MicroStrategy Wants All the Bitcoin—And Their Stock Is Exploding Because of It

Summary

In this video, the speakers explore innovative financial strategies surrounding Bitcoin, focusing on MicroStrategy's use of convertible debt to fund Bitcoin purchases. They compare MicroStrategy’s equity to a call option on Bitcoin, leveraging debt at 0% interest. The discussion also delves into volatility harvesting, where strategies like selling covered calls are used to generate yield from Bitcoin’s high volatility. They highlight the unique nature of Bitcoin options markets, emphasizing the potential for retail investors to capitalize on volatility while navigating associated risks and trade-offs.

Takeaways

• 😀 MicroStrategy’s equity is a call option on Bitcoin, as the company borrows at 0% interest to buy Bitcoin, leveraging its debt for potential upside.
• 😀 MicroStrategy's debt issuance strategy is tied to Bitcoin's price, as the company issues convertible debt that becomes more manageable as Bitcoin's value increases.
• 😀 The debt structure of MicroStrategy allows for continued Bitcoin acquisition, but this depends on the price movement and timing of debt issuance.
• 😀 Bitwise offers a range of crypto investment products, including index funds, single-token ETPs, and a trend-following strategy focused on Bitcoin and Ethereum.
• 😀 Bitwise’s trend-following strategy capitalizes on Bitcoin and Ethereum’s price momentum, using autocorrelation to generate returns by riding market trends.
• 😀 Volatility harvesting involves using instruments like covered calls to generate yield by capitalizing on the high volatility of assets like Bitcoin.
• 😀 Unlike traditional markets, Bitcoin’s volatility surface demands premiums for both upside speculation and downside protection, creating opportunities for those selling calls.
• 😀 Selling covered calls against Bitcoin can help reduce the cost basis of a long position, but it limits the potential upside if Bitcoin experiences significant growth.
• 😀 Volatility harvesting should not be seen as an income-generation strategy but as a way to reduce the cost of holding a volatile asset like Bitcoin.
• 😀 The use of options in crypto markets provides leverage, but this can lead to significant risks, as seen with the altcoin wipeout caused by extreme options leverage.
• 😀 Options strategies allow retail investors to take on leverage without the liquidation risk associated with perpetual swaps, offering a different path for positioning in crypto markets.

Q & A

What is the role of MicroStrategy in the Bitcoin ecosystem, according to Jeff Park?

MicroStrategy plays a unique role in the Bitcoin ecosystem by utilizing its access to traditional finance tools, such as zero-interest borrowing, to acquire Bitcoin. This allows the company to hold Bitcoin at a reduced cost and gain exposure to Bitcoin's upside potential without paying significant interest on the debt. This makes owning MicroStrategy's equity similar to holding a call option on Bitcoin.

How is owning equity in MicroStrategy similar to holding a call option on Bitcoin?

Owning equity in MicroStrategy is similar to holding a call option on Bitcoin because investors in MicroStrategy gain exposure to Bitcoin’s price movements while much of the company’s Bitcoin holdings are financed through debt. This creates a leveraged position where equity holders benefit from Bitcoin’s upside without bearing the full cost of acquiring the Bitcoin.

Why does MicroStrategy have the advantage of borrowing at zero interest rates?

MicroStrategy has the advantage of borrowing at zero interest rates because it is a publicly traded company with access to traditional financial markets. This allows it to raise capital at very low cost, enabling the company to purchase large amounts of Bitcoin without incurring high financing costs, which is a privilege that Bitcoin as an asset itself cannot access.

What is meant by 'volatility harvesting' in the context of Bitcoin?

Volatility harvesting refers to the strategy of capitalizing on the price volatility of Bitcoin or other assets by selling options, such as covered calls. The goal is not to generate regular income but to reduce the cost basis of a long position by collecting premiums from options trading, thus potentially making the asset free to hold over time while still benefiting from its upside.

How does the volatility surface of Bitcoin differ from traditional assets like stocks?

Bitcoin’s volatility surface differs from traditional assets in that it exhibits a 'volatility smile.' Unlike stocks, where puts typically carry a higher premium due to their insurance value, Bitcoin options have higher premiums for both puts and calls due to Bitcoin's potential for both extreme price increases (melt-ups) and decreases (meltdowns), creating unique opportunities for volatility harvesting.

What are the risks associated with selling covered calls against MicroStrategy's stock?

The main risk of selling covered calls against MicroStrategy’s stock is missing out on significant upside potential, especially if Bitcoin experiences a rapid price increase. For instance, in November, Bitcoin surged from $300 to $550, and no amount of call selling could offset the potential profit from holding the stock directly. This highlights the trade-off between generating income through options and participating in large price movements.

Why does Jeff Park emphasize that volatility harvesting should not be viewed as an income-generating tool?

Jeff Park emphasizes that volatility harvesting should not be seen as an income-generating tool because it is not a predictable or stable source of income like bonds. Instead, it's a strategy to reduce the cost basis of a long position by capturing premiums from options, with the goal of eventually owning the asset for free. The volatility in the underlying asset, such as Bitcoin, can lead to significant price swings that affect the strategy's effectiveness.

What is the significance of the large open interest in Bitcoin call options with strikes as high as $1,000?

The large open interest in Bitcoin call options with strikes as high as $1,000 reflects the increasing use of leverage in the crypto markets, particularly with long-dated options. This open interest can create significant price movements as it represents a large amount of potential exposure to Bitcoin’s price. It also highlights the growing interest in Bitcoin as a speculative asset, and the potential for massive payoffs if Bitcoin continues to rise.

How can options strategies in Bitcoin benefit retail investors?

Options strategies in Bitcoin, such as volatility harvesting or using long-dated call options, can benefit retail investors by allowing them to gain exposure to Bitcoin's volatility without taking on as much risk as directly holding the asset. By carefully managing the options positions, investors can reduce their cost basis or increase their leverage while mitigating some of the risks associated with direct ownership.

What does Jeff Park mean by the phrase 'the beautiful path dependency' in the context of options in crypto?

Jeff Park refers to 'the beautiful path dependency' as the way that options in crypto, particularly Bitcoin, can create unique opportunities for investors. Path dependency means that the outcome of an options position depends on the asset’s price trajectory over time. In the case of Bitcoin, the volatility and large price moves can create advantageous conditions for options traders who can strategically manage their positions and capitalize on these price fluctuations.