Author: Saurabh Deshpande
Translated by: TechFlow
Hello!
Newton is known for discovering universal gravitation, but in his era, he was more interested in another field: the alchemy of finance, or the pursuit of turning lead into gold. This pursuit even led him to delve into theological studies. Modern finance seems to echo his interests - through financial engineering, we are in an era of turning "lead into gold" by combining the right elements.
In today's article, Saurabh details how companies can achieve a premium on their actual value by adding cryptocurrencies to their balance sheets. Taking MicroStrategy as an example, this company has quarterly revenues slightly over $100 million, yet holds nearly $10.9 billion worth of Bitcoin. Globally, 80 companies are exploring how to incorporate cryptocurrencies into their balance sheets. Traditional financial institutions have shown immense interest and are paying a premium for the volatility and potential returns of such stocks.
Saurabh also analyzes the rise of convertible bonds, which help create this booming ecosystem, while discussing the risks and the companies attempting to incorporate other cryptocurrencies into their balance sheets.
Let's dive in!
A software/business intelligence company with quarterly revenues of only $111 million, yet with a market value of $109 billion. How was this achieved? The answer: it bought Bitcoin with other people's money. And now the market is valuing its Bitcoin holdings at a premium of up to 73%. What kind of "alchemy" is behind this?
MicroStrategy (now called Strategy) created a financial mechanism that allows it to borrow almost at zero cost to purchase Bitcoin. Taking its $3 billion convertible bond issued in November 2024 as an example, here's how it works:
The company issued a 0% coupon convertible bond, meaning bondholders will not receive regular interest payments. Instead, each $1,000 bond can be converted into 1.4872 shares of Strategy's stock, provided its stock price rises to $672.40 or higher before maturity.
When these bonds were issued, Strategy's stock price was $433.80, so the stock price needs to rise by 55% for conversion to be profitable. If the stock price never reaches this level, bondholders will get back $1,000 after five years. But if Strategy's stock price soars (which typically happens when Bitcoin prices rise), bondholders can convert to stocks and capture all the upside gains.
The clever mechanism here is that bondholders are essentially betting on Bitcoin's performance while enjoying downside protection that direct Bitcoin holders do not have. If Bitcoin crashes, they can still get their principal back because bonds have priority over stocks in bankruptcy liquidation. Meanwhile, Strategy can borrow $3 billion at zero cost and immediately use these funds to buy more Bitcoin.
However, the key trigger point for this mechanism is that from December 2026 (just two years after issuance), if Strategy's stock price remains above $874.12 (130% of the conversion price) for a period, the company can force early redemption of these bonds. This "redemption clause" means that if Bitcoin drives the stock price high enough, Strategy can force bondholders to convert to stocks or redeem funds early, thus refinancing under more favorable terms.
This strategy works because Bitcoin has achieved approximately an 85% average annual growth rate over the past 13 years, with a 58% average annual growth rate in the past 5 years. The company is betting that Bitcoin's growth rate will far exceed the 55% stock price increase required to trigger bond conversion. They have already proven the success of this strategy by successfully redeeming earlier issued bonds early, saving millions in interest expenses.
[The translation continues in the same manner for the rest of the text, maintaining the specified translations and preserving the original HTML structure.]Twenty One holds 37,230 BTC. Since CEP owns 2.7% of Twenty One's shares, this effectively means CEP controls approximately 1,005 BTC (valued at around $108,000 per BTC, worth about $108.5 million).
However, CEP's stock market value is as high as $486 million, which is 4.8 times its actual BTC value! After the publication of its BTC correlation, CEP's stock price soared from $10 to around $60.
This massive premium means that investors are paying $433 million for a $92 million BTC exposure. As more similar companies emerge and increase their BTC holdings, market forces will ultimately bring these premiums back to more reasonable levels, although no one knows when this will happen or what the "reasonable level" actually is.
An obvious question is: Why do these companies have a premium? Why are investors willing to pay a premium for these companies' stocks instead of directly buying BTC from the market to gain exposure? The answer may lie in "optionality". Who is funding MicroStrategy's BTC purchases? Primarily hedge funds seeking "delta-neutral strategies" through bond trading.
If carefully considered, this transaction is very similar to Grayscale's Bitcoin Trust. In the past, Grayscale's Bitcoin Trust also traded at a premium to BTC because it was closed-ended (investors cannot withdraw BTC until it is converted to an ETF).
Therefore, investors would deposit BTC into Grayscale and sell its publicly traded GBTC shares. As mentioned earlier, MicroStrategy's bondholders can enjoy over 9% compound annual growth rate (CAGR).
But how risky is this? MicroStrategy's annual interest burden totals $34 million, while the gross profit for fiscal year 2024 is $334 million, sufficient to repay the debt. MicroStrategy issued convertible bonds related to the BTC four-year cycle, with a maturity long enough to mitigate price drop risks. Therefore, as long as BTC rises more than 30% within four years, new stock issuance can easily cover redemption fees.
When redeeming these convertible bonds, MicroStrategy can simply issue new shares to bondholders. Bondholders will be paid based on the reference stock price at issuance, which is about 30-50% higher than the stock price when the bonds were issued. This only becomes a problem if the stock price is lower than the conversion price. In this case, MicroStrategy must return cash, which can be done by raising new debt on more favorable terms to repay earlier debt, or by selling BTC to raise cash.
