The MicroStrategy playbook: The good, bad and ugly

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A specter is haunting crypto — the specter of cheap leverage.

“Digital Asset Treasury companies” (DATs) are assembling stockpiles of bitcoin by funding it with primarily cheap debt and equity.

It’s particularly weird because it’s not just financial services companies in the mix. GameStop has bought 4,710 BTC, the Japanese hotel business Metaplanet has built up $930 million in BTC holdings, and the Singapore-based Basel Medical Group announced a purchase agreement of up to $1 billion in BTC.

Not one to be left out of the spotlight, Trump Media also announced its own $2.5 billion BTC treasury deal last week.

It’s not just BTC treasuries either — DeFi Development Corp. (formerly Janover) has amassed 609,190 SOL ($107 million), the Consensys-backed Sharplink Gaming is raising $425 million to buy ETH, and VivoPower has raised $121 million for an XRP treasury.

The trade explained

DATs are funding their crypto purchases by issuing bonds at low coupon rates (0-5%).

Who’s buying these?

One group of buyers are the market-neutral hedge funds, which simultaneously buy the bond note and short MSTR stock to delta-hedge.

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Their profits come from the underlying volatility of MSTR stock. When MSTR’s price goes up, the fund shorts more stock. When prices drop again, they buy it back at a lower price.

The more volatile the stock price, the more of a profitable spread there is. The profit exists because realized volatility exceeds expected/implied volatility (otherwise known as gamma-scalping).

As my colleague Byron Gilliam put it aptly, Saylor is in the business of selling cheap volatility.

The second group of buyers are long-only asset managers (e.g. Allianz, Calamos).

For these guys, if MSTR trades above the conversion price of the bond, then the bond is just like equity and can soar well past par.

Should MSTR’s price collapse, bondholders still have a senior claim on principal at maturity; today that claim is backed by ~$60.4 billion of BTC on its balance sheet (though MSTR’s converts are unsecured).

It’s profitable due to an asymmetric payoff. Limited downside and equity-like upside.

Both these sets of buyers enable Saylor to buy more bitcoin, which drives up the net asset value (NAV) of the company, which in turn drives up the price of MSTR stock.

This is what’s referred to as Saylor’s “infinite money loop”: It works so long as the option value of the equity trades at a premium to the net bitcoin per share (because markets are inefficient!)

Why aren’t funds just buying the ETF if they want crypto exposure?

I’ll let Pantera’s Cosmo Jiang do the explaining for me, per his recent letter:

“If you buy MSTR at 2x NAV, you are buying 0.5 BTC instead of buying 1.0 BTC via spot. However, if MSTR can raise capital and grow BPS 50% per year (last year it grew 74%), by the end of year two you would have 1.1 BTC — more than if you had simply bought spot.”

Bitcoin per share (BPS) is the benchmark metric that all the participants in this game are eyeing.

DATs want to grow BPS (or ETH/SOL/XRP per share) faster than the company’s stock price appreciation, and that in turn depends on how well the firm can leverage capital markets to raise even more.

The risks

But of course, there is no such infinite money glitch.

DATs are already advertising their stock as offering “yield,” but no such organic cash yield exists. The metric works only as long as the stock price stays above the underlying NAV.

Whereas Strategy’s bonds were originally unsecured, copycats are raising capital with secured terms, which entails real liquidation risks.

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Should crypto markets tank, DATs will be forced to sell their assets to repay note-holders if they cannot top up collateral.

Everyone’s excited about the buying, but no one’s talking about the potential forced selling.

Until they have to.

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