11th March 2024 > > $71k, Cathie Woods, & MSTR.

tl;dr

This morning’s price action is just too pleasing for words. Cathie Woods starts to get real. A q&d analysis of the latest CB offering from MSTR.

Market Snap

Market Wrap

This is (probably) the decisive break of $70k that we have been looking for. Clear blue sky above. We are in uncharted price discovery mode which I suspect will get very interesting. No-one knows just how high we can go from here.

The ETFs will continue to accumulate – BlackRock now holds 1% of all BT. The rollout of ETFs by IFAs to their retail clients is only just getting going. Broad based funds are starting to add spot BTC ETFs to their portfolio. Pension funds are coming on board. The list goes on.

All of these demand developments have been scrutinised over and over again by the CCC during the last bull, and especially during the bear. Those who were paying attention to the factual narrative expressed in this daily missive will reap their hard-earned and justified rewards.

But a word of caution – that is a ridiculous perpetual futures funding rate.

Curious Cryptos’ Commentary – Cathie Wood

Ark Invest has long been a crypto supporter. Cathie herself gave a prediction – one I have always maintained is somewhat on the conservative side – of $1mm per BTC by 2030.

Cathie has clearly been reading and listening to the CC. I will let her explain her previous miscalculation:

“Our target is above that; it’s well above that, and with our new expectations for institutional involvement, the incremental price that we assume for institutions actually has more than doubled.”

Take it or leave it, it is your choice.

Curious Cryptos’ Commentary – MSTR (MicroStrategy)

I feel compelled to come back to MSTR on a regular basis for one simple reason. Anyone who is a BTC supporter, and wishes to take financial advantage of this crypto revolution, really should consider whether their personal portfolio is enhanced by adding MSTR.

In very simple terms, MSTR is a leveraged bet on the price of BTC, but with no risk of liquidation.

Some may say that is a bold claim but I can very easily prove it.

As you all know, the CC Treasury first invested in MSTR on New Year’s Eve 2020 when MSTR stock was trading at $391 with BTC at $29,100. In the intervening period BTC reached an ATH (at the time) of a touch over $69k followed by a low of a touch over $15k. MSTR’s price moves were even greater. Investors who believe in DCA – a tried, tested, and very successful investment philosophy – love that kind of volatility. Buying more at a lower price always works well.

As of Friday’s close, MSTR stock since NYE 2020 has returned 264%. BTC at that close had returned 132%, a beautiful number that is exactly 50% of the MSTR return. Coincidences like that do seem to pop-up all over the place.

Getting nearly 4x your investment in a little over three years ain’t bad.

…

The question that you are now asking is – how? How is it that MSTR provides such superior returns (and greater losses in a downturn) than BTC?

I think it was sometime during the summer of 2021 we looked in detail at a convertible bond offering by MSTR, an offering that was made for the express purpose of buying BTC to add to MSTR’s balance sheet. I should dig it out, but frankly I have some other more pressing matters to deal with today. Long story cut short, any reasonable analysis of the T&Cs of those convertible bonds would come to a very clear conclusion – all the upside to an increase in the price of BTC would accrue to ordinary shareholders. Any decrease in the price of BTC would be (mostly) borne by bondholders.

Frankly I find it remarkable that any sane investor who understands cryptos would ever buy such a product. But happy days for us ordinary shareholders that there are people who find an offer like that compelling.

…

https://www.microstrategy.com/press/microstrategy-announces-pricing-of-offering-of-convertible-senior-notes_03-06-2024

Here comes another convertible bond offering from MSTR. initially sized at $600mm but increased to $750mm, there is no doubt that there is significant investor appetite. So, does that mean the buyers of these convertibles, with different T&Cs, are getting a better deal today than back in 2021?

It is a simple answer.

No.

Let’s dig into the key elements of the bond prospectus to understand what is going on here.

The maturity date is March 15th 2030. This is a six-year bond with a semi-annual coupon of 0.625% on an ACT/ACT basis. Five-year “risk-free” treasuries yielded 4.05% as at Friday’s close. Convertibles always yield less than govvies as they are expected to make up the difference on conversion into equity. But still, that gap looks large to me though one might possibly be able to justify it if one is a believer in the BTC story and the consequent potential upside in the MSTR stock price.

The conversion rate is 0.6677 shares of MSTR which is very close to $1,500. This offering was announced on 6th March 2024 with a previous day closing price of $1,050. Investors in the convertible are paying 3.5% of notional per annum for six years to buy MSTR stock at a 50% premium. That doesn’t sound great to me.

There is only one scenario that makes that trade any sense. And that is if you think there is a decent chance that BTC will be much more valuable in 2030, and that the price of MSTR stock – which is leveraged on the price of BTC – reacts to that price change.

BUT.

And this is a very big but.

The company has the option to redeem the convertible bonds at par plus accrued interest from March 22nd 2027 if MSTR stock ever closes at 130% of the conversion price, which is just under $2,000.

MSTR stock closed at $1,400 on Friday, just $100 shy of the conversion price, a near 40% gain in a matter of days. There is an overwhelming probability – if you believe in the crypto revolution – that MSTR will be far in excess of $2,000 in three years. If so, MSTR will redeem these bonds in March 2027 at par. Convertible bond holders will be left shaking their heads at their paltry return wishing they had thought harder about their investment, whilst existing shareholders will make out like bandits.

This is not financial advice. It is simply an analysis of my interpretation of some convertible bond investors’ decisions that make absolutely no sense at all to me. We are all consenting adults, and I feel no shame in profiting from their mistake.