The Impact of Bitcoin on Convertible Bonds in 2024
Key drivers for equity markets over the past year can largely be distilled into interconnected themes: artificial intelligence, Donald Trump, and Bitcoin. The convertible bond universe, which is inherently aligned with growth companies and emerging technologies, saw Bitcoin’s influence become particularly pronounced in 2024.
Key drivers for equity markets over the past year can largely be distilled into interconnected themes: artificial intelligence, Donald Trump, and Bitcoin. The convertible bond universe, which is inherently aligned with growth companies and emerging technologies, saw Bitcoin’s influence become particularly pronounced in 2024.
The U.S. software company MicroStrategy Inc., founded in 1989, made a fundamental decision in 2020 to pivot its business model entirely around Bitcoin, allocating all available funds to this cryptocurrency. Between March and November 2024, the company issued five convertible bonds explicitly to fund additional Bitcoin purchases. Concurrently, equity offerings were conducted with the same purpose. This was part of a plan announced in late October to raise a record $42 billion in fresh capital for Bitcoin acquisitions.
In mid-November, Holinger Asset Management participated in a digital investor conference with MicroStrategy’s founder, former CEO, and current chairman, Michael J. Saylor. During this session, we gained direct insight into the company’s radical vision and strategy, which informed our analysis. Our assessment concluded that we would not hold MicroStrategy (MSTR) convertible bonds in our portfolio, as they represent a leveraged bet on Bitcoin’s future trajectory, with the company’s credit quality effectively tied to the price of Bitcoin.
The global balanced convertible bond index, however, included up to five of MicroStrategy’s six outstanding convertible bonds, with a combined issuance volume exceeding $7 billion, representing significant index weightings.
Bitcoin experienced a sharp rally from October to mid-December, partially driven by MicroStrategy’s actions. In Q4 2024, the company purchased 195,250 BTC, valued at $18 billion. As a result, MSTR convertible bonds surged; for instance, the 2027 bond rose from 79% at the start of the year to 335% in November. This leveraged buy-and-hold Bitcoin strategy contributed directly to the index’s strong performance.
The accompanying chart illustrates the 2024 performance of MicroStrategy’s convertible bonds and their relevance to index performance during specific periods.
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Thanks to the rebalancing mechanism and selection periods of the balanced index, nearly all of Bitcoin’s rapid rise—and by extension, the MSTR bonds’ rally—was reflected in the index. However, the correction that began in mid-December had no impact on the index, as the MSTR bonds were excluded by then. Two bonds were removed in December’s rebalancing, while three others were dropped in November. A newly issued $3 billion convertible bond in November did not qualify for index inclusion due to an excessively high conversion premium caused by MicroStrategy’s falling stock price.
In 2024, MSTR convertible bonds contributed +2.85% to the index’s overall performance of +6.94%.
The investment strategy of the H.A.M. Global Convertible Bond Fund follows an absolute approach and does not benchmark against indices. This strategy avoids the need to neutralize large index weights. However, not holding MicroStrategy convertible bonds resulted in a relative underperformance compared to the index.
The theme of Bitcoin and convertible bonds is set to remain significant for investors in 2025. The next rebalancing in mid-January will see several new Bitcoin-related issuances added to the index:
CleanSpark Inc |
MARA Holdings Inc |
Galaxy Digital Holdings |
Core Scientific |
MARA Holdings Inc |
Riot Platforms Inc |
The index will also retain the following titles:
Coinbase Global Inc |
Coinbase Global Inc |
For now, MicroStrategy convertible bonds remain excluded due to their low or high sensitivity to the company’s stock.
