A shit version of the 3 body problem.

Bond Buyers, MSTR holders and Saylor. Floating around and around.

Disclaimer: I am not a financial advisor. I am a blueberry. I do not have any financial background or any education in anything. I am purely a moron with a youtube account. Nothing in this article is truthful or factual, and everything should be taken as pure and unadulterated parody. I will mention various complex concepts in this article, and simplify them to a level I can understand. In this process the concepts will be entirely abridged and untrue, and thusforth it is vital that nothing in this article is taken as fact. I am literally making all of this up. Nothing is true or should constitute ANY form of advice. I am not being compensated for this article by any of the entities mentioned within.

The microstrategy trade is truly hilarious. If I had to compare it to anything, it would be to this meme.

At each level lies a mastermind genius, outsmarting the poor schmucks giving them free money. Above them lies their puppetmaster.

Ok, hilarity aside, let’s talk the MSTR trade. To really understand this trade, you need to first break it down into key parts. For brevitys sake (and it’s also just not required for you to understand these pieces. If you are interested in them I highly recommend this youtube video.) I will keep this very very generic and concise.

$MSTR Holders: These are people who *currently* own $MSTR. The people that everyone assumes are getting *shafted* by being diluted by Saylor in an effort to buy more stock.

Convertible Bond buyers (Gamma Farmers): Ok so.. This part could get incredibly complicated, but it doesn’t have to be. For this article, we will be assuming that the majority of the convertible bond buyers (more on this at the end) are doing so to farm Gamma. (Gamma is a complicated options thing, but you don’t need to know about that.) So Let’s call these people Gamma Farmers for now.

Saylor (future equity holders): This is the part all the research I’ve done so far on this topic has missed, predominantly because most of the actual financial analysis has been done by delta neutral options people / educators, and they don’t really have any optimistic bones in their bodies and assume ANYTHING and everything is a scam that’s going to zero and they’re just here to farm volatility on the way down. Conceptually, these are the sum of all FUTURE MSTR holders. I’ll use Saylor as the effective label for this group of people as he represents the ideology of this group. It’s effectively $MSTR share holders in 3–5 years time. Think of it as MSTR in a future point in time. Ergo we I will call it Saylor.

Right now $MSTR is issuing convertible bonds (These are bonds that convert to equity pending maturity) with the proceeds of these bonds going to buy bitcoin. Effectively, he is telling people hey, give us a loan, we will use that loan to buy bitcoin, and when maturity hits (in 3 or 5 or however many years) we will give you equity as a thank you for that loan.

Usually these bonds feature a coupon. This is an interest rate paid by the company to the bond buyers. Saylor has managed to sell Bonds with 0 coupon (zero interest rate) which at first glance seems really promising. However, this isn’t entirely true. The companies ARE receiving something outside of just the backing of the bond for their money. That something is the volatility premium that exists in the call option contained within the bond.

In volatile markets, call options are worth more. Think of options as something you can use to hedge risk. If stuff is volatile, there is more risk, so people pay a premium to hedge that risk. Now, all you need to know about $MSTR bonds is that you shouldn’t consider them as convertible bonds atall. Gamma farmers don’t want the bonds to mature and would prefer to roll them into the future ad infinitum if possible, as they aren’t interested in the equity or the bitcoin. They’re fundamentally only interested in the ability to farm gamma from the bonds. Now, it’s also important to realise that they DON’T want the bonds to convert to equity. Why? Well, the second the conversion happens their beautiful call options are transferred to straight stock, and poof goes their sweet free call option. So it makes way more sense to just think of the bonds as a way for people to get $MSTR call options.

With this understanding, you realise WHY people are willing to give Saylor billions and billions of dollars (via the bonds) to buy bitcoin with. It’s a cheap way for them to get $MSTR call options, enabling them to farm gamma.

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(You can ignore this part, but if you want to know why people feel safe buying these bonds, can read it)
The bonds are senior to $MSTR equity holders. They are backed with equity, and also feature the underlying bitcoin bought with them. Finally, to farm Gamma effectively the bond buyers have to deploy shorts on the stock itself. This provides them with a decent amount of downside protection. So in worst case scenarios, they are still going to be receiving something. These are GIGANTIC institutions buying the bonds, and they have pretty stringent risk departments. This isn’t a bunch of cowboys yolo’ing into bonds for the sake of it.

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Let’s recap. Saylor is selling people convertible bonds to raise capital to buy bitcoin, (effectively) diluting share holders in the process. So why are share holders ok with this? Well, they’re effectively being dumped on so $MSTR can buy more bitcoin. So, anyone with $MSTR at any premium should sell and buy a bitcoin ETF to get more bitcoin exposure?

