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

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.

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• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

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  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 0:59Speaker 01

  But according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

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• 1:46Speaker 03

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• 1:48Tracy Alloway?

  Oh, God. Okay, speaking of fun, this is the antithesis.

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  Speaking of fun.

• 1:53Tracy Alloway?

  This is the antithesis of fun.

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  No, it's not.

• 1:55Tracy Alloway?

  No, no, no. You haven't heard me.

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  Oh, okay, sorry.

• 1:58Tracy Alloway?

  So I went to write one of our-

• 2:00Speaker 03

  Thanks for having me.

• 2:04Joe Weisenthal?

  I did a deadlift.

• 2:05Tracy Alloway?

  I am both the most popular trader and most successful trader at Citadel.

• 2:10Joe Weisenthal?

  Fed is going viral.

• 2:11Tracy Alloway?

  Uh, barges.

• 2:12Joe Weisenthal?

  This is an after school special, except.

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  I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.

• 2:20Joe Weisenthal?

  Black gold.

• 2:20Tracy Alloway?

  These are the important questions. Is it robots taking over the world?

• 2:23Joe Weisenthal?

  No, I think that like in a couple of years, the AI will do a really good job of making the Odd Lots podcast. One day that person will have the mandate of heaven.

• 2:33Tracy Alloway?

  How do I get more popular and successful?

• 2:36Joe Weisenthal?

  We do have. The perfect guest.

• 2:39Tracy Alloway?

  You're listening to Lots More, where we catch up with friends about what's going on right now.

• 2:43Joe Weisenthal?

  Because even when Odd Lots is over, there's always lots more.

• 2:47Tracy Alloway?

  And we really do have the perfect guest.

• 2:53Tracy Alloway?

  So I went to write one of our Odd Lots newsletters recently and I was going to write about MicroStrategy 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.

• 3:19Joe Weisenthal?

  Many such cases, but at least he'll come on the podcast.

• 3:22Tracy Alloway?

  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.

• 3:30Speaker 03

  It's not that new.

• 3:31Tracy Alloway?

  It's pretty new.

• 3:32Speaker 03

  It's a year old. I know. I keep thinking it's two months old, but it's almost a year.

• 3:35Joe Weisenthal?

  Yeah.

• 3:35Tracy Alloway?

  Oh, really?

• 3:36Speaker 03

  No, it's like 10 months, nine months ago.

• 3:38Tracy Alloway?

  Wow, time flies.

• 3:39Joe Weisenthal?

  I always think 2020 was two years ago.

• 3:41Speaker 03

  Same, same, same, same.

• 3:43Tracy Alloway?

  Yeah, time is a flat circle. Matt, what is MicroStrategy's perpetual motion machine?

• 3:49Speaker 03

  MicroStrategy, I keep saying perpetual motion machine. I think I'm kidding. I think I'm kidding. I keep, I keep hoping that I'm kidding. So MicroStrategy is a pot of Bitcoins that issue 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. MicroStrategy, like, it never gets any closer. So they keep selling more stock and buying more Bitcoins, and that keeps driving the

• 4:34Speaker 03

  value of the company up, and so they keep getting more and more valuable.

• 4:37Joe Weisenthal?

  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?

• 4:49Speaker 03

  So, I mean, like...

• 4:52Joe Weisenthal?

  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.

• 5:00Speaker 03

  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, 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, 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 have a ton of like, you know, just sort of regular, like, non-marginable leverage, other than the converts.

• 5:44Speaker 03

  But, like, yeah, that's a, that's a theoretical case, it's just like, it's just not, like, true as a matter of pricing.

• 5:50Tracy Alloway?

  Wait, the convertible bonds are actually what, like, initially caught my eye, because I think they issued at, like, one of the recent ones, 0% with a conversion premium of 55%. 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.

• 6:19Speaker 03

  Yeah, like, a convert is just like, like, a convert, you just plug into a model, right? Like, well, sorry, I, taking a step back.

• 6:27Tracy Alloway?

  I actually need you to explain convertible arbitrage to me.

• 6:29Speaker 03

  So there's, there's two things here. There's convertible arbitrage. There's also a lot of like fundamental investors. You think about like a micro strategy 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, 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.

• 7:12Speaker 03

  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 a convert arb is, 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 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.

• 7:56Speaker 03

  And every time the stock goes down, you buy back stock to, to, 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 zeros 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.

• 8:19Tracy Alloway?

  Joe, I didn't realize this until recently, but you know, if you go and look at some of micro strategy's earning presentations, like 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?

• 8:35Speaker 03

  I think so, yeah.

• 8:36Tracy Alloway?

  Yeah, it's like MSTR is more volatile than any other S and P 500 stock. And there's another one that...

• 8:42Speaker 03

  They're marketing to convertible investors.

• 8:42Tracy Alloway?

  Yeah, they're clearly like marketing the volatility as a selling point.

• 8:46Speaker 03

  Like, they know what they're doing. Like, like...

• 8:49Joe Weisenthal?

  This is important.

