Crypto glossary
Convertible notes for bitcoin purchases
Convertible notes for bitcoin purchases are bonds a company sells, convertible into its shares, to raise cash that it then uses to buy bitcoin for its treasury.
A convertible note is debt that pays a coupon, often very low or zero, and can be swapped for shares if the stock rises above a conversion price. Strategy used this tool repeatedly from 2020, and other treasury companies followed. Buyers, frequently hedge funds, value the embedded option on a volatile share and often hedge it by shorting the stock.
For the issuer, convertibles raise large sums cheaply without immediate dilution. If bitcoin and the share price rise, the notes convert into equity and the debt disappears; the company keeps the extra bitcoin bought with the proceeds, which boosts its bitcoin per share.
If bitcoin falls and the share price stays below the conversion level, the notes must be repaid in cash at maturity or refinanced, possibly forcing sales of bitcoin in a weak market. Leverage magnifies drawdowns for shareholders, and convertible arbitrage flows can add volatility to the stock.
Example
A listed company sells 1 billion dollars of five-year convertible notes at a 0% coupon, convertible at a 40% premium, and spends the entire proceeds on bitcoin the same week.