The Bubble With Bitcoin

Followers via LinkedIn will have seen a string of my recent posts focused on the fact that bitcoin miners are borrowing to buy bitcoin, aping the "very novel strategy" of MicroStrategy, the loss-making former software company whose boss, Michael Saylor, continuously hypes the cryptocurrency. We've been here before, in 2022 when several miners collapsed, ruining many amateur investors, but the stakes are gradually rising each time...

In November '24, Allianz, the German insurer, bought 24% of MicroStrategy's $2.6bn [later corrected by Allianz to be $0.6bn] convertible bond issue that was used to purchase bitcoin (raising the price by 4.3% to $98k). It seems that Allianz wants to gain exposure to bitcoin without actually going to the trouble of buying and holding it, even though it could have got that exposure more cheaply through ETFs. After all, the convertible feature of the bond only gets Allianz shares in a company that consistently loses money and whose share price is tied to bitcoin volatility and price: 

On November 21, 2024, MicroStrategy issued $3 billion of 0% convertible notes maturing on December 1, 2029... Its stock was trading at $430 at issuance, and the conversion price was $672. Investors were willing to accept call options instead of interest payments. The equity options have value if MicroStrategy shares rise by more than 50% over the next five years. If the stock does not get above $672, investors will earn a 0% return on their investment. MicroStrategy And Its Convertible Debt Scheme

By purchasing the bonds with cash that it knows will be used to buy bitcoin, an investor like Allianz is effectively boosting the price of bitcoin - and by direct correlation MicroStrategy's share price - to the conversion price. As Michael Lebowitz explains, MicroStrategy's share price began correlating with the price of bitcoin the more the company borrowed to buy the cryptocurrency - a total of $7.27bn since 2020.

So it was interesting to see the USD price of bitcoin subsequently hit $106k for two days in December (for which Donald Trump weirdly congratulated everyone, so presumably he's in on the trade).

But why did the price stick so firmly at $106k (before sliding ominously below $100k)? 

Well, on 7 Jan 2025, the FT reported the estimate by CoinShares, the investment group, that:

“Including depreciation and stock-based compensation charges, the average cost to produce a bitcoin was $106,000.”

This is somewhat new, as previous cost estimates at the time of the bitcoin mining bankruptcies in 2022 only seemed to factor in the (very significant) energy/computing costs, not those wider costs.

Meanwhile, the FT reports, not satisfied with mining rewards that halved in April, miners are continuing to borrow more and more to buy and hold bitcoin in a bid to support the price (and eventually ‘profit’ from sales to ‘greater fools’). For instance, at the latest peak Riot Platforms borrowed $595m, maturing in 2030, using it mainly to buy bitcoin. Others have also concluded that bitcoin miners are mimicking MicroStrategy by borrowing to buy bitcoin.

But all this capital is clearly failing to support the price of bitcoin at the cost price, as the slide below $100k from the recent peak has demonstrated. This suggests that the miners (and MicroStrategy) will need to borrow again and buy more bitcoin as the overall mining costs rise, hoping that the price of bitcoin at the time of bond maturity is enough to repay the principal owed.

Some miners are looking to diversify into supporting AI and to cut mining costs by producing their own electricity from smaller, remote landfill sites (though surely the power generated should still be accounted for as a cost at market value?). But both of these moves highlight miners' - and bitcoin's - vulnerability to competition for resources from businesses pursuing more profitable ventures, or actual energy producers. Note that crypto mining is responsible for up to 2.3% of US annual electricity consumption. 

All of which suggests that it is not sustainable to endlessly borrow to buy your own product without being able to sell it.

[Update 01.04.26: all Microstrategy's convertible bonds are out of the money: "Conversion prices for Strategy bonds range from a low of $149.77 to a high of $672.40" "...creditors will demand on-time interest payouts and principal repayment [15.09.28] through [15] June 2032, unless the price of MSTR starts to rally and sufficiently motivate them to exercise their convertible options." 

In addition, MSTR cut its STRK share offering by 85% on 22 March 2026, having raised ~95% less funding than it could have. That stock has a conversion option at $1,000. "Strategy now owes roughly $112 million per year in STRK dividends on the shares it did manage to sell. To service those dividends, the company posted a $5.4 billion operating loss in fiscal year 2025. STRK dividends, by design, never stop."

MSTR share price at time of update $123.10, BTC $68,491.25].