I'm going to take a break and think of a better / new way to share my performance.
For the first time in it's decade plus history, bitcoin surpassed $100,000 this year. Amazing!
Heads up that starting in 2025, I'm going to change this blog a bit. I want to write posts that has more substance rather than just posting my positions. Stay tuned.
Bitcoin is on an incredible run and seems to have no end in sight. It's up 10% this week, which is on top of the prior week's incredible run-up.
Since the election of Trump, Microstrategy has been on a regular cadence of issuing convertible bonds to purchase more bitcoin. I previously wrote about it here but didn't quite articulate it as well.
The current premise is that Microstrategy is:
- Issuing their convertible bonds to get USD
- Using the USD to buy bitcoins
- Watching their stock price go up
- Realizing that the convertibles bonds are in-the-money that can convert into stock
Then rinse and repeat 1-4.
Matt Levine, came to this conclusion here:
We talked last month about MicroStrategy’s plan here, which is pretty straightforward. MicroStrategy is essentially a pot of Bitcoins: Currently it owns 331,200 Bitcoins, and Bitcoin is trading at around $91,000, making MicroStrategy’s pot worth about $30 billion. It also runs an enterprise software business but that hardly seems relevant. MicroStrategy’s market capitalization is about $84 billion, meaning that it trades at well over a 150% premium to the value of its Bitcoins. So it can sell $1 worth of stock, buy $1 worth of Bitcoin, and add $2.50 of market capitalization. It can create value out of nowhere.
The natural response to discovering this magical phenomenon is to ask “well, okay, but how much of this can we do?” That was MicroStrategy’s response — it would absolutely be mine! — and it hasn’t found the limit yet. It did $4.6 billion of stock sales, and $4.6 billion of Bitcoin buying, last week. Its stock was up, Bitcoin was up, and its premium to Bitcoin also went up modestly.[1]
If you can issue stock for $1 and watch your stock price go up by $2.50, why would you stop?
Bitcoin seems to have found it's footing at the ~$90k level. Stocks retreated Wednesday after Federal Reserve officials dampened expectations for a December rate cut, suggesting they need more economic data before committing to easing monetary policy. I'm thinking about buying Q2'25 earnings (July / August) puts on the Nasdaq on Monday to hedge for a weaker economy once Trump's economic plans gain more clarity.
Bitcoin has surpassed a new all-time record high of over $84,000:
This is on the heels of Trumps' presidential win and the expectation (hope?) that America will become the crypto capital of the world.
Following the bitcoin bull run, Microstrategy today announced that it was acquired 27,200 BTC worth just over $2 billion:
I dug into what BTC Yield, because even as a finance pro, I haven't heard of this term before. Here's how Microstrategy explains it in today's press release:
In other words, it's the delta between the BTC / DSO from two points in time -- see my scratch math here:"BTC Yield is a key performance indicator (“KPI”) that represents the percentage change period-to-period of the ratio between the Company’s bitcoin holdings and its Assumed Diluted Shares Outstanding. Assumed Diluted Shares Outstanding refers to the aggregate of the Company’s actual shares of common stock outstanding as of the end of the applicable period plus all additional shares that would result from the assumed conversion of all outstanding convertible notes, exercise of all outstanding stock option awards, and settlement of all outstanding restricted stock units and performance stock units. The Company uses BTC Yield as a KPI to help assess the performance of its strategy of acquiring bitcoin in a manner the Company believes is accretive to shareholders. The Company believes this KPI can be used to supplement an investor’s understanding of the Company’s decision to fund the purchase of bitcoin by issuing additional shares of its common stock or instruments convertible to common stock."
Thinking on this strategy for a moment, there are two scenarios in which this might play out:
Scenario 1: Bitcoin becomes the world currency reserve, alongside or supplanting the USD.
In this scenario, people no longer think about their local currency but their local currency relative to bitcoin. So, you go to your local grocery store to buy eggs and you're presented with two prices: your local currency and bitcoin (or maybe given the option to transact in bitcoin since bitcoin prices fluctuates). Microstrategy currently has over 1% of the total supply of bitcoin, and would be in a great position to put that capital to work to ostensibly make acquisition, share buybacks, etc. since bitcoin will be free to transact. This would be like a company today holding onto a massive supply of gold -- they have unlimited options on how to spend it. The benefit of being a Microstrategy shareholder is that, theoretically, you can increase you bitcoin holding as Microstrategy accumulates more bitcoin via issuing converting debt, which converts into shares (instead of being repaid).
Scenario 2: Bitcoin for some reason goes to zero or well-below the conversion price in the convertible debt.
I won't speculate on the how or why of bitcoin, but let's suppose that bitcoin's price is well-below the conversion price of the convertible debt. This means that Microstrategy will need to repay the debt, since the debt will be out of the money. What happens then if Microstrategy doesn't have sufficient balance sheet cash? They can try to convert their bitcoin holdings into cash but the more they convert, the higher the chance of crashing the market (remember, they hold over 1% of total supply). In this scenario, it would seem that as a shareholder your recourse would be to wait for the bankruptcy process to play out and hope that you still have claim to any remaining asset. Similar to how FTX's bankruptcy process played out: equityholders actually had a net gain despite the bankruptcy because bitcoin's price had a run up so creditors were made whole.
If you're a bitcoin maxi, would you prefer to own Microstrategy or bitcoin? Option 1 has more upside because you can potentially gain more bitcoin indirectly when the company makes bitcoin purchases, which are funded by the convertible shares. But as you can see in option 2, if there's a market crash, and Microstrategy is unable to repay its debt then you're in trouble.
The market has spoken and it seems investors like what they're seeing sending Microstrategy's shares to nearly $320 per share.
As a Tesla shareholder, this has been an incredible week. Look at that gain! Just a week ago, I opened a LEAP (expires Dec 2025) with a strike price of $300. We've clearly surpassed that already and it's not even Dec 2024. Whoa. I've already 2x my Tesla purchase but because I sold calls, my upside is capped to $300 (though, I did gain $55 in option premium, so my breakeven is closer to $355).
With this week's impressive run-up in the broader market, let's see if it holds into next week.
After soaring the past few weeks, tech rebounded back to Earth. This week we saw a big reversion for Tesla and Microsoft, as earnings either met expectations or slightly missed. Thankfully, my Tesla covered call counter-balanced the negativity and put me back in the green.
We're only a few days away from the Presidential Election. All eyes are on Tuesday November 5.