Well… not really. People are missing the 3rd piece of this equation. Which is Saylor (remember, Saylor is a representative of FUTURE equity holders). Saylor’s big play is that by being able to raise billions of dollars through enticing Gamma farmers to buy bonds, he is able to buy more bitcoin. $MSTR already has a big treasure trove of bitcoin (with a USD value of X). Now, they are using the proceeds of bond sales (let’s call this Y) to buy MORE bitcoin.

The assumption I’ve seen most make is a final NAV (Net Asset Value) OF $MSTR is X + Y. He has $100bn of $BTC, buys $10bn more, and has $110 bn of $BTC. This isn’t true however. It’s more like $MSTR = X+X(price impact of Y) + Y. Each Dollar Saylor raises and uses to buy Bitcoin with affects the Existing holdings of $MSTR. Each dollar raised increases the strength of his narrative, the price of bitcoin and most importantly, the likeliness of being able to raise another $. It increases the speculative value of $MSTR, and the media attention hype interest etc etc of $MSTR. In kind, this increases $MSTR’s volatility. And this means more people buy bonds, letting Saylor buy more bitcoin, increasing MSTR’s NAV.

(I don’t want to talk about GBTC here as there isn’t really any point. It’s irrelevant. But if you’re interested you can read this article on GBTC to understand what happened over there)

Current share holders are not upset with (seeming like) getting shat on and being diluted so MSTR can buy more bitcoin. Because Saylor’s big play is that instead of MSTR having a mcap of $100bn with $100bn of $BTC, they are in a transition period of having a mcap of $200bn with $100bn of $BTC, and END UP in a position where they have a mcap of $500bn with $500bn of $BTC. The $MSTR premium is designed to go to zero. It’s inevitable. That isn’t a bad thing. Saylor probably kows its coming. What’s important is that the CURRENT impact of a dollar raised has more than a dollar of impact on MSTR’s NAV.

This is why $MSTR holders aren’t selling. Because while right now they are in a stock with a high premium to NAV, there is a real and non negligible chance that $MSTR CAN keep raising more funds, and the dilution impact of those funds is much less than the appreciation of microstrategies existing holdings.

What could go wrong:

Each bond issuance is in essence a volatility dampener. The gamma traders need to hedge the delta (price) of the bonds they bought. So as MSTR issues more bonds, there’s more people hedging against the book. All of this hedging effectively means there are more people dampening volatility. As price goes up they short. as price goes down they close their shorts. Saylor is in the business of selling Vol. He needs Vol to continue to keep issuing bonds. This gets progressively harder as he sells more and more bonds.

What happens if bitcoin collapses?

So this is the Tricky part. Some of the bonds are issued against debt. Saylor most likely has to give these people their money back. Money he can only get by issuing more debt / selling bitcoin. IF the price of bitcoin drops dramatically, MSTR will have to sell some of their bitcoin holdings. BUT (and this is a big BUT) while I am trying to remain as impartial here as possible, I think this generalised assumption that bitcoin can (and will) just drop 80% is pretty… crazy? Like it took some intense hyper fraud to take us down 80% from ‘21 high to ‘22 high. Aslong as bitcoin doesn’t completely crater, the bet Saylor is making isn’t that insane or degenerate. If there’s enough demand I can write more on this. But it involves alot of maths and i’d do a pretty bad job of it. maybe we can get someone else to do it. i

Bond Buyers (continued)

Now, everything above has been written under a fairly cynical eye, which is that there are NO participants in the bond sales who simply want to own more Microstrategy. This isn’t entirely true. If you put your venture capitalist glasses on, you can see that by taking part in the bond issuances you are effectively giving Microstrategy more fuel for their business, which is buying bitcoin. If you have a large bag of Microstrategy already, you are somewhat incentivised to double down via the bond issuances rather than just buying more equity. Effectively supporting the cause.

Some of the bitcoin purchases are backed by debt. This debt will need to get paid back. While it is still years away from being called, it’s still a reality. Saylor WILL need to raise money to pay off these loans. These are facts. but they are facts for things that are years out, and discussion about this specifically serves no benefit to the purpose of this article, which is me being really mad at people comparing the GBTC premium to the MSTR premium.

In Conclusion:

Saylor is making two bets. One of the bets is that bitcoin will go up. The other big bet is that MSTR 0.00%↑ will stay volatile. He is leveraged, but not in the way people think. This isn’t a texas hedge. It’s more like using bitcoin as collateral to buy calls. He goes from a static position that benefits IF bitcoin goes up eventually, to one that needs bitcoin to go up before the expiry. However, time is not on his side. Volatility fades and he needs this key ingredient more than anything else. (I will add we are going to crazy times and volatility really doesn’t seem to be going anywhere)