MicroStrategy is likely to enter the Nasdaq 100 index on December 23, with the announcement expected as early as December 13.
Bloomberg ETF analysts Eric Balchunas and James Seyffart broke the news, predicting that the software company turned Bitcoin whale could hold a weight of about 0.47% in the index. This would make it the 40th largest holding among the $550 billion worth of ETFs tracking the Nasdaq 100.
Moderna is reportedly on its way out to make room for MicroStrategy. Meanwhile, the S&P 500 remains out of reach for now, largely due to profitability issues. But Eric thinks that changes to accounting rules for Bitcoin valuation might make MicroStrategy eligible by 2025.
Massive convertible bonds drive Bitcoin hoard
MicroStrategy’s rise in prominence started with a pivot in August 2020, when the company transformed itself from an enterprise software vendor to a Bitcoin-dominated entity. Its latest decision? Issuing a $3 billion zero-coupon convertible bond with a 55% conversion premium—the fifth such issuance this year—to buy even more Bitcoin.
The bond is set to mature in five years. The company’s plan seems straightforward: borrow money at zero interest, use it to buy Bitcoin and repay the debt once the stock price skyrockets. The catch? It only works if Bitcoin trades at or above $100,000.
Right now, MicroStrategy’s stock is trading at a huge premium to the net asset value (NAV) of its Bitcoin holdings, making the strategy viable *only* for now. But the allure of this financing model hasn’t gone unnoticed.
Last week, Bitcoin miner Marathon Digital Holdings followed suit, issuing $850 million in zero-coupon convertible bonds with a 40% conversion premium.
MicroStrategy’s approach relies heavily on its stock’s volatility, which analysts say is the true driver behind the favorable terms of its bonds. By leveraging its wild price swings, the company has essentially engineered a mechanism to secure cheap funding for its Bitcoin acquisition spree.
Volatility: MicroStrategy’s secret weapon
MicroStrategy’s stock volatility is actually part of the company’s strategy. The stock has a 252-day historic volatility rate of 106%, translating to daily price swings of around 6.6%. Its 30-day implied volatility is 2.5 times higher than that of Bitcoin itself.
This extreme unpredictability makes the embedded call options in MicroStrategy’s convertible bonds particularly valuable. They offset the cost of borrowing and allow the firm to secure funds at highly advantageous rates.
Michael Saylor, the company’s co-founder and arguably Bitcoin’s strongest believer, plays a key role in stoking this volatility. His public statements, media appearances, and relentless social media activity serve to amplify the stock’s unpredictability.
Before the Bitcoin pivot, the stock’s volatility hovered in the low 30s. Now, it’s consistently over 100%, creating a feedback loop where higher volatility leads to better bond terms, which in turn fund more Bitcoin purchases, further increasing volatility.
Saylor’s investors often use a strategy called gamma trading to capitalize on the stock’s volatility. This involves dynamically shorting and buying shares to maintain a neutral position as the stock price fluctuates.
For instance, an investor buying $1,000 of a MicroStrategy convertible bond might initially short $500 worth of stock. As the stock price rises, they would sell more shares to stay neutral. Conversely, if the stock falls, they will buy back shares.
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