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GameStop (NYSE: GME) recently announced plans to add Bitcoin (BTC) to its corporate treasury using $1.3 billion raised through convertible bonds. The announcement, which came shortly after what many considered positive earnings results, led to a counterintuitive sharp decline in the company’s stock price. This financing approach, as detailed in a recent HighStrike newsletter, mirrors strategies employed by other Bitcoin-focused companies and brings with it complex implications for shareholders.
The newsletter offers valuable insights into why what seems like bullish news can sometimes lead to bearish short-term price action, and what it might take for this strategy to eventually pay off for investors.
GameStop’s Bitcoin Strategy: Following the MicroStrategy Playbook
A recent newsletter from HighStrike analyzes GameStop’s sharp stock decline following its announcement of a $1.3 billion convertible bond issuance to fund Bitcoin purchases. Despite what some viewed as bullish news about adding Bitcoin to its balance sheet, GameStop shares dropped over 25% on Thursday, falling from nearly $30 to around $22.
According to HighStrike, GameStop is following in the footsteps of companies like MicroStrategy (NASDAQ: MSTR) and Marathon Digital Holdings (NASDAQ: MARA), which have used similar financing strategies for their Bitcoin acquisitions. These convertible bonds offer investors a 0% yield along with the right to convert into shares in 2030, essentially functioning as low-risk, long-term equity positions with seniority over shareholders in potential bankruptcy scenarios.
While the issuance benefits GameStop by providing immediate cash without interest payments until 2030, HighStrike points out that shareholders face a $1.3 billion dilution risk. This occurs because bondholders typically hedge their positions by shorting the stock or selling short-dated calls, creating ongoing sell pressure that suppresses the share price.
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The Bitcoin Price Threshold is $110,00 for Shareholders
HighStrike’s newsletter suggests that for GameStop, MicroStrategy, and Marathon to achieve significantly higher stock prices, Bitcoin may need to reach what they call “exit velocity” – breaking above $110,000 and surpassing these companies’ average purchase prices. Only at that point might fresh demand for these stocks outpace the dilutive pressure from bondholder hedging.
The newsletter illustrates this phenomenon by pointing to MicroStrategy’s convertible notes with conversion prices ranging from $433.43 to $2,043.32 per share, and Marathon’s with conversion prices around $25.91 and $34.58. Despite both companies increasing their Bitcoin holdings (with MSTR now holding over 506,000 BTC), their stocks have consistently traded below these thresholds due to hedging pressure.
HighStrike concludes with a warning to short-dated options buyers, noting the significant losses experienced by 3/28 call buyers during Thursday’s selloff, with most calls set to expire worthless. Until Bitcoin experiences a major breakout, analysts expect GameStop and other Bitcoin-holding public companies to likely stay range-bound.
Disclaimer: The author does not hold or have a position in any securities discussed in the article. All stock prices were quoted at the time of writing.
About the author
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.
