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

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2:19So 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 MicroStrategy'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. 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.

2:56It's not that new. It's pretty new. It's like a year old. I know. I keep thinking it's two months old, but it's almost a year. Oh, really? No, it's like nine months or something. Wow, time flies. I always think 2020 was two years ago. Same, same, same. Yeah, time is a flat circle. Matt, what is MicroStrategy's perpetual motion machine? MicroStrategy. I keep saying perpetual motion machine. I think I'm kidding. I think I'm kidding. I keep hoping that I'm kidding. So MicroStrategy is a pot of Bitcoins that issues stock. And the stock trades at, call it, two times the value of the pot of Bitcoins.

3:34And so if you have that situation, you sell more stock to buy Bitcoins. Because 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 micro strategy like it never gets any closer so it keeps like more stock and buying more bitcoins and it keeps driving the value of the 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?

4:15So, I mean, like - Like if I wanted to borrow Bitcoin or borrow money to buy Bitcoin, I could, but there was 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 MicroStrategy, you get back$1 of Bitcoin, which is the opposite of leverage. Now, it's true. And by the way, also, they do have the ability to – they're right.

4:55They'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 have a ton of like just sort of regular non-marginal leverage other than the converts. But yeah, that's a theoretical case. It's just not true as a matter of pricing. Wait, the convertible bonds are actually what initially caught my eye because I think they issued at one of the recent ones, 0 % with a conversion premium of 55%. And that's already when the stock is trading at this massive premium to the value of its assets.

5:34And so 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 a convert you just plug into a model, right? Like, well, sorry. 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? If you think about like a micro strategy convertible, nevermind 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.

6:18And 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. Right. 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 right 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.

7:02And this is a very, you know, has like 100 % annualized volatility. And you know, what you're doing is like you get, 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, it's like zeros up 55, is like that sounds outrageous, but you plug it into the model and you put in 100 % volatility and that's cheap.

7:45And so people want to buy it. Joe, I didn't realize this until recently, but if you go and look at some of MicroStrategy's earning presentations for Q1, Q4, I should check those out. 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 stock. Right. And there's another one. They're marketing to convert investors. Yeah. They're clearly like marketing the volatility as a selling point. Like they know what they're doing. This is important. This is like they're sort of using every part of like this strategy to raise money, which they're really like thoughtful about it and like selling lots of volatility.

8:25is very helpful to them. And the point about the ETFs is like, you know, a convert investor buys low, sells high, right? 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, you're profiting from volatility, but you're also dampening volatility, right? Because like, when 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.

8:57Every 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 solid. No, I don't care. The thing that I don't understand is the premium of the 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 Bitcoins? I don't know. 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.

9:27Yeah. 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 %? Does it go down by 90 %? I don't know. Who knows?

9:51Your best restaurant location gets five-star reviews. How do you make every location like your best location? Your best paper mill has been operating at peak productivity. How do you make every mill like your best mill? Your best data center has optimized every drop of water. How do you make every data center like your best data center? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. For enterprise organizations, managing all your food needs is a tall order. But with EasyCater, you get a single workplace food vendor with the tools and resources to make it easy.

10:32Giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform. All while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. 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. 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.

11:11And so some of them should do it. Some of them do it like Dogecoin, you know, like you can have other. Who is that? There's like random like kind of classic penny stocks. 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 Fartcoin strategy, right? Yeah, but it's not a company, right? Oh, yeah, so this can be replicated on chain. So, yeah, let's talk about that. Well, it can – like the mechanics can be replicated. 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?

11:44I mean, one thing that's attractive about MicroStrategy, they're trying to get into the S &P 500, which is a fascinating, that turns on a change in the accounting rules that allow for them to account for their Bitcoin gains as profits. I didn't know that. Yeah. So they may not get into the S &P anyway, but they've not been profitable enough to get into the S &P. But the Bitcoin gains, they have had Bitcoin gains most of the time, and that will become accounting profit for them. I want to ask a question that touches on one of Tracy's favorite topics, and it's actually a little bit adjacent here.

12:21What would be the problem of just having an index that's just, these are the 500 biggest companies? 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 an ETF, right? I mean, like, arguably, this is an ETF, right? It's in, it's in the trappings of a tech company. But like, if you said the biggest company is, well, you know, like, is it S &P 500 fund? Yeah. A company. But away from that, no, I mean, like, people definitely have very rule-driven indices.

13:05I think part of the appeal of the S &P is it's a product that's sold to fund managers. If every fund manager says, I don't want to own... For a while, a lot of indexes were excluding dual-class stocks because 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 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 a market-driven thing, right? If people want a certain index, they get that index. There's nothing wrong with having the top 500 companies be the index.

13:40Like 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. 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 MicroStrategy. So it's almost like, is this going to be like an asset class, a thing that stays with us? Yeah, you know, people in the convert market talk about being saturated with crypto converts, right? If you grew up as a convert investor, you're like, I can't have 90 % of my portfolio in crypto, right?

14:20In part because you think about the volatility and the technical aspect of making money on trading the volatility. That depends on the credit being good. And 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 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.

15:13And that's more attractive to convert it. Like there are 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.

15:37you have a deep seek take oh yeah deep seek yeah i have various takes my my my main take was i wrote today like your old i saw my name that uh you know the way to monetize deep seek was this is very incestuous it's just like all three of us referencing each other i would say 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.

16:11But 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 DeepSeek did it, but it'd be cool if they did.

16:27Lots More is produced by Carmen Rodriguez and Dashiell Bennett with help from Moses Andam and Kale Brooks. Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts. Please rate, review, and subscribe to OddLots 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. For enterprise organizations, managing all your food needs is a tall order. But with EasyCater, you get a single workplace food vendor with the tools and resources to make it easy.

17:05Giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform. All while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. Thursday night football is on and it's only on Prime Video. That's going to be caught. This week, the Minnesota Vikings head west to face the Los Angeles Chargers. They will take that all day. Coverage begins at 7 p.m. Eastern with football's best party. TNF Tonight presented by Verizon.

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