How Michael Saylor's Bet On Bitcoin Quadrupled MicroStrategy's Stock?

MicroStrategy's stock price has increased more than four times this year, leaving retail investors in awe. Michael Saylor has capitalized on their demand to satisfy his own substantial appetite for Bitcoin. In addition to this, hedge funds that care little about MicroStrategy's stock price have also aided him.

MicroStrategy, which is continuously expanding its cryptocurrency reserves, has issued over $6 billion in convertible notes this year to raise money for buying coins. Among the buyers of these notes is Eli Pars, co-Chief Investment Officer at Calamos Advisors LLC. Like many other fund managers, Pars uses these notes for market-neutral arbitrage trades, which profit from the surge in the volatility of the underlying assets.

"Convertibles are a way for issuers to monetize the volatility of their stocks, and MicroStrategy is an extreme example," says Pars. His firm's long/short and arbitrage strategies hold over $130 million in MicroStrategy notes.

MicroStrategy's co-founder Saylor has accumulated Bitcoin worth about $40 billion over the past four years, believing that the small business software manufacturer needs to blaze a new trail to survive. He accelerated this strategic shift in October, announcing a plan to raise $4.2 billion over the next three years through half stocks and half fixed-income securities. Since October 31 alone, MicroStrategy has purchased about $1.35 billion in Bitcoin and issued $3 billion in zero-coupon convertible notes, the company's fifth bond issuance transaction this year.

The balance of these low-interest long-term notes now exceeds $7 billion and can be converted into shares when the stock price breaks a certain level. Hedge funds buy these notes to deploy their version of convertible bond arbitrage strategies - a strategy that is the hottest on Wall Street this year, already used by institutions such as AQR Capital Management and Man Group in other contexts.

Although the strategies vary in style, convertible bond arbitrage traders typically use hedging to isolate the conversion feature of the notes, treating it as a stock option - a value linked to the stock's volatility. The greater the stock price fluctuation, the more profitable the trade - and volatility is one of the most prominent features of MicroStrategy's stock price. This year, MicroStrategy's average daily fluctuation has been 5.2%, while the S&P 500 index has a fluctuation of only 0.6%.

Saylor introduced the fundraising plan in an earnings call with investors and analysts in October, highlighting volatility as a selling point, noting that its stock price volatility is stronger than all S&P 500 index components. Part of the reason for this situation is the dramatic fluctuation in Bitcoin prices, which have more than doubled this year. Additionally, MicroStrategy's stock is trading at a premium of over 200% over the value of the Bitcoin it holds, which could also exacerbate volatility.

The pricing of MicroStrategy's convertible bonds is another factor attracting Wall Street professionals, as their relatively cheap levels allow them to lock in potential substantial arbitrage profits. MicroStrategy is the largest global issuer of convertible bonds this year.