How Bitcoin will enter the Nasdaq in Christmas week with MicroStrategy

2024 will be a year to remember for Bitcoin. On 11 January, the first ETFs replicating the spot (market) price of the cryptocurrency were listed on Wall Street. They are currently proving to be an unprecedented success as they have raised more in 10 months than similar physical gold products have raised in 10 years since their launch in 2006. On 5 December, the price of Bitcoin surpassed the symbolic and psychological threshold of $100,000 for the first time in history, bringing its market capitalisation to over $2 trillion, in seventh place in the world asset ranking led by physical gold ($18 trillion) followed in second place by Apple ($3.75 trillion). And now, while several states (USA, Japan, Brazil) are talking about adopting Bitcoin as a national strategic reserve, another piece of news has arrived. A sort of cherry on top of the 2024 cake: as of Christmas week Bitcoin will 'enter' the Nasdaq 100, the most important and liquid basket of technology stocks on the planet.

But how can Bitcoin, considered a commodity by both the Sec (the authority that regulates US financial markets) and Ctfc (the US federal agency that regulates commodity futures and options markets) become part of a basket of technology stocks? The entry is not direct but takes place through the stock MicroStrategy, the company founded by Michael Saylor that holds 420,000 Bitcoins in its treasury and that in its last quarterly report presented its new strategy of wanting to become the 'world bank of Bitcoin'.

In the Italian night, Nasdaq announced entries and exits as part of the annual rebalancing that always takes place in the fourth week of December. The statement read: 'Nasdaq today announced the results of its annual review of the Nasdaq-100 Index, which will become effective before the markets open on Monday, 23 December 2024. The following three companies will be added to the Index: Palantir, MicroStrategy and Axon. Following the review, the following three companies will be removed from the Index: Illumina, Super Micro Computer and Moderna."

Technically, then, it is not Bitcoin but MicroStrategy that has entered the Nasdaq 100. But the correlation between the cryptocurrency and the company is high. Not only because the company continues to purchase, recently on a weekly basis, new Bitcoins to hold in treasury. But also because in doing so, MicroStrategy has set itself the goal of becoming the gateway to invest in Bitcoin for a number of financial players who would like to expose themselves to cryptocurrency but cannot (due to compliance) or find it inconvenient due to balance sheet regulations. For this reason, MicroStrategy announced the issuance of new convertible bonds. The latest one, launched at the end of November, was even issued at 0 interest (so the company will not pay any interest until maturity in 2029). Despite being interest-free, the bond received strong demand (prompting the company to increase the amount from 1.8 to 2.6 billion) from large institutional investors (insurance companies, hedge funds, financial institutions).

How so? The bond provides for the possibility of converting the investment into MicroStrategy shares at a price (conversion strike price) 55% higher than the issue date. In practice, those who bought this bond bought the right to be able to buy the company's shares four years from now at a much more expensive price (55% higher). If this condition does not materialise at maturity, they will receive their capital back. In fact, this is a kind of call-out-of-the-money option (with an exercise price of the right to buy the shares far from the current market price) but which, unlike the call-out-of-the-money options available on the options market today, offers repayment of the principal at maturity if the share price has not exceeded the strike price in the meantime. In the traditional options market, on the other hand, if the condition does not occur (technically if the 'out of the money' option does not become 'in the money') the investor loses the entire capital invested to buy the 0option.