Odd Lots - Lots More with Matt Levine on MicroStrategy's Infinite Money Machine

Episode Date: January 31, 2025

Everyone knows by now that MicroStrategy looks a lot like a giant Bitcoin ETF. Its founder, Michael Saylor, is a huge supporter of the cryptocurrency and his company has been snapping up billions of dollars worth of the coins. The strategy has so far proved successful. In fact, MicroStrategy is trading at a market cap that's worth more than the value of its entire Bitcoin portfolio. How does this happen? And how long can it keep going? In this episode, we speak with Bloomberg Opinion's Matt Levine. We talk to him about how MicroStrategy has created a sort of "perpetual motion machine" of investment and how the strategy is starting to expand to other companies, too. Money Stuff: Crypto Perpetual Motion Machines Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

Bloomberg Audio Studios. Podcasts Radio News. Yeah, we've got to have more fun around here. Oh, God. Okay, speaking of fun, this is the antithesis. Speaking of fun. This is the antithesis of fun. No, it's not.

No, no, no. You haven't hurt me. Oh, okay, sorry. So I went to write one of our... Thanks for having me. I did a dead list. I'm both the most popular trader and most successful trader at Citadel. Fed is going viral.

Barges. This is an aftersgris. special except I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Black gold. These are the important questions. Is it robots taking over the world? No, I think that like in a couple of years, the AI will do a really good job of making the

Outlots podcast. One day that person will have the mandate of heaven. How do I get more popular and successful? We do have the perfect guest. You're listening to Lots More, where we catch up with friends about what's going on right now. Because even when the odd lots is over, there's always lots more. And we really do have the perfect best. So I went to write one of our odd lots newsletters recently and I was going to write about micro strategy and I had this idea. I was going to call it micro strategy's infinite

money loop. And then I was researching on the terminal and I stumbled on a bunch of Matt Levine columns where you actually titled it Crypto's Perpetual Motion Machine. And then I thought, well, I'm not even going to try to compete with Matt. I'm just going to ask him to come on the show and explain it to us. Many such cases. Yeah. Many such cases. But at least he'll come on the podcast.

So here we are with Matt Levine, who is, of course, the author of the Money Stuff column, but also the co-host of the new Money Stuff podcast. It's not that new. It's a year old. I know. I keep thinking it's two months old, but it's almost a year. Yeah. Oh, really?

No, it's like nine months or something. Wow. Time flies. I always think 2020 was two years ago. Same, same, time, time. Yeah, time is a flat circle. Matt, what is micro-strategy's perpetual motion machine? Micro-strategy.

I keep saying perpetual motion machine. I think I'm kidding. I think I'm kidding. I keep hoping that I'm kidding. So micro-strategy 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, like, classically, that's an arbitrage, and you close the arbitrage, right?

You sell stock that brings down the price of your stock. You buy Bitcoins that brings up the price of Bitcoin. Eventually, you get to the point where your stock and the value of the underlying Bitcoins is the same. Mecham strategy, like, it never gets any closer. So it keeps allowing more stock and buying more Bitcoins, and that keeps driving the value of their company up, and so they keep getting more and more valuable. They have an asset, so to speak, that's not Bitcoin. and that asset is the ability to get like non-margin callable leverage, right?

So, I mean, like... Like, if I wanted to borrow Bitcoin or borrow money to buy Bitcoin, I could, but there is a chance that Bitcoin goes down tomorrow. They ask for my money back and I'm homeless. So this is a thing that they say and that has some truth to it, but this is not a levered way to buy Bitcoin. And the way you know that is that the market cap of the company, is 2x the value of its Bitcoins, right?

So it's like an anti-levered way to buy Bitcoin, right? Like if you put $2 into micro strategy, you get back $1 of Bitcoin, which is the opposite of leverage. Now it's true that like, and they do, and by the way, also like they do have the ability to, like they're right. Like they've sort of touted this as their strategy, like we are a better mousetrap for buying Bitcoin because we can get leverage. They do a lot of convertible bonds. They don't, I don't think of a ton of like, you know, just sort of regular non-marginable, like, non-marginable. leverage rather than the converts. But yeah, like, that's a, that's a theoretical case. It's just like, it's just not like true as a matter of pricing. Wait, the convertible bonds are actually what like

