Odd Lots - Lots More with Matt Levine on MicroStrategy's Infinite Money Machine
Release Date: January 31, 2025

Hosts: Joe Weisenthal and Tracy Alloway
Guest: Matt Levine, Author of the Money Stuff column and Co-host of the Money Stuff podcast

Introduction

In this episode of Odd Lots, Joe Weisenthal and Tracy Alloway welcome Matt Levine to delve deep into the intriguing financial mechanics behind MicroStrategy's strategy, aptly dubbed the "Infinite Money Machine." The conversation explores how MicroStrategy leverages its Bitcoin holdings and convertible bonds to sustain an ever-increasing market valuation, effectively creating a perpetual motion machine in the financial world.

MicroStrategy's Perpetual Motion Machine

Discussion Highlights:

• Matt Levine explains MicroStrategy's unique approach: the company holds a substantial reserve of Bitcoin and issues stock at a valuation approximately twice the value of its Bitcoin holdings. This discrepancy creates a continuous cycle where the company sells more stock to purchase additional Bitcoin, driving up its market capitalization indefinitely.

  "MicroStrategy is a pot of bitcoins that issues stock and the stock trades at, call it, two times the value of the pot of bitcoins. And so if you have that situation, you sell more stock to buy bitcoins because, classically, that's an arbitrage and you close the arbitrage, right?"
  — Matt Levine [03:07]

• Joe Weisenthal probes the sustainability of this model, questioning how MicroStrategy manages to maintain a stock price that significantly exceeds the value of its Bitcoin assets.

  "And so they keep getting more and more valuable."
  — Unknown Speaker 1 [03:55]

Convertible Bonds and Arbitrage Strategies

Convertible Arbitrage Explained:

• Matt Levine delves into convertible bonds, clarifying their role in MicroStrategy's strategy. Convertible bonds allow investors to benefit from the company's stock volatility without directly investing in Bitcoin. These bonds have a conversion premium (e.g., 55%) and are zero-coupon, making them attractive to certain investors despite seeming unattractive metrics at first glance.

  "A convertible arbitrage strategy is like an options trading strategy. Like you're buying call options on MicroStrategy and call options are more valuable the more volatile the company is."
  — Matt Levine [05:47]

• Tracy Alloway highlights the appeal of these bonds to fixed income investors seeking Bitcoin exposure without altering their investment mandates.

  "This is a way to get Bitcoin upside with downside protection."
  — Unknown Speaker 2 [05:37]

The Mechanics of the Infinite Money Loop

Sustaining Valuation Through Volatility:

• Matt Levine elaborates on how convertible bonds contribute to the company's persistent high valuation. By issuing these bonds, MicroStrategy effectively sells volatility to investors, which in turn dampens the stock's volatility due to the hedging activities of convertible bond investors.

  "Selling lots of volatility is very helpful to them... the levered ETF is like jacking up the volatility, which is part of why the stock is so volatile."
  — Matt Levine [08:07]

• The interplay between convertible bonds and levered ETFs creates a unique dynamic where the company's stock remains highly volatile yet perpetually overvalued relative to its Bitcoin holdings.

Risks and Market Implications

Sustainability Concerns:

• Joe Weisenthal raises questions about the long-term viability of MicroStrategy's model, especially considering the historical volatility of Bitcoin.

  "A big crash in Bitcoin would be really bad. Right. And that's very possible because it's crashed many times in its history."
  — Unknown Speaker 1 [09:12]

• Matt Levine acknowledges the precarious nature of the premium MicroStrategy's stock holds over its Bitcoin assets, highlighting the uncertainty surrounding future Bitcoin performance and its impact on the company's valuation.

  "The thing that I don't understand is the premium of the stock, the volatility. Like, yeah, like, that works, right? The volatility trade is a good trade. The stock. Like, why is the stock worth twice the value of the underlying Bitcoins?"
  — Matt Levine [09:00]

Comparisons and Future Outlook

Potential Replications and Market Trends:

• The hosts discuss whether MicroStrategy's strategy can be replicated by other companies or within different asset classes. Matt Levine references humorous examples like "fartcoin" but emphasizes the unique position of a real corporation like MicroStrategy.

  "One thing that's attractive about MicroStrategy, they're trying to get into the S&P 500, which is fascinating. That turns on a change in the accounting rules that allow for them to account for their bitcoin gains as profits."
  — Matt Levine [12:20]

• The conversation also touches on other companies, such as Mara Holdings, which are considering similar convertible strategies to tap into Bitcoin's volatility, raising questions about the emergence of new asset classes centered around cryptocurrency-based financial instruments.

  "They're really thoughtful about it. And selling lots of volatility is very helpful to them."
  — Matt Levine [08:07]

Conclusion and Final Thoughts

Sustainability and Market Dynamics:

• The episode concludes with reflections on the sustainability of MicroStrategy's model and its broader implications for financial markets. Matt Levine and the hosts acknowledge the innovative yet risky nature of creating a perpetual motion machine through financial engineering, leaving listeners to ponder the future trajectory of such strategies in an ever-evolving economic landscape.

  "No one's like at this scale but like a lot of companies have looked at this and said we should do that."
  — Matt Levine [11:53]

Notable Quotes:

• Matt Levine [03:07]: "MicroStrategy is a pot of bitcoins that issues stock and the stock trades at, call it, two times the value of the pot of bitcoins."
• Unknown Speaker 1 [05:45]: "Need you to explain convertible arbitrage to me."
• Matt Levine [08:07]: "Selling lots of volatility is very helpful to them... the levered ETF is like jacking up the volatility."

Timestamps Referenced:

• [03:07] – Explanation of MicroStrategy’s Stock and Bitcoin Valuation
• [05:37] – Appeal of Convertible Bonds
• [05:47] – Convertible Arbitrage Strategy
• [08:07] – Impact of Convertible Bonds and Levered ETFs
• [09:00] – Sustainability Concerns of the Business Model
• [12:20] – Accounting Rules and S&P 500 Inclusion

This episode provides a comprehensive analysis of MicroStrategy's financial strategies, offering listeners a nuanced understanding of how innovative (and speculative) financial mechanisms can create seemingly infinite value underpinned by volatile assets like Bitcoin. Matt Levine's expert insights, combined with the hosts' probing questions, make for an engaging and informative discussion for anyone interested in the intersections of technology, finance, and market dynamics.