MicroStrategy has decided to repay the $1.05 billion convertible bond issued in 2021 two years early.
The reason for this decision is attributed to the current stock price ($350), which is significantly higher than the conversion price ($142), enabling the company to reduce stock dilution by 60% (when future price of MSTR reaches $500, just for example). If they did not repay the bond, investors would convert their bonds into shares at the lower price, diluting the equity of existing shareholders.
In 2021, when the stock price was around $80, MicroStrategy issued convertible bonds to raise funds, which were used to purchase Bitcoin at $40,000. Bitcoin has since risen to $106,000, representing a 165% return. This exemplifies the success of their strategy to "issue stock at a low price and buy Bitcoin at a discount."
However, this move has disrupted the strategies of gamma traders. Gamma traders often profit through a combination of convertible bond investments and short-selling the underlying stock. For instance, they buy convertible bonds and short the stock, capitalizing on stock price fluctuations.
If the convertible bonds are repaid early, this strategy collapses. To mitigate losses, gamma traders may attempt to artificially increase market volatility. They could, for example, place large sell orders or establish short positions in the options market, driving the stock price down.
This is not the first instance of early repayment by MicroStrategy. Similar actions occurred on June 13, 2024, and September 16, 2024, with repayments completed on July 15 and September 26, respectively.
The stock price movements around these announcements were as follows:
- June 13 announcement day: (-7.46%) June 14: (+0.78%) June 15: (+0.78%) July 15 repayment completion day: (+15.35%)
- September 16 announcement day: (-4.90%) September 17: (-2.42%) September 18: (+1.06%) September 26 repayment completion day: (+9.24%)
Yesterday, on January 25, 2025, the stock price dropped by 5.21% following the latest announcement.
P.S. I think my original post was somewhat unclear. What I meant to say is this: If MSTR’s stock is trading significantly higher than $142.38 (as it currently is at $350), every investor will convert their bonds to shares, causing dilution to happen instantly. However, compared to a scenario where the stock price reaches $500 in the future (for example), this approach definitely reduces the overall dilution of existing shareholders.
P.S. Regarding the dilution issue, at any future prices, the number of shares newly added stays the same. However, while the number of new shares from conversion is fixed at around 7.23M, the economic dilution (value loss to shareholders) increases as MSTR’s stock price rises. At $500 (for example), bondholders would extract over $3.5B in value compared to $2.6B at $350. When the conversion price ($142) is significantly lower than the market price, the difference (i.e., the discount) is taken by the convertible bondholder, and that value is transferred from existing shareholders. This transfer of value is dilution. The higher the stock price, the greater the value transferred, resulting in more severe dilution (given the same conversion price).
P.S. As one user pointed out in the comment below, Saylor may have chosen to settle the bond early for various reasons—such as tax implications or future investment plans. Even so, I believe this move also benefits existing shareholders by reducing overall economic dilution.
P.S. Just for reference: I collected data around the last announcement day
Announcement Day (Sep 16): Both MSTR and Bitcoin saw significant drops. But MSTR dips more.
Completion Day (Sep 26): MSTR surged 🟢 +9.24%, Bitcoin rose 🟢 +3.20%.
As a result of this announcement, the volatility of MSTR is expected to increase, as shown in the data.
P.S. Lastly, multiple factors contribute to daily price of MSTR. Perhaps, other economic factors as well as players in the market might have played a bigger role that time. Therefore, it is hard to say this is a sole factor that drops MSTR market price. I also think that as long as you have a firm belief in bitcoin and Saylor's vision, you don't need to analyze everyday price fluctuation. A lot of things got involved and it's hard to predict.
