Supply Shock — On the Margin: Convertible Bond Expert Breaks Down Why MicroStrategy Is Soaring | Richard Byworth

Podcast: Supply Shock
Host: Pete Rizzo (as "Felix" in transcript)
Guest: Richard Byworth, Managing Partner at Syz Capital
Release Date: December 10, 2024

Episode Overview

In this engaging episode, Pete Rizzo is joined by convertible bond expert Richard Byworth to demystify the financial engineering behind MicroStrategy’s recent meteoric rise. The discussion centers on how Michael Saylor leverages convertible bonds to “violently” accumulate Bitcoin and redefine the company’s value proposition. Through Byworth’s deep experience in both traditional convertible bond trading and the crypto sector, the episode dissected why so many analysts misunderstand what MicroStrategy is doing—and why its playbook may set a new paradigm for public companies seeking Bitcoin exposure.

Key Discussion Points

Richard Byworth’s Background and Convertible Bond 101

[03:05–09:45]

• Byworth shares a detailed account of his career evolution from trader to top convertible bond salesperson at Nomura, including stints in London, Tokyo, and Hong Kong.
• Provides a primer on convertible bonds—hybrid securities priced on interest rates, company credit, stock valuation, and volatility.
• Explains how “volatility is the opportunity” in convertible bonds, especially for arbitrage traders.

  “You’re there for the volatility. You’re there to take advantage of the fact that this thing moves.” — Richard Byworth [04:41]

The MicroStrategy “Secret Sauce”: Issuing Convertible Bonds to Buy Bitcoin

[10:25–14:40]

• Saylor capitalizes on MSTR’s stock volatility (itself driven by its ties to Bitcoin) to issue zero-coupon bonds with a high conversion premium, allowing him to buy more Bitcoin with less dilution.
  • “He’s selling stock, not just at the current rate…he’s selling it at a massive premium and then using that cash to buy bitcoin. This is the ultimate hack that he’s managed to find.” — Byworth [12:15]
• This creates a reflexive cycle: higher Bitcoin/stock price allows for more accretive capital raises, leading to even more Bitcoin purchases.

Why Accretive Dilution is a Gamechanger

[13:16–15:56]

• Raises the (counterintuitive) concept that Saylor’s dilution via convertible bonds is actually “accretive” for shareholders when the premium to Net Asset Value (NAV) persists.
  • “The dilution is accretive. And this is what everybody in financial markets is really struggling to get their head around.” — Byworth [13:56]
• Explains scenarios: as long as MSTR trades at a premium to NAV (or even at NAV), further CB issuance remains accretive.

Convertible Bond Mechanics and Why MSTR Is Unique

[15:56–21:14]

• Explores the structure of recent MSTR convertible bonds: zero-coupon, long-dated, with massive implied volatility (implied vols up to 77%).
• Arbitrage funds profit from the “Vega kick” (volatility premium) and gamma trading, not coupon.
• Explains a typical convertible bond arbitrage hedge fund play: buy the bond, hedge the delta in the stock, and profit from volatility swings.
  • “If I haven’t tightened up all my Deltas… I can come back and have millions of dollars of exposure. This stuff is whipping around like crazy.” — CB arb trader, relayed by Byworth [24:02]

Why Investors Buy Zero-Coupon MSTR Converts

[21:14–26:32]

• Most investors (hedge funds, arbs) are attracted by the mispricing between the issued volatility (say 60% implied) and the quickly traded market volatility (70%+).
• The structure and volatility allow “day one” profits for convertible bond buyers.

Realized vs. Implied Volatility: Risks to Saylor’s Playbook

[26:32–29:33]

• Saylor’s ongoing ability to issue CBs at zero coupon is entirely dependent on realized volatility in the stock; if volatility subsides, future issuance becomes more expensive.
• If MSTR’s realized vol drops, Saylor can’t repeat the “hack.”

Do Convertible Bonds Have First Claims on Bitcoin in Liquidation?

[29:33–31:53]

• Byworth clarifies: MSTR converts are NOT secured by Bitcoin—they’re unsecured claims on MicroStrategy itself.
• In bankruptcy, creditors could only get to Bitcoin after other assets are exhausted—and only if Bitcoin prices haven’t crashed.

Premium to NAV: Why Does It Persist Despite Spot ETFs?

[31:53–34:34]

• Discusses why MSTR’s premium endures, despite the advent of spot Bitcoin ETFs.
• Speculates that Saylor is urgently raising as much capital as possible while conditions allow; premium unlikely to fade just due to ETF competition.

