Debt-leveraged Bitcoin vehicles face structural instability
The bear case argued against debt-leveraged Bitcoin vehicles is that they represent an unstable equilibrium prone to death-spiral risks when the underlying asset drops, as Bitcoin lacks native yield to service debt coupons.
The argument
The speakers discussed how issuing convertible debt to buy non-productive assets like Bitcoin creates a fragile structure. Tarun argued that this leverage model is an unstable equilibrium with a non-zero probability of blowing up if the equity value of the issuing vehicle declines significantly.
The thesis, stress-tested
✓ What validates it
- ✓MicroStrategy issues further dilutive equity to cover cash interest payments
- ✓A sustained drop in BTC price below the convertible debt strike prices
▸ Risks discussed
- ▸Sharp declines in Bitcoin price can trigger a liquidation or dilution spiral
- ▸Refinancing debt at higher interest rates increases coupon pressure
Hear it yourself
"Please see chopping blocks at x y z for more disclosures. So, we had some Ethereum bearishness on the show last time, and we thought it might be good to counterpoint a little bit with some Ethereum bullishness. Unfortunately, we brought you on on a day where it feels a little hard to be bullish. ETHBTC is up. ETHBTC is up. As as Wiz had pointed out before the show the majors, the ether is less. Yes. Of of the majors, Ethereum is the least worst. Bullish. Yes. Bullish bullish for those of you who are doing the pair trade."
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