• 8:50Speaker 03

  This is like they're 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 like, you know, 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, 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

• 9:34Speaker 03

  up the volatility, which is part of why the stock is so volatile.

• 9:37Joe Weisenthal?

  So it is a perpetual motion machine. It's solid. No, I don't care.

• 9:40Speaker 03

  The the thing that I don't understand is the premium of the stock. Like the volatility, like, yeah, like that 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.

• 9:53Joe Weisenthal?

  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.

• 10:00Speaker 03

  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 the stock go down by 50%? Because it go down by 90%? I don't know. Who knows?

• 10:25Speaker 00

  What's next for virtual assets? I'm Jacob Greece, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 10:41Speaker 06

  We're seeing a lot of institutional players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service institutional clients.

• 10:50Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reece Merrick of Ripple says.

• 10:58Speaker 07

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 11:17Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 11:27Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices,

• 12:10Speaker 01

  but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 12:50Tracy Alloway?

  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.

• 13:01Speaker 03

  Companies do it. Like, companies are trying. And 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.

• 13:11Joe Weisenthal?

  Who is it? It is like random, like, kind of.

• 13:13Speaker 03

  They're small companies. Yeah. I wrote about a half joking crypto thing that's doing it called, you know, there's like a crypto called Fartcoin.

• 13:21Joe Weisenthal?

  And there's a fart coin strategy, right?

• 13:22Speaker 03

  Yeah, but it's not a company, right?

• 13:24Joe Weisenthal?

  Oh, yeah. So this can be replicated on chain. So, yeah.

• 13:27Speaker 03

  Sure. Yeah. Well, it can, like, the mechanics can be replicated and 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 MicroStrategy, like, they're trying to get into the S and P 500.

• 13:44Joe Weisenthal?

  Yeah.

• 13:45Speaker 03

  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.

• 13:57Joe Weisenthal?

  I didn't know that.

• 13:58Speaker 03

  Yeah. So like, they may not get into the S and P anyway, but like, they've not been profitable enough to get into the S and P. But like, the Bitcoin gains, they have had Bitcoin gains most of the time, and like, that will become accounting profit for them.

• 14:11Joe Weisenthal?

  I want to ask you a question that touches on one of Tracy's favorite topics, 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 and P that sometimes has some discretion versus just like, here are the 500 biggest companies in the world, in the US, whatever?

• 14:35Speaker 03

  In this immediate case, like, what is a company? Like, is Spy a company?

• 14:42Joe Weisenthal?

  Oh, interesting.

• 14:43Speaker 03

  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, of a tech company. But like, if you said the biggest company as well, you know, like is it S and P 500 fund?

• 14:55Joe Weisenthal?

  Yeah.

• 14:55Speaker 03

  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 and P is, you know, it's a product that's sold to fund managers, right? And like, if, if every fund manager says, I don't want to own, you know, for a while, the S and 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, 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.

• 15:36Tracy Alloway?

  Like nowadays, everyone has started custom indexing as well, right? So like, if you don't like the S and 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 gonna issue converts, basically to do the same thing as MicroStrategy. So it's almost like, is this gonna be like an asset class, a thing that stays with us?

• 16:02Speaker 03

  Yeah, you know, like, people in the convert market talk about being saturated with, with like crypto converts, right? Like, if you like, grew up as a convert investor, like, you, you're like, I can't have 90% of my portfolio in crypto, right? Part because like, you think about like, the volatility and like, the, 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.

• 16:35Joe Weisenthal?

  Prior to all this, what was the canonical use case of who and why issue converts?

• 16:41Tracy Alloway?

  Oh.

• 16:44Joe Weisenthal?

  I seem to remember energy companies.

• 16:46Speaker 03

  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.

• 17:09Joe Weisenthal?

  Yeah.

• 17:10Speaker 03

  And 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.

• 17:34Joe Weisenthal?

  You have a DeepSeek take? Oh, yeah. DeepSeek.

• 17:36Speaker 03

  Yeah, various takes. My, my, my main take was, I wrote today, like, your old take.

• 17:41Joe Weisenthal?

  I saw my name.

• 17:42Speaker 03

  About, you know, the way to monetize DeepSeek was.

• 17:45Joe Weisenthal?

  This is very incestuous. It's just like all three of us referencing each other. I was at my old blog at thestalwart.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.

• 18:14Speaker 03

  Yeah. I mean, there's no evidence that DeepSeek did it. It'd be cool if they did.

• 18:23Joe Weisenthal?

  Lots More is produced by Carmen Rodriguez and Dashil Bennett with help from Moses Andam and Kale Brooks.

• 18:29Tracy Alloway?

  Our sound engineer is Blake Maples. Sage Baumann is the head of Bloomberg Podcasts.

• 18:34Joe Weisenthal?

  Please rate, review, and subscribe to Odd Lots and Lots More on your favorite podcast platforms.

• 18:40Tracy Alloway?

  And remember that Bloomberg subscribers can listen to all our podcasts ad-free by connecting through Apple Podcasts. Thanks for listening.

• 18:51Speaker 08

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• 19:27Speaker 09

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