MicroStrategy as a “Bitcoin Refinery” & New Financial Paradigm

[34:34–38:27]

• Byworth shares that Saylor now refers to MicroStrategy as a “Bitcoin refinery,” leveraging traditional capital markets to efficiently accumulate and “refine” Bitcoin.
• Suggests that as Saylor demonstrates the asset base boost (akin to earnings growth), a case could emerge for applying higher valuation multiples.
  • “Why is this not the same thing [as earnings]? And therefore, why should I not apply a multiple?” — Byworth [36:07]

Risks: Liquidation, Downside, and ETF Comparisons

[38:27–42:46]

• Even though Saylor’s approach brings leverage, downside is also leveraged. If Bitcoin drops ~80% in price, MSTR stock can crash harder and premium to NAV can evaporate.
• Describes “soft call” mechanics—Saylor can force converts to convert to equity if stock price rises, removing debt and cleaning up the balance sheet.

Index Inclusion and the Macro Backdrop

[42:46–44:06]

• Speculates on odds of MSTR joining S&P 500 or Nasdaq; probability is hard to assess, but index inclusion could lift premium further.
• References Tesla’s history with index inclusion as a precedent.

Top Misconceptions: NOT a Bitcoin ETF

[44:22–49:09]

• Byworth is emphatic: MicroStrategy is not a Bitcoin ETF.
  • “You’re getting more Bitcoin per share. He’s charging you no fee. So it’s accretive…he is literally leveraging—violently leveraging—the capital markets to get as much Bitcoin as he possibly can.” — Byworth [45:46]
• Most ETF products incur a management fee, bleeding value; MSTR “accretes” value and Bitcoin/share.
• Critics miss the point by refusing to view capital raised to buy Bitcoin as “earnings.”

MicroStrategy vs. Leveraged Bitcoin ETFs

[49:09–51:31]

• Byworth strongly discourages using leveraged MicroStrategy ETFs or short-dated options as a way to amplify exposure—the embedded costs and bleed make them poor for anything but very short-term speculation.
  • “Unless you want to trade it for maybe two or three days and you’re very sure…even holding over a weekend you’re bleeding to death.” — Byworth [50:59]

Looking Ahead & Copycats

[51:50–53:47]

• Expects more public companies to attempt the Saylor playbook, especially in Japan (Meta Planet cited).
• Warns that both upside and downside are amplified versus “just owning Bitcoin.”

Notable Quotes & Memorable Moments

• On MSTR’s “violent” capital markets strategy:
  “He wants to demonstrate to people the value that he can add in a single year…he’s completely changed the basis of the value of the company in a single year.” — Byworth [00:00], [47:56]

• Explaining the accretive dilution:
  “The dilution is accretive. And this is what everybody in financial markets is really struggling to get their head around.” — Byworth [13:56]

• Convertible bond pricing insight:
  “For a convertible bond to trade at 70 implied vols is absolutely insanity. But it just shows you how volatile his stock is.” — Byworth [19:08]

• On the misconception that MSTR is just a Bitcoin ETF:
  “That’s a really bad misconception...you’re getting more Bitcoin per share. He’s charging you no fee. So it’s accretive as we’ve discussed many times.” — Byworth [45:46]

• On the risk profile:
  “There is, of course, this thing to understand that—this is leverage upside. It’s also leverage downside.” — Byworth [41:44]

• Why leveraged MSTR ETFs are a bad idea:
  “Unless you want to trade it for maybe two or three days…even holding over a weekend you’re bleeding to death.” — Byworth [50:59]

Important Timestamps

• [03:05] Byworth’s career & convertible bond 101
• [10:25] Unique advantages of convertible bonds and Saylor’s “hack”
• [13:16] Accretive dilution explained
• [17:49] Convertible bond payoff and time value
• [21:14] How CB arbitrage funds make money on MSTR issues
• [26:32] Volatility’s role in future convertible bond issuance
• [29:33] Discussion of convertibles’ claims on BTC
• [34:34] MicroStrategy as a “Bitcoin refinery”
• [38:27] Risk models and downside scenarios for MSTR
• [44:22] The biggest misconception: MSTR is not an ETF
• [49:09] Dangers of leveraged MicroStrategy ETFs
• [51:57] Other firms (e.g., Meta Planet) adopting the same playbook

Closing Thoughts

Byworth forecasts that Saylor’s strategy will inspire imitators and possibly reshape how corporations use financial engineering to gain crypto exposure, but he cautions listeners to fully understand the leverage and risks involved. The premium to NAV, potential index inclusion, and the spread between traditional ETF structures and “Bitcoin operating companies” like MSTR could all drive the next paradigm in digital asset investing.

Find Richard Byworth:

• Twitter: @RichardByworth
• LinkedIn: Richard Byworth
• Podcast: “Syz the Future” on YouTube, Spotify, and Apple

(Episodes like this showcase how Wall Street mechanics, Bitcoin history, and company evolution can all converge to create new and misunderstood value. Essential listening for anyone watching the Bitcoin–Wall Street crossover unfold.)