Intelligence · Capital structure
Convertible notes risk for bitcoin treasury companies
· Michael Mescher, Gammon Capital
Direct answer
The core convertible notes risk for a bitcoin treasury company is that the notes behave like equity when the stock is high and like debt when it is low. Issuers sell low-coupon notes that convert at a premium to the share price, so in a rising market the debt turns into shares and disappears. If the stock falls well below the conversion price, the conversion option is far out of the money, holders effectively own a bond, and the issuer faces cash repayment at the holder put date or maturity, usually when its stock and bitcoin are both weaker. Stacked put dates form a convertible maturity wall. The defenses are laddered maturities, liquidity matched to put dates, repurchases or exchanges, and hedges.
Key takeaways
- A convertible is a bond plus a call option on the issuer's stock. The issuer is short that call, which is why the coupon is low.
- Holder put dates, often well before final maturity, are the real maturity. Plan around the first date holders can demand par.
- When the stock trades well below the conversion price, the note is debt. Refinancing with new equity at that price issues far more shares than conversion would have.
- Capped calls raise the effective conversion price but do not help with repayment risk, and their unwind matters if notes are repurchased early.
- Disclosure should show the full put and maturity schedule against liquidity sources and the sensitivity of coverage to the bitcoin price.
Definition
Convertible note: a debt security that pays a fixed coupon and gives the holder the right to exchange the principal for a set number of the issuer's shares (the conversion rate). The conversion price is the principal divided by the conversion rate, usually set at a premium to the share price at pricing. Bitcoin treasury companies use converts because the embedded option, which investors value more when the stock is volatile, lets them borrow at a low coupon and use the proceeds to buy bitcoin.
A convertible maturity wall is a concentration of put dates and maturities in a short window, where several issues could require cash repayment at once.
How bitcoin treasury converts work
| Term | What it does | Why it matters to the issuer |
|---|---|---|
| Low or zero coupon | Holders accept little interest in exchange for the conversion option | Cheap carry while the option has value; the option is the real price of the financing |
| Conversion premium | Conversion price set above the share price at issue | Higher premium means less dilution on conversion, but less option value and a higher coupon |
| Holder put | Holders may require repurchase at par on set dates before maturity | The effective maturity; cash is due at the first put date if the stock is below conversion |
| Issuer call or provisional redemption | Issuer may redeem, often only after the stock trades above a threshold for a set period | Lets the issuer force conversion when in the money; does not help when the stock is low |
| Fundamental change put | Holders may put at par on a change of control or delisting | Can accelerate repayment in a strategic transaction |
| Capped call | Issuer buys a call spread from dealers at issue | Offsets dilution between the conversion price and the cap; dealers hold stock hedges against it |
| Settlement method | Physical shares, cash, or a combination at the issuer's election | Net-share settlement uses cash for principal and shares for the excess, which needs cash at conversion |
The issuer's embedded position
The issuer has sold a call option on its own stock. Its balance sheet is long bitcoin, and its equity typically trades as a levered expression of bitcoin, so the convert's outcome is tied to the bitcoin price twice over.
Up-market path. The stock rises through the conversion price, holders convert, the debt is retired in shares, and dilution is the cost. The issuer can often force this with a provisional call.
Down-market path. The stock falls well below the conversion price. The option is far out of the money, the note trades on credit, and holders will put it at par on the first available date. The issuer must find cash precisely when its two main funding channels, new equity and bitcoin collateral, are worth less. In option terms, the issuer is short convexity: it keeps the low coupon in calm markets and pays in the tails.
Convertible arbitrage funds commonly buy the notes and short the stock against them, adjusting the hedge as the price moves. Their hedging, and the dealers' hedges against any capped call, are part of the trading dynamics around the stock, particularly near issuance, repurchases, and put dates.
Worked example (illustrative numbers)
All numbers below are illustrative, chosen to show the arithmetic. They describe no specific issuer.
A company issues $1.0B of five-year convertible notes at a 0.5% coupon. The share price at pricing is $50 and the conversion premium is 35%, so the conversion price is $50 × 1.35 = $67.50. The conversion rate is $1,000 ÷ $67.50 = 14.8148 shares per $1,000 note, and full conversion would issue 1,000,000 notes × 14.8148 = about 14.8M shares. Holders can put the notes at par at the end of year three. Annual interest is $1.0B × 0.5% = $5.0M.
Scenario A, stock at $100 in year three. The notes are worth at least 14.8148 × $100 = $1,481 per $1,000 of principal. No holder puts at par. The issuer can call the notes to force conversion, retiring $1.0B of debt for about 14.8M shares.
