Article compiled by: Block unicorn
Original title: Financial Alchemy of Crypto: Financial Innovation of Corporate Balance Sheets
Preface
Newton is now known for his research on gravity, but in his time, he had another area of interest: financial alchemy. In other words, the quest to create gold from materials such as lead. His quest led him to study theology. Modern finance echoes his interests. We live in an age of financial engineering that transforms lead into gold by combining the necessary elements.
In today's article, Saurabh explains how companies are bringing cryptocurrencies into their balance sheets and earning a premium over their true value. MicroStrategy, a company with just over $100 million in quarterly revenue, holds close to $109 billion in Bitcoin . 80 companies around the world are exploring how to bring cryptocurrencies into their balance sheets. Traditional financial institutions are very bullish on this and are paying a premium for the volatility and upside potential of these stocks.
Saurabh discusses how the emergence of convertible bonds has contributed to this burgeoning ecosystem, as well as the attendant risks and companies exploring the inclusion of other cryptocurrencies on their balance sheets.
Realizing a Bitcoin Premium Through Convertible Bonds and Preferred Stock
A software/BI company with $111M in quarterly revenue has a market cap of $109B. How did it accomplish this feat? It bought Bitcoin with other people’s money. And the market is now valuing it at a 73% premium to the amount of Bitcoin it holds. What’s the alchemy behind this math?
Strategy (formerly Micro Strategy) created a financial mechanism that allows it to borrow money to buy Bitcoin at almost zero cost. Taking its $3 billion convertible bond issued in November 2024 as an example, here's how it works: the company issued a convertible bond that pays 0% interest, which means that bondholders will not receive regular interest payments. Instead, every $1,000 of bonds can be converted into 1.4872 shares of Strategy stock, but only if the stock price reaches or exceeds $672.40 before maturity.
When these bonds were issued, the stock was trading at $433.80, so it would need to rise 55% to make conversion profitable. If the stock price never reaches that level, bondholders will simply get their $1,000 back after five years. But if Strategy's stock soars (which typically happens when Bitcoin rises), bondholders can convert to stock and receive all of the upside.
The clever thing about this is that bondholders are actually betting on Bitcoin's performance while enjoying downside protection that those who buy Bitcoin directly don't have. If Bitcoin crashes, they can still get their principal back because bonds take precedence over stocks in bankruptcy. At the same time, Strategy was able to borrow $3 billion for free and immediately use the funds to buy more Bitcoin.
But the key trigger is this: starting in December 2026 (just two years after issuance), if Strategy’s stock trades above $874.12 (130% of the conversion price) during a certain period, the company can force an early redemption of the bonds. This “redemption clause” means that if Bitcoin drives the stock price high enough, Strategy can force bondholders to convert to stock or get their principal back early. This allows the company to refinance on more favorable terms.
The strategy works because Bitcoin has grown at an annualized rate of about 85% over the past 13 years and 58% over the past five years. The company is betting that Bitcoin will grow much faster than the 55% share price appreciation required to trigger the conversion, and they have proven the viability of this strategy by successfully redeeming early bond issuances and saving millions of dollars in interest expenses.
At the heart of this structure are three different series of perpetual preferred stock: STRF, STRK and STRD, each tailored for a different investor type.
STRF: Perpetual preferred stock, 10% cumulative dividends, highest priority. If Strategy fails to pay dividends, all unpaid STRF dividends must be paid before paying other shareholders, and the dividend rate will increase as a penalty for default.
STRK: Perpetual preferred stock, 8% cumulative dividends, medium priority. Unpaid dividends accumulate and must be paid in full before common shareholders receive any return. Also includes the right to convert to common stock.
STRD: Perpetual preferred stock, 10% non-cumulative dividend, lowest priority. The higher dividend rate compensates for the higher risk - if Strategy skips a payment, these dividends will be lost forever without the need to make up later.
Perpetual preferred stock allows Strategy to raise equity-like capital while paying bond-like dividends forever, with each series tailored to different investors' risk preferences. The accumulation feature protects STRF and STRK holders by ensuring that all dividends are eventually paid, while STRD provides higher current income but no security against unpaid dividends.
Strategy Scorecard
Strategy began raising funds to buy Bitcoin (BTC) in August 2020. Since then, the price of Bitcoin has soared from $11,500 to $108,000, an increase of about 9 times. At the same time, Strategy's stock price has surged from $13 to $370, an increase of nearly 30 times.
Strategy's regular business has not grown, and its quarterly revenue remains at $100 million to $135 million. The only change is that they borrowed money to buy Bitcoin. Currently, they hold 582,000 Bitcoins, worth about $63 billion. And their stock market value is about $109 billion, 73% higher than the actual value of their Bitcoin. Investors paid an additional premium to hold Bitcoin through Strategy's stock.
