Michael Saylor's Brilliant Bet
Michael Saylor's Brilliant Bet
There's a series of trades that are talked about repeatedly: Burry and the big short, Soros bet vs the pound There's one happening right now -- it's Saylor's short fiat, long BTC trade
Originally dated June 29, 2023 — tweet
In retrospect, Saylor’s strategy to purchase Bitcoin has been nothing short of brilliant
The way he was able to structure his debt offerings to go short fiat / long bitcoin is probably going to be the greatest trade of all time if it works out. In this write-up, I will cover:
Overview of Saylor & MicroStrategy
MicroStrategy’s debt offerings
Convertible bonds
Senior secured notes
Silvergate margin loan
Analysis
Overview of Saylor & MicroStrategy
MicroStrategy (MSTR) started out as a business analytics company
Although its emphasis now is more on buying and holding Bitcoin, MSTR is a legit software business
Starting in Q3 ‘20, Saylor pivoted its emphasis to buying & holding Bitcoin
On June 28, 2023, Saylor announced MSTR’s purchase of another 12,333 BTC at an avg price of $28,136
Although MSTR has a sizable amount of revenue, how did they get enough $ to purchase 140,000 BTC over the past 2 to 3 years?
MicroStrategy’s Debt Offerings
Convertible bonds – issued out on Dec 7, 2020 and Feb 19, 2021
Senior secured notes - issued out on June 1, 2021
Collateralized margin loan - issued out on March 23, 2022. Closed out on March 27, 2023
Convertible bonds
Convertible bonds are bonds that are converted to equity on maturity. They are to some predetermined share price. When the debt matures, they are converted into the equivalent number of shares
MSTR convertible debt offering #1 on Dec 7, 2020 (expires in 2025)
MSTR issues $650M worth at a conversion price of $398 – 50% above its share price at the time, $289. The debt also has a coupon of 0.75% (it pays out 650M * 0.75% annually in interest)
MSTR convertible debt offering #2 on Feb 19, 2021 (expires in 2027)
MSTR issues $1.05B in convertible bonds at a conversion price of $1432 – 50% above its share price at the time, $955. The debt has a 0% coupon (no additional interest payments)
Senior secured notes
These are bonds that must be repaid before other debt in the case MSTR declares bankruptcy / insolvency
MSTR senior secured notes offering %1 on Jun 14, 2021 (expires in 2028)
MSTR issues 500M worth of senior secured notes with a coupon of 6.125%
Keep in mind this was done when rates were at 0%
At this point, Saylor opened up a subsidiary MacroStrategy, to hold the existing 92,079 BTC they owned
The secured note was opened under MicroStrategy – this meant this note is not secured against their 92,079 BTC (MacroStrategy’s holdings) but only 14,890 BTC (MicroStrategy’s holdings)
Silvergate margin loan
A margin loan allows you to borrow against the value of securities you own
If the loan value to collateral (securities you own) goes above a certain threshold, lender asks for more collateral or for the debtor to pay off enough of the loan to bring loan-to-value below the threshold
MSTR opened margin loan of 205M against 19500 BTC on March 23, 2022 (closed as of March 27, 2023)
MSTR borrowed 205M dollars backed by about 19,500 BTC ($42,000 per BTC at the time) facilitate by Silvergate Bank
The max loan to value was 50% – this was the origin of the rumored $21,000 liquidation price (in reality it was actually $3,562 considering there were another 115,109 BTC to be pledged)
The rate would fluctuate based off the secured overnight financing rate (SOFR) as well as the loan-to-value ratio
After the recent Silvergate bankruptcy, Saylor paid back the loan at a 22% discount (160M) – they realized a gain of +45M within the year (opening Mar ‘22, closing Mar ‘23)
Analysis
Saylor’s ultimate thesis is that fiat degrades in value, and bitcoin will only appreciate
He is taking a pair trade here, and structuring it in a way where he has a comfortable margin of safety
By issuing convertible bonds (priced at +50% of his share price) during the peak in ‘21 to DCA into BTC, he’s hedged out substantial downside risk
If BTC drops, MSTR share price does too
MSTR’s “junk” bond offering via senior secured notes allowed him to lock in a reasonable rate during a time when the Fed Funds rate was effectively 0%
The Silvergate margin loan was an amazing bet. Why?
BTC was never close to the liquidation price of $3,562 (even the biggest of bears couldn’t fathom this price point)
He borrowed 205M at a point at the start of a huge bear market, allowing him to accumulate across ‘22 at much lower prices
The FED hiking rates 500 bps within the year caused havoc in the system (due to banks holding long term debt) which resulted in many bank runs, notably Silvergate’s
MSTR paid back this loan at a 22% discount, realizing a 45M dollar gain
Due to the favorable liquidity conditions through ‘20 and ‘21, he is able to do this in size, and with substantial leverage — altogether he’s borrowed 2.4B+ to buy BTC. At its lows (Dec ‘22) MSTR was worth 1.6B
It’s arguable whether Saylor was able to foresee all of these factors or some of them, but repeatedly, Saylor was issuing debt with favorable terms during times when credit was abundant
And as the rate hikes played out, the trade has been working out very well so far
But what are the risks? We don’t get another Bitcoin cycle
Saylor has create a subsidiary, MacroStrategy so that senior secured note can’t touch 125,110 BTC
If by, 2028, they have issues rolling the debt, only 14,890 of their BTC is on the hook
1.7B of debt issued via convertible bonds, so the lenders are issued $MSTR at $398 and $1432
Saylor has no concrete liquidation, and his invalidation is either 1) his inability to pay interest (approx 36M / year) or 2) BTC goes to zero vs. USD and never recovers
And what is his upside? It is literally unbounded
Saylor took absolute advantage during easy times – he extracted liquidity from the market and structured it such that he could sit comfortably holding Bitcoin for an indefinite period of time
Here’s my Twitter — feel free to reach out if you have any questions, want to discuss the article or just chat!