initially caught my eye because I think they issued at like one of the recent ones, zero percent with a conversion premium of 55 percent. And that's like already when the stock is trading at this massive premium to the value of its assets. And so I, you know, usually the higher the conversion premium and the lower the coupon, the less attractive that would be for investors. But clearly people are buying this stuff because they keep doing it. Yeah, like a convert is just like, they can convert, you just plug into a model, right? Like, well, sorry, I'm taking a step back. I actually need you to explain convertible arbitrage to me. So there's two things here. There's convertible arbitrage. There's also a lot of like fundamental investors, right? You think about like

a microchratory convertible, never mind convertible arbitrage. There are people in the world who run, I don't know, fixed income funds who run, you know, like convertible fundamental funds, who run various sorts of funds who wake up in the morning thinking, I want to buy some Bitcoin. And they can't because their mandate doesn't include Bitcoin. It might not even include micro strategy stock or micro strategy stock might be too rich for them. But they like, they can buy a fixed income product that has some Bitcoin upside. They're like, oh, that's great. So part of the investment thesis for these bonds, and there's like a lot of these bonds is something like that. It's like, this is a way to get Bitcoin upside with downside protection. But the convert arbitrage strategy is, this is a way

to get micro strategy volatility. And micro strategy is so volatile, in part because it's crazy, but in part because of like technical factors involving their ETFs. And so the convert arbitrage is just an options trading strategy. Like you're buying call options on micro strategy. And call options are more valuable, the more volatile the company is, more volatile the stock is. And this is a very, you know, has like a 100% annualized volatility. And what you're doing is, like, you buy a convertible, you sell some stock to hedge, and you adjust your hedge over time as the convertible gets more or less in the money. And the way you do that is basically every time the stock goes up,

you're selling more stock to get shorter. And every time the stock goes down, you buy back stock to reduce your hedge. And if the stock is constantly bouncing around, you're constantly buying low and selling high and making a lot of money. So it's a good volatility trade. And those convertible terms, you know, it's like zero is up 55. is like that sounds outrageous, but you plug it into the model and you put in, you know, 100% volatility. And that's cheap. And so like people want to buy it. Joe, I didn't realize

this until recently, but you know, if you go and look at some of micro strategies earning presentations, like for Q1, Q4. So they actually have slides on there that are basically like boasting about how volatile the stock is. Have you seen these, Matt? I think so, yeah. Yeah, it's like MSTR is more volatile than any other S&P 500. hundred stock. Right. They're marketing to convert investors. Yeah.

Yeah, they're clearly like marketing the volatility as a selling point. Like, they know what they're doing. Like, like, this is important. This is like they're like sort of using every part of like this strategy to raise money, which like they're really like thoughtful about it. And like selling lots of volatility is very helpful to them. And the point about the ETFs is like, you know, convert investor buys low, sells high.

Every time the stock goes down, you have to buy back some stock. Every time the stock goes up, you have to sell some stock. That is your, your, you know, you're a convert investor. you're profiting from volatility, but you're also dampening volatility, right? Because then the stock goes down, you're buying. So if you issue a lot of convertibles, you dampen the volatility in your stock. MicroStrategy doesn't have this problem because they also have these levered ETFs, which so much increase the volatility of the stock.

Because a levered ETF, every time the stock goes up, they have to buy more stock. Every time the stock goes down, they have to sell stock. And so the levered ETF is like jacking up the volatility, which is part of why the stock is so volatile. So it is a perpetual motion machine. It's solved. No, I don't care. The thing that I don't understand is the premium of stock. Like, 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 Bitcoin? Yeah, that's weird. A big crash in Bitcoin would be really bad, right? And that's very possible because it's crashed many times in its history. Yeah, you know, like your guess is as good as mine about, like, what that does to the premium. Like, if Bitcoin goes down by 50%, does this stock go down? by 50% because it go down by 90%.

I don't know. Who knows? Could I start my own perpetual money making machine where I just have a pot of something and then I try to make my stock as volatile as possible? Like maybe I just say stuff on the internet constantly. Companies do it. Like companies are trying. No one's like at this scale, but like a lot of companies have looked at this and said,

we should do that. And so some of them just do it. Some of them do it like Dogecoin, you know? Like you can have other. Who is there? There's like random like kind of quasi-company stock. Yeah. Yeah.

I wrote about a half-joking crypto thing that's doing it called, you know, there's like a crypto called Fartcoin. And there's a fart coin strategy. Yeah, but it's not a company, right? Oh, yeah, so this can be replicated on chain. So, yeah, yeah. Well, it can, like, the mechanics can be replicated. Yeah, that's what I'm saying. Can the premium be replicated on chain?

