Convertible Senior Notes Explained: How MicroStrategy Uses Them to Acquire Bitcoin
Companies use various methods to raise money, among them being the issuance of convertible senior notes. This article dives deep into convertible senior notes and explains how MicroStrategy, the largest institutional Bitcoin holder, is using them to acquire more BTC.
What Are Convertible Senior Notes?
Simply put, a convertible senior note is a loan obtained from investors. This note can be converted into shares of the company issuing it. The word ‘senior’ means that if the issuing firm is declared bankrupt, then holders of convertible senior notes are prioritized in the repayment process.
Here are the common terms you may come across when dealing with convertible senior notes:
Principal amount: This is the initial loan amount obtained by a company from investors.
Maturity date: It is the date when a company repays the principal amount.
Interest rate: This is a variable or fixed rate of interest to be paid on the borrowed amount.
Conversion price: It’s the price at which each convertible senior note can be exchanged for a company’s share.
How Companies Issue Convertible Notes for Crypto Investments
Alongside MicroStrategy, numerous other companies have adopted Bitcoin as their reserve asset. Here is how they use convertible notes to finance Bitcoin purchases.
Step 1: Company issues convertible notes – A firm wishing to buy Bitcoin will announce its intention to issue notes and invite interested investors.
Step 2: Investors Purchase issued notes – Interested investors buy the convertible notes, thus lending money to the firm.
Step 3: The company Acquires Bitcoin – After receiving money from the investors, the company buys Bitcoin from a crypto platform that serves institutional clients.
If Bitcoin’s price rises, the shares of the company issuing notes will likely increase in value. That means investors who convert their notes into the firm’s shares could see significant gains.
It is noteworthy that since a convertible note is a debt instrument, it comes with downside protection, meaning investors will not lose their principal investment in case the company files for bankruptcy.
MicroStrategy and Its Use of Convertible Senior Notes
MicroStrategy co-founder Michael Saylor, a well-known Bitcoin advocate, made the coin his firm’s reserve asset in 2020. Since then, the software company has bought over 402,000 Bitcoin.
Let’s take a look at how MicroStrategy issues convertible senior notes to buy Bitcoin.
1. Issuance of convertible notes: MicroStrategy has issued convertible senior notes in several rounds to raise capital. The issued notes do not attract periodic interest as they have a zero-coupon structure.
According to data from Microstrategy.com, the Saylor-led company has raised more than $10 billion via convertible notes since 2020. The latest round of issuing convertible notes happened on December 3rd, 2024, with the firm raising $2.1 billion.
2. Using proceeds to purchase BTC: As mentioned, MicroStrategy has purchased over 400,000 Bitcoin using money obtained through the issuance of convertible notes. The firm’s BTC holding represents roughly 1.9% of the total Bitcoin supply.
MicroStrategy’s Bitcoin investment has helped the company achieve some exceptional milestones since 2020. For instance, its stock value has increased by 2,021% in the past four years, according to Nasdaq data. During that period, MicroStrategy’s MSTR outperformed all the leading stocks in the United States, including Nvidia.
Advantages of Convertible Senior Notes
1. Low issuance costs: Issuing convertible notes usually involves lower costs than traditional equity issuance.
2. Convinient capital acquisition: Convertible notes allow companies to raise money directly from investors to finance various causes, thus saving on costs associated with borrowing loans from traditional banks.
3. Investor appeal: Investors who want exposure to Bitcoin without holding the coin themselves find convertible notes issued by companies like MicroStrategy attractive.
Disadvantage of Convertible Senior Notes
1. Bitcoin extreme price volatility: BTC is a highly volatile asset. So, any company holding it can suffer significant financial losses if the coin trends downwards.
2. Regulatory uncertainty: Crypto rules are constantly evolving. This poses extra risks for companies with exposure to Bitcoin.
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