As mentioned previously, Strategy issued new shares to finance its Bitcoin purchases. Since starting to buy Bitcoin, they have nearly tripled the number of shares from 95.8 million to 279.5 million (a 191% increase).
Normally, issuing so many new shares would hurt existing shareholders because each person would own a smaller percentage of the company. But even though the number of shares increased by 191%, the share price soared by 2,900%. This means that even though shareholders own a smaller percentage of the company, each share is worth significantly more, so they still made a profit.
Strategy's model is popular
Several companies holding Bitcoin have emerged to try to replicate Strategy's success. One of the most recent examples is Twenty One (XXI), a special purpose acquisition company (SPAC) led by Jack Mallers and backed by Brandon Lutnick's Cantor Fitzgerald, Tether, and SoftBank. Unlike Strategy, Twenty One is not listed. The only way to get public investment is through Canter Equity Partners (CEP), which invested $100 million in XXI and holds a 2.7% stake in it.
Twenty One holds 37,230 Bitcoins. Since CEP owns 2.7% of Twenty One, they effectively control about 1,005 Bitcoins (worth about $108.5 million at $108,000 per Bitcoin).
CEP's stock market value is $486 million, 4.8 times its Bitcoin holdings! When its Bitcoin connection was announced, CEP's stock price soared from $10 to about $60.
This massive premium means that investors paid $433 million for $92 million worth of Bitcoin exposure. As more similar companies emerge and their Bitcoin holdings grow, market forces will eventually pull these premiums back to more reasonable levels, although no one knows when that will happen or what a “reasonable” level will look like.
An obvious question is why are these companies trading at a premium? Why not just buy Bitcoin from the market to gain exposure? I think the answer lies in options. Who is funding Strategy's Bitcoin purchases? Mainly hedge funds, who pursue delta-neutral strategies by trading bonds. If you think about it, this trade is similar to Grayscale's Bitcoin Trust (GBTC). The trust used to trade at a premium because it was closed (no Bitcoin could be withdrawn until it was converted to an ETF).
Therefore, you can store your Bitcoin at Grayscale and sell publicly traded GBTC shares. As mentioned earlier, by holding Strategy's bonds, holders can enjoy a compound annual growth rate (CAGR) of more than 9%.
So what could go wrong? Strategy might need to sell Bitcoin to meet its redemption or interest payment obligations. But how big is that risk? Strategy's total annual interest burden is $34 million. With gross profits of $334 million in fiscal 2024, Strategy is well positioned to service its debt. The maturity of the convertible bonds issued by Strategy matches Bitcoin's four-year cycle, long enough to reduce the risk of a price decline. Therefore, as long as Bitcoin grows by more than 30% in four years, redemptions can be easily covered by issuing new shares.
When redeeming these convertible bonds, Strategy can simply issue new shares to bondholders. The reference share price that bondholders receive is noted at the time of issuance, and is typically about 30-50% higher than the share price at the time of issuance. Problems only arise if the share price falls below the specified conversion price. In this case, Strategy needs to return cash, and it can do so by issuing a new round of debt with more favorable terms to repay earlier debt, or by selling Bitcoin to cover cash needs.
Value Chain
Obviously, it all starts with companies trying to acquire Bitcoin. But eventually they use exchanges and custodial services. For example, Strategy is a Coinbase Prime customer. It buys Bitcoin through Coinbase and stores it in Coinbase Custody, Fidelity, and its own multi-signature wallet. It’s hard to estimate exactly how much Coinbase earns from Strategy’s Bitcoin trading and storage, but we can make some guesses.
Assuming transaction fees and escrow costs
Assuming an exchange like Coinbase charges 5 basis points (0.05%) for over-the-counter (OTC) purchases of Bitcoin on Strategy’s behalf, the purchase of 500,000 Bitcoins would generate $17.5 million in revenue for the exchange at an average execution price of $70,000. Bitcoin custodians typically charge an annual fee of 0.2% to 1%. Assuming the lower 0.2%, storing 100,000 Bitcoins (at $108,000 each), the custodian would earn $21.6 million per year for storing Strategy’s Bitcoins.
Beyond Bitcoin
So far, good progress has been made in creating investment tools to increase BTC's exposure to capital markets. In May 2025, SharpLink raised $425 million through a private equity investment (PIPE) led by ConsenSys founder Joe Lubin, who also served as executive chairman. The round of financing was priced at $6.15 per share, and approximately 69 million new shares were issued, which will be used to purchase approximately 120,000 ETH, which may be pledged later. Currently, ETH ETFs do not allow staking.