Value Chain
This process obviously begins with companies trying to acquire BTC, but ultimately they use exchanges and custody services. For example, MicroStrategy is a Coinbase Prime customer, purchasing BTC through Coinbase and storing BTC in Coinbase Custody, Fidelity, and its own multi-signature wallets. While it's difficult to precisely estimate how much Coinbase earns from MicroStrategy's BTC execution and storage, we can make some guesses.
Assuming exchanges like Coinbase charge 5 basis points for over-the-counter trade execution representing MicroStrategy's BTC purchases, buying 500,000 BTC at an average execution price of $70,000, they would earn $17.5 million from execution. BTC custodians charge 0.2% to 1% annual fees. Assuming the low end of the range, storing 100,000 BTC at $108,000 each, custodians would earn $21.6 million annually by storing MicroStrategy's BTC.
Beyond BTC
So far, financial instruments designed to provide BTC exposure in capital markets have performed well. In May 2025, SharpLink raised $425 million through a PIPE financing round led by ConsenSys founder Joe Lubin, who also became the company's executive chairman. The financing issued approximately 69 million new shares at $6.15 per share, with funds to be used to purchase around 120,000 ETH and potentially engage in staking afterwards. Currently, ETH ETFs do not allow staking.
These financial instruments offering 3%-5% yields are more attractive than ETFs. Before this news, SharpLink's stock was $3.99, with a total market value of about $2.8 million and only 699,000 circulating shares. The financing issue price was 54% higher than the market price. After the announcement, its stock price briefly soared to $124.
Notably, the newly issued 69 million shares are approximately 100 times the current circulating share count.
Another company, Upexi, plans to acquire over 1 million SOL by the fourth quarter of 2025 while maintaining cash flow neutrality. The plan began with a PIPE financing round led by GSR, with Upexi raising $100 million by selling 43.8 million shares. Upexi expects to pay preferred stock dividends through 6%-8% staking rewards and MEV rebates, and self-fund future SOL purchases. On the day of the announcement, its stock price jumped from $2.28 to $22, later closing around $10.
Upexi had 37.2 million circulating shares before financing, so the new share issuance diluted old shareholders by about 54%, but the nearly 400% stock price surge was enough to compensate for the dilution.
Sol Strategies is another company financing SOL purchases through capital markets. The company operates Solana validator nodes, with over 90% of its revenue coming from staking rewards. Currently, the company has staked 390,000 SOL, with another approximately 3.16 million SOL delegated to its nodes by third parties. In April 2025, Sol Strategies reached a convertible bond agreement with ATW Partners, obtaining financing of up to $500 million, with the first $20 million used to purchase 122,524 SOL.
Recently, Sol Strategies filed a shelf registration statement planning to refinance $1 billion through common stock (including "at-the-market" issuance), warrants, subscription receipts, units, debt securities, or any combination. This provides the company with diverse financing flexibility.
Unlike MicroStrategy's convertible bond model, SharpLink and Upexi raised funds by directly issuing new shares. In my opinion, MicroStrategy's model is more suitable for different investor groups. Investors indirectly gaining exposure by purchasing stocks instead of directly buying ETH or SOL need to bear additional risks, such as intermediaries potentially leveraging beyond investors' risk tolerance. Therefore, unless there is additional service value, the convertible bond model with sufficient operational profit buffer to pay interest is more reasonable.
When the Music Stops
These convertible bonds primarily target hedge funds and institutional bond traders seeking asymmetric risk-return opportunities, rather than retail investors or traditional stock funds.
From their perspective, these financial instruments offer a "win big, limit losses" option that fits perfectly within their risk management framework. If BTC achieves the expected 30%-50% increase within two to three years, they can choose to convert the bonds; if market performance is poor, they can still recover 100% of principal, although they may lose some value due to inflation.
The advantage of this structure is that it addresses the practical problems of institutional investors. Many hedge funds and pension funds lack the infrastructure to directly hold cryptocurrencies or are prevented by investment restrictions from directly purchasing BTC. These convertible bonds provide them with a compliant "backdoor" entry into the crypto market while maintaining the downside protection required of fixed-income assets.
However, this advantage is destined to be temporary. As regulations gradually become clearer and more direct crypto investment tools (such as custody solutions, regulated exchanges, and more explicit accounting standards) emerge, the demand for these complex detour methods will gradually decrease. The current 73% premium paid by investors to gain BTC exposure through MicroStrategy may shrink with the appearance of more direct alternatives.
We have seen similar situations before. In the past, opportunistic managers used the Grayscale Bitcoin Trust (GBTC) premium—buying BTC and depositing it into Grayscale's trust, then selling GBTC shares in the secondary market at a 20%-50% premium to net asset value (NAV). However, when more people began to imitate this, by the end of 2022, GBTC's premium had turned into a record 50% discount. This cycle indicates that crypto-backed stock plays will ultimately be arbitraged by the market if they lack sustainable revenue to support repeated financing.
The key question is how long this situation can last and who can stand firm when the premium collapses. Companies with strong business foundations and conservative leverage ratios may withstand this transformation, while those lacking persistent revenue sources or competitive barriers and merely chasing crypto assets may face sell-offs due to dilution when the speculative fever subsides.
Currently, the music is playing, and everyone is dancing. Institutional capital is flowing in, premiums are expanding, and more companies announce BTC and crypto asset strategies every week. However, smart investors know this is a trade, not a long-term investment logic. The companies that will survive are those that use this window to create enduring value beyond their crypto holdings.
The transformation of corporate financial management may be permanent, but the extraordinary premiums we see today are not. The question is whether you are prepared to profit from this trend or are just another player hoping to find a seat when the music stops.
