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"Value is a word I find hard to define."

— Maurizio Cattelan, comedian-artist

Thursday bananas mailbag

Q: Why does one Bitcoin cost nearly $100,000?

I could cite the recent election or the growing appeal of hard money, but the proximate cause of bitcoin approaching six figures is that Michael Saylor appears to have discovered an infinite money glitch.

Saylor manifested another $2.6 billion of demand for bitcoin this week by offering bonds convertible into MicroStrategy stock at much higher prices — a neat bit of financial engineering that creates a virtuous circle of BTC and MSTR driving each other higher.

Saylor would tell you this dynamic is sustainable because MicroStrategy is only an intermediary: "The people who bought the bond can’t buy bitcoin," he said on an X spaces yesterday.

I find that misleading because the demand for convertible bonds comes mostly from hedge funds and if those funds wanted to buy bitcoin directly, they would — that’s just not the business they’re in.

Instead, they’re in the business of buying cheap call options, which is what Saylor is selling them (in the form of a convertible bond).

By offering convertible bonds, Saylor is transforming the volatility of MSTR stock (high volatility makes call options valuable) into demand for bitcoin (creating, in turn, more demand for MSTR  bonds and equity). 

Saylor wants you to think this is a real business: "Our operating business is a Treasury operation that’s securitizing bitcoin… We borrow from capital markets and lend to the bitcoin network and capture that spread."

But "capturing a spread" is not really an "operational" business, it’s just a trade. 

Saylor is in the business of financial engineering and that type of business doesn’t usually get valued as highly as MicroStrategy (MSTR), which now trades at about 3x its net asset value (NAV).

Yes, it could get much more expensive than that — if bitcoin keeps going up, there’s no reason why MSTR couldn’t trade on, say, 10x NAV, who knows.

But financial engineering often leads to bubbles and bubbles, of course, tend to end badly.

There’s no reason to think the Saylor bubble will burst anytime soon, but I do think that’s what it is: MSTR is a memecoin that holds a memecoin — a memecoin squared, so to speak. 

I can’t help but be reminded of the "CDO-squared" that led to the Great Financial Crisis. 

Saylor’s financial engineering is presumably more sustainable than that, but it’s hardly risk-free, as he’d have you believe.

The thing about convertible bonds is that, if your stock doesn’t go up a lot, they are turn into debt that you have to pay back.

If that debt comes due while bitcoin is having one of its occasional 70% drawdowns, it could cause trouble for both MicroStrategy and bitcoin.

Q: What’s a convertible bond?

Here’s an excellent podcast on convertible bonds, helpfully explained in the context of MSTR.

But the short answer is that convertible bonds are debt securities that can be converted to equity above some strike price.

The strike price on the most recent MSTR 0% convert is $672.40, about 50% above current prices.

So, buyers of the convert are lending money to MSTR at 0% (because they don’t care about yield) in return for a call option to buy the stock at $672.40.

Given the high volatility of both MSTR and BTC, that seems like a reasonable thing for them to do.

Q: Ok, but why is one bitcoin worth $100,000?

I don’t know because value is hard to define — why is a banana taped to a wall worth $6.2 million?

You can at least eat the banana, as the buyer of the comedy-art, Justin Sun, intends to do — and then he can tape another banana to the wall, look at it for a while, and eat that one, too. 

This shouldn’t destroy its value, however, because the museums that display Maurizio Cattlelan’s banana art simply replace the bananas when they get overripe.

I find this not so different from Saylor’s convertible bonds, really.

As long as MSTR goes up, he can continually replace the old converts with new ones, creating ever more demand for bitcoin (which creates ever more demand for MSTR’s converts).

It’s kind of bananas. 

Q: Is 3x NAV a lot?

MSTR’s valuation is ridiculously high by TradFi standards.

REITs, which do the same thing as MicroStrategy but with real estate, generally trade at about 1.2x NAV.

But crypto is more exciting than real estate, so Saylor is able to sell MicroStrategy stock at 3x NAV and then sell convertible bonds at a 50% premium to that, even. 

Magic internet money, indeed.

(For an even sillier example, on a much smaller scale, check out the ai16z token, which trades on about 33x NAV.)

Q: Should corporations hold bitcoin in treasury?

I can’t see why they would because treasury funds are meant to meet future expenses and companies’ future expenses will be in fiat, not bitcoin.

Also, US dollars held in money market funds yield above the rate of inflation, so companies holding dollars are growing their purchasing power, risk free.

But Saylor thinks they should hold bitcoin instead and he’s increasingly convincing them to.

Over 60 corporations are said to hold bitcoin now and some of the holdings are substantial: The bitcoin miner MARA Holdings announced a convertible bond this morning that will raise $1 billion, most of which will probably be used to buy bitcoin.

Saylor doesn’t stop there, however — he also advises companies to stop paying dividends and buying back shares and buy bitcoin instead. 

This is possibly the worst financial advice I've ever heard.

If a company has excess capital it should return the capital to shareholders and let them decide whether or not to buy bitcoin with it.

He doesn’t even stop there, though.

On the spaces yesterday, Saylor said companies should aim to have half of their stock market value in bitcoin, because that would be less risky than having their entire value dependent on earnings, as most do now. 

But this is a dystopian view of finance — companies should make things we want and need, not just HODL bitcoin.

We can HODL for ourselves.

Q: Will we get a Doge ETF soon?

If we’re expected to take a banana taped to a wall seriously as comedy-art then I guess we have to take Dogecoin seriously as comedy-finance.

It looks like Solana is likely to get an ETF and the next in line after that may well be the original comedy coin, DOGE.

This is testing my free-market convictions.

One of my core beliefs is anti-paternalism — I believe in my God-given, constitutional right to lose my money however I choose.

So, if people want to put their hard-earned money into DOGE, I don’t think we should stop them.

But making DOGE available on regulated stock markets feels like a bridge too far, even for me.

The friction of having to open a Coinbase account to buy DOGE or download a wallet to buy newer memecoins is a useful bit of friction, much like a cautionary browser pop-up: You sure you want to do this?

Putting DOGE on the stock market removes that friction, gives it implicit approval, and makes it look like an actual investment.

I'm fine with gambling as entertainment, but people need to know they're gambling — the people I found on TikTok yesterday don’t seem to know that that’s what they’re doing.

I get the appeal; I, too, would like to put $1,000 into a memecoin and then retire when it does a 1000x. 

But let’s not pretend this is investing.

The purpose of stock markets is to channel investment savings to productive purposes, creating value that’s not hard to define.

Allowing a DOGE ETF to trade on major stock exchanges would do the opposite, channeling savings out of productive companies and into unproductive memecoins.

In fact, it’s already happening: By redirecting TradFi money into his convertible bonds, Michael Saylor’s infinite money glitch is vampire attacking the stock market.

Let’s hope we survive it.

— Byron Gilliam

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