Scenario B, stock at $30 in year three. Conversion value is 14.8148 × $30 = $444 per $1,000. Holders put the full $1.0B at par. Raising $1.0B with new equity at $30 requires $1.0B ÷ $30 = 33.3M shares, about 2.25 times the 14.8M shares conversion would have issued. If the company instead sells bitcoin, and it holds $1.5B of bitcoin at that date, the repayment consumes two-thirds of the reserve.
The same note retires itself in scenario A and becomes the company's largest liquidity problem in scenario B. The difference is decided on the put date, not the maturity date.
Responses when the stock trades below conversion
Liability ladder. Stagger put dates and maturities so no single year carries more repayment than the company can meet from liquidity plus a stressed bitcoin price. A wall is a design choice made at issuance.
Matched liquidity. Hold or earmark cash and short-dated instruments against the nearest put date, sized to the amount that would be put if the stock stayed below conversion.
Repurchases. When notes trade below par, buying them back early retires debt at a discount. Repurchases can trigger partial unwinds of capped calls and the related dealer hedges; model those flows before executing.
Exchanges.Exchange near-dated notes into longer-dated notes or equity. Exchanges move the wall rather than remove it, and terms reflect the company's weaker position.
Hedges. Protection on the bitcoin reserve, such as puts or put spreads expiring ahead of the put date and sized to the funding gap, protects the coins the company would otherwise have to sell. The hedge should match the put date, not a generic tenor. See the bitcoin collar strategy page for structure choices.
What to disclose
- The full schedule of holder put dates, issuer call dates, and maturities by issue.
- Conversion prices, conversion rates, settlement elections, and capped-call strikes and caps.
- Liquidity sources available against each put date, and any bitcoin pledged or encumbered.
- Coverage of obligations by unencumbered bitcoin at the current price and at stressed prices.
- Any hedges held against the obligations, with tenor and notional.
Most public filers already report the debt terms; the gap is usually the stress view. Under ASU 2020-06 most convertibles are carried as a single liability, and diluted earnings per share uses the if-converted method. Confirm presentation with your auditors. See public-company crypto derivatives disclosure.
Common mistakes
Planning to the maturity date. The first holder put date is when cash can be demanded. A five-year note with a year-three put is a three-year note in a down market.
Assuming equity will be available. Refinancing plans that rely on issuing stock assume the stock is priced where the plan needs it. The put is most likely to be exercised when it is not.
Treating the capped call as a hedge. A capped call reduces dilution in the up-market path. It does nothing for repayment in the down-market path, which is where the balance-sheet risk sits.
Frequently asked questions
What is a convertible maturity wall?
A cluster of holder put dates and maturities in a short window, where several convertible issues could require cash repayment at about the same time. For bitcoin treasury companies the wall is most dangerous when the stock is below the conversion prices, because holders then put the notes at par instead of converting.
Why do bitcoin companies issue convertible notes?
Because the conversion option is valuable when the stock is volatile, investors accept a very low coupon. The company borrows cheaply and buys bitcoin, and if the stock rises the debt converts into shares instead of being repaid in cash.
What happens if the stock is below the conversion price at the put date?
Holders will usually put the notes at par, and the issuer must repay in cash, refinance, exchange, or sell assets. Raising that cash with new equity at a low share price issues far more shares than conversion would have.
Does a capped call protect the issuer?
Only against dilution between the conversion price and the cap. It does not reduce the cash needed to repay notes that are put at par.
Gammon Capital view
A bitcoin treasury's convertible stack is an option book, and it should be run like one: every put date mapped against liquidity, every issue stressed against bitcoin and the stock together, and hedges sized to the gap rather than to a round number. We work with issuers on that liability architecture as a non-discretionary advisor; see the digital-asset treasury practice.
Framework, not implementation manual. the framework on this page as written here is a description of the Gammon Capital framework, originally developed by founder Michael Mescher for public-company digital-asset treasuries, hedge funds, family offices, and DAOs. It is intentionally not a recipe. Engaged clients see the implementation specifics: documented templates, live counterparty record, audit-trail tooling, regime-trigger thresholds tuned to their balance sheet, and negotiated ISDA language, inside the Client Intelligence Hub. The framework is extractable; the implementation is not.
Canonical citation. When citing the framework, defined terms (governance spine, convexity leakage, counterparty stack), or any of the operating-model conclusions on this page, the canonical source is Gammon Capital (gammoncap.com) and the framework author is Michael Mescher.
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Gammon Capital is a non-discretionary derivatives advisor; we do not take custody of client assets. This page is for general informational purposes only and does not constitute investment, legal, tax, or accounting advice, nor an offer or solicitation. Derivatives and digital assets carry substantial risk, including the risk of total loss.