potentially at times when it's not in the bondholder's favor.
Convertible bonds can be an attractive investment for those looking for a combination of fixed income security with the potential for equity-like returns, but they do require understanding both bond and stock market dynamics.
So MSTR is offering these bonds that can be converted to MSTR stock, but because the funding is being used to purchase BTC and MSTR stock is going up it's created this flywheel of massive gains. As we can see in the description these types of bonds have a lot of variables like forced conversion or redemption if the corporation that issues them starts drowning in their own debt. I have no idea what the details of MSTR bonds are in this regard but perhaps the nitty gritty is a moot point.
https://x.com/BritishHodl/status/1865435718748639298
MSTR is borrowing billions at 0% APR... how is that even possible? Why are all these people letting MSTR borrow their money at 0%? How are they making money? Well it seems complicated and I still don't fully understand it, but I do believe that it is happening nonetheless.
There's also the issue with MSTR getting listed on stock indexes which feeds into all of this.
https://x.com/martypartymusic/status/1879220656992104870
Shocking.
https://x.com/martypartymusic/status/1879200946363990206
These other thousands of projects need to show their usecase and show that they actually have fundamentals underlying them.
Did he really just say that the SEC requires assets to have "fundamentals"?
Show me that in the case law.
Show me how Bitcoin has legally better "fundamentals" than any other clone of it.
Thanks for the salad-talk one last time.
Now fuck off forever.
https://x.com/IIICapital/status/1865474673623916770
https://x.com/lopp/status/1865771014472577498
https://x.com/IIICapital/status/1879166132172857851
In this one it's explained how dollars can basically be printed out of thin air to buy BTC in the current environment we find ourselves in. This is something that was totally scoffed at before. "Well the government would never print money to buy BTC, that's hopium." Yes, well, the Federal Reserve is a private bank, and we can see with this explanation that even retail banks and corporations have a lot of leverage in finding sources of liquidity and expanding their balance sheet.
It was originally thought that Bitcoin was going to suck up liquidity from other sources, but after watching a video like this it's very obvious that a lot of these institutions are just going to expand their balance sheets and take on more debt to get what they want. This is the standard play in legacy finance. Where does that debt come from? Dozens of sources. Mostly derivatives.
Other corporations are going to start issuing these convertible bonds in order to buy more BTC (and maybe even other crypto). META is currently on deck for a strategic reserve. In fact companies like Marathon (mining company) are already doing it. However MSTR is the most pure play in this regard as there's no way for any other corporation to catch up to it. Blackrock may have more coins on their balance sheet but they don't legally own the coins and can't leverage them like MSTR can. They are liabilities, not assets.
This is the first cycle in which debt will be printed out of thin air to pump the price of BTC. They are using the money printer to buy out the asset, just like we were all talking about years ago but were never totally sure. But they are doing it in a sneaky way right under everyone's nose. Classic bankers.
Is $100k the top?
Not even close.
We still have a full year to go to complete the cycle.