I don't know. I mean, you can sort of sell anything. But, like, I think part of the premium here comes from it being a real corporation, right? I mean, one thing that's, like, attractive about a micro strategy. Like, they're trying to get into the S&P 500. Yeah. Which is a fascinating, like, that turns on a change in the accounting rules that allow for them to take, to account for their Bitcoin gains as profits. I didn't know that.

Yeah. So, like, they may not get into the S&P anyway, but, like, they've not been profitable enough to get into the S&P. But, like, the Bitcoin gains, they have had Bitcoin gains most of the time. And, like, that will become accounting profit for them. I want to ask a question that touches on one of Tracy's favorite topic. and it's actually a little bit adjacent here. What would be the problem of just having an index that's just, these are the 500 biggest companies?

Is there any, like, what's better about having an S&P that sometimes has some discretion versus just like, here are the 500 biggest companies in the world, in the U.S., whatever? In this immediate case, like, what is a company? Like, is spy a company? Oh, interesting. Because, like, this is, this is a company. an ETF, right? I mean, like, arguably, this is an ETF, right? It's in the trappings of a tech

company. But, like, if you said the biggest company as well, you know, like, is an S&P 500 fund a company. But away from that, no, I mean, like, people definitely have very rule-driven indices. I think part of the appeal of the S&P is, you know, it's a product that's sold to fund managers, right? And like if every fund manager says, I don't want to own, you know, for a while, the S&P was, For a while, a lot of indexes were excluding dual-class stocks because, like, fund managers would call the index providers and say, we don't want to own dual-class stocks. We're bound to buy the index, so take them out of the index. And then, like, they changed their mind because all the dual-class stocks were doing well.

And so they had to put them back in the index. But it's just like, it's just a market-driven thing, right? Like, if people want a certain index, they get that index. There's nothing wrong with having the top 500 companies be the index. Like nowadays, everyone has started custom indexing as well, right? So, like, if you don't like the S&P-500, you can just ask for your own index. index and that's why there's a billion indexes now. The other thing I saw was there was a Bitcoin miner, I think it was called Mara or something,

Mara Holdings, and they said they were going to issue converts basically to do the same thing as micro-strategy. So it's almost like, is this going to be like an asset class, a thing that stays with us? Yeah, you know, like people in the convert market talk about being saturated with, like, crypto converts, right? If you grew up as a convert investor, you're like, you're like, I can't have 90% of my portfolio in crypto, right? In part because, like, you think about, like, the volatility and, like, the technical aspect of making money on the, on trading the volatility. That depends on the credit being good.

And, like, no one really knows the credit here, right? If there's a big crypto crash, all of these credits, like, in a very correlated way, become terrible. And so, like, your whole, you know, asset class falls apart. prior to all this, what was the canonical use case of who and why issue converts? Oh. I seem to remember energy companies. Energy did a lot. I mean, like the canonical case is like tech, biotech, like, but a lot of energy too.

You know, it's like, it's like companies that are volatile, companies that often don't want to get credit ratings. Companies that, you know, like what you're selling is. in some sense, equity upside and in some other sense, equity volatility. Yeah. And that's more attractive to convert it. Like, they're companies that have attractive equity volatility and not such attractive credit to like traditional credit investors. And so they can do that trade rather than issuing bonds.

You have a deep seek take? Oh, yeah. Deep Seek. Yeah, various takes. My main take was, I wrote today, like, your old take about, you know, the way to monetize Deepseek was short in video. It's just like all three of them referencing each other. I was saying my old blog at the stalwart.com in like 2000.

This was when, you know what I thought about this? When Google introduced sheets or when they came out with their Excel competitor. I was like some companies should start doing this when they short Microsoft. For some reason, sheets never really took off and became an Excel competitor on a real level. But back when there was so much free web 2.0 software, I thought, give out free software and short your competitor. Anyway. Yeah. I mean, there's no evidence that.

keep saying tonight. It'd be cool if they did. Lots more is produced by Carmen Rodriguez and Dashel Bennett with help from Moses Ondom and Kail Brooks. Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg podcasts. Please rate, review, and subscribe to Odd Lots and Lots More on your favorite podcast platforms. And remember that Bloomberg subscribers can listen to all our podcasts ad-free by connecting through Apple Podcasts. Thanks for listening.