Everyone who owns bonds in MicroStrategy is likely seeing their portfolios expand as of late.
MicroStrategy Is Rewarding Risk-Taking Shareholders
The company was amongst the first major institutional players to pledge support for bitcoin, the world’s leading digital currency by market cap. MicroStrategy ultimately bought more than half a billion dollars-worth of BTC between the months of August and December of last year, and this set up a long stride of additional institutional players – amongst them Square, Stone Ridge and Massachusetts Mutual to name a few – who stepped in to get their fingers on the expanding cryptocurrency.
However, where MicroStrategy really played it smart was in its maneuver to transfer debt and then use the proceeds to purchase additional units of the currency. This allowed bond holders to get in on the action, and their stashes are growing like mad at press time according to figures like portfolio manager Dave King, who presently works with the Columbia Convertible Securities Fund.
In a recent interview, King commented that bond holders are likely witnessing some solid returns even though bitcoin’s price has fallen somewhat in recent days. He comments:
This is a classic ‘heads, I win, tails we tie’ play. We win if bitcoin goes up a lot, and if bitcoin goes down and stays down, we get our money back.
In early January, the conversion price of the bitcoin-backed stock shares was around $397, though now, that price has surged to about $540 given how much the company’s fourth quarter earnings went up. As soon as the bond notes mature, they are paid out and holders can garner some healthy profits.
However, granted bitcoin stays as it is, holders simply get whatever money they put into the bonds returned to them.
King believes that the amount of money MicroStrategy has made on its bitcoin investments is anywhere between $800 million and $1.4 billion. It’s important to remember that initially, the firm purchased roughly $250 million worth of BTC in August 2020. At the time, the asset was trading for a “mere” $10,000, which was a slip down from the recent $12,000 per unit it was enjoying.
Thus, when the currency rose by more than $30,000 just a few months later, you can imagine how much profit was made on the company’s part. King estimates that MicroStrategy’s bitcoin holdings account for roughly 22 percent of its total portfolio. He states:
The founder [Michael Saylor] has become a big bull on bitcoin and invested its large cash pile in it. Even if bitcoin goes down 30 to 40 percent, the company still has enough to pay this bond off easily.
This Is Likely to Keep Going
Craig Manchuck of Osterweis Strategic Income Fund believes that bond offerings like MicroStrategy’s will become far more common in the coming months, claiming:
It’s a barometer of how speculative markets are now.