This instrument, which offers a 3-5% yield, is automatically more attractive than an ETF. Before the announcement of the offering, SharpLink's share price was $3.99, with a market capitalization of approximately $2.8 million and approximately 699,000 shares outstanding. The offering price was a 54% premium to the market price. After the announcement, the share price soared to a high of $124.
Such investment vehicles can also offer a 3-5% yield, making them naturally more attractive than ETFs. Prior to the announcement of the offering, SharpLink was trading at $3.99 per share, with a market capitalization of approximately $2.8 million and approximately 699,000 shares outstanding. The offering price represents a 54% premium to the market price. After the announcement, the stock soared to a high of $124.
The 69 million new shares issued are about 100 times the current outstanding shares.
Upexi plans to acquire more than 1 million Solana (SOL) by the fourth quarter of 2025 while remaining cash flow neutral. The plan began with raising $100 million through a private placement of 43.8 million shares, led by GSR. Upexi expects to cover preferred stock dividends through a 6-8% staking yield plus maximum extractable value (MEV) rebates, and self-fund the purchase of more SOL. On the day of the announcement, the stock price jumped from $2.28 to $22, and finally closed at about $10.
Upexi originally had 37.2 million shares, and the newly issued shares had a dilution rate of about 54% for existing shareholders. However, the stock price rose by about 400%, which completely offset the dilution effect.
Sol Strategies is another company that raised funds through the capital markets to purchase SOL. The company operates Solana's validation node and earns more than 90% of its revenue from staking rewards. The company has currently staked 390,000 SOL, and approximately 3.16 million SOL are entrusted by third parties. In April 2025, Sol Strategies obtained a financing facility of up to $500 million through a convertible bond agreement with ATW Partners. The first $20 million has been used to purchase 122,524 SOL.
Recently, the Company filed a plan for a hybrid securities offering of up to $1 billion consisting of common stock (including a “market offering”), warrants, subscription receipts, units, debt securities, or a combination thereof, providing it with the flexibility to raise capital through different mechanisms.
Unlike Strategy's convertible bonds, SparkLink and Upexi raised capital by issuing new shares directly. In my opinion, Strategy's option model that allows 100% cash redemption is aimed at a different type of investor. If I can only get exposure to ETH or SOL by buying your shares, why don't I buy ETH or SOL directly? Why take the additional risk of excessive leverage of the middleman? Unless there are additional services, it makes more sense to raise funds using convertible bonds with enough operating profit cushion to pay interest.
When the music stops
These convertible bonds are targeted at hedge funds and institutional bond traders seeking asymmetric risk-return opportunities, rather than retail investors or traditional equity funds.
From their perspective, these instruments provide an investment opportunity that fits their risk framework: if Bitcoin achieves the expected 30-50% increase in two to three years, the bonds will be converted; if the market goes bad, even if a slight loss due to inflation is taken into account, 100% of the principal will be returned.
The beauty of this structure is that it solves a real problem for institutional investors. Many hedge funds and pension funds either lack the infrastructure to hold cryptocurrencies directly or are restricted by their investment mandates from purchasing Bitcoin directly. These convertible instruments provide a regulatory-compliant backdoor into the crypto market while maintaining the downside protection required for fixed income allocations.
This advantage is temporary in nature. As regulatory clarity improves and more direct crypto investment vehicles with custody solutions, regulated exchanges, and clearer accounting standards emerge, the need for these complex detours will decrease. The 73% premium that investors currently pay to gain Bitcoin exposure through Strategy is likely to compress as more direct alternatives emerge.
We have seen this before. Opportunistic managers have taken advantage of the Grayscale Bitcoin Trust (GBTC) premium - buying Bitcoin and depositing it in the Grayscale Trust, then selling GBTC shares in the secondary market at a 20-50% premium to the net asset value (NAV). When everyone started doing this, GBTC went from a peak premium to a record 50% discount at the end of 2022. This cycle shows that without sustainable income to support repeated financing, the equity play backed by crypto assets will eventually be eliminated by arbitrage.
The key question is, how long can this last? Who will be left standing when the premium collapses? Companies with strong underlying businesses and conservative leverage ratios may weather the transition. Companies that chase crypto asset reserves and do not have sustainable revenue streams or defensive moats may face dilution-driven selling after the speculative craze bursts.
For now, the music is playing and everyone is dancing. Institutional capital is flowing in, premiums are widening, and more companies are announcing Bitcoin and crypto reserve strategies every week. But the smart money understands that this is a trade, not an investment thesis. The companies that survive will be those that use this window to build lasting value beyond the value of their crypto holdings.
The transformation of corporate balance sheets may be permanent, but the outsized premiums we see today are not. The question is whether you are positioned to profit from this trend or are just another player looking to find a seat when the music stops.
