What are convertible senior notes? How MicroStrategy uses them to buy Bitcoin
2024-12-05

 Convertible senior notes, explained 
Convertible senior notes are hybrid debt instruments companies use to raise capital without immediate dilution while giving investors the opportunity to convert debt into equity under favorable conditions. 
To simplify, a convertible senior note is a type of debt security (loan) that you (as an investor) can convert into shares of the issuing company’s common stock. But you might be wondering what “senior” means here.
The term “senior” means that in the event of the company’s bankruptcy, holders of these notes have priority over other debt holders (like holders of junior notes or unsecured debt) when it comes to repayment.
Here are key terms associated with convertible senior notes that you should be aware of:
But why would a company issue convertible senior notes? Well, there are many reasons, including: 
Now, a question arises: Why would an investor buy convertible senior notes? 
Convertible senior note holders can participate in the company’s growth through equity conversion, making them more attractive than traditional debt. Since they are debt instruments with a fixed interest rate and maturity date, investors get protection against losses.
 How convertible notes work for Bitcoin investments 
Convertible notes are a hybrid financing tool used in various contexts, including Bitcoin investments.
MicroStrategy is a well-known example of a company that has extensively used convertible notes to fund its Bitcoin BTCUSD purchases.
Here’s a simplified explanation of how they work in this context:

Did you know? MARA Holdings raised $1 billion by issuing zero-coupon convertible notes, a move that allows them to acquire Bitcoin without paying interest until maturity.
 How MicroStrategy uses convertible senior notes to fund Bitcoin acquisitions 
MicroStrategy, co-founded by Michael Saylor, has employed a strategic approach involving the issuance of convertible senior notes to finance its significant Bitcoin acquisitions.
Let’s understand how the company acquires BTC via convertible senior notes:
On Nov. 20, 2024, MicroStrategy announced the pricing of a $2.6-billion offering of 0% convertible senior notes due 2029. Key details of this offering include:
This approach has worked to MicroStrategy’s advantage, with the company delivering an annualized return of 80% between 2020 and 2024, outperforming Bitcoin itself. Since mid-2020, MicroStrategy has outperformed all major US stocks, including Nvidia, due to its strategy of accumulating Bitcoin. 
The company’s stock has surged by over 2,500% since August 2020, while Bitcoin has experienced a 660% rise during the same timeframe. This performance underscores the significant impact of Bitcoin’s appreciation on MicroStrategy’s market success.
However, investors should note the higher volatility and risk associated with the company’s strategy, which is heavily tied to Bitcoin’s long-term growth potential.

 Benefits of convertible senior notes 
Convertible senior notes appeal to companies looking to raise capital efficiently while maintaining flexibility and minimizing immediate dilution.
For companies like MicroStrategy, convertible senior notes offer the following advantages:
 Risks associated with convertible senior notes 
While MicroStrategy manages financial risks through a hybrid debt-equity instrument, its investment approach is not risk-free. 
Here are some potential risks to consider:
Overall, the sustainability of MicroStrategy’s bold strategy of using convertible senior notes to fund significant Bitcoin purchases hinges on both financial principles and the broader economic landscape.
The risk is particularly pronounced for investors who may not fully understand or agree with the rationale behind holding such a volatile asset on the balance sheet. Thus, to ensure long-term sustainability, companies must adopt a balanced approach, integrating market analysis, risk management strategies and flexible capital planning.