How Tokenized Convertible Bonds Will Change Investment Options for Good
MicroStrategy, the largest corporate holder of Bitcoin with 402,100 BTC valued at around $39 billion, funds its Bitcoin purchases through two key methods — selling shares and issuing convertible bonds.
These bonds have revolutionized MicroStrategy’s approach, a strategy now being adopted by global asset managers as the crypto market surpasses $3.4 trillion in market capitalization, with institutional investors eager to claim their share of the growing sector.
In essence, convertible bonds have allowed MicroStrategy to raise billions of dollars.
In November, the company reported that it raised $3 billion through zero-interest convertible senior notes, which are due in 2029.
This gave them the capital to continue accumulating Bitcoin while offering investors the option to convert their bonds into company stock later if the price rises. It’s a win-win for both the company and its investors.
What Are Convertible Bonds?
Convertible bonds are a financial tool that combines the benefits of debt and equity. They allow companies to borrow money while giving investors the option to turn that loan into company shares at a set price.
For instance, a company issues a convertible bond. As an investor, you earn regular interest payments, just like you would with a traditional bond. However, if the company’s stock price rises, you have the option to convert your bond into company shares. This means you could potentially profit more from the stock’s growth than you would from just holding the bond.
This flexibility makes convertible bonds attractive to both issuers and investors.
Companies like MicroStrategy can raise funds without immediately diluting their existing shareholders’ ownership. Meanwhile, investors benefit from steady interest payments and the possibility of higher returns if the company performs well.
MicroStrategy isn’t the only company using convertible bonds to grow its Bitcoin reserves. MARA, formerly known as Marathon Digital Holdings, a leading Bitcoin mining company, has adopted a similar approach. In December, MARA announced a $700 million zero-coupon convertible bond offering to fund Bitcoin purchases and pay off older debt.
Challenges of Convertible Bonds
One major challenge of convertible bonds is shareholder dilution. When bondholders convert their bonds into shares, the total number of shares increases. This can reduce the value of each share, making it less attractive to existing shareholders. For companies, this means balancing the need to raise money with the risk of upsetting shareholders.
Another issue is market swings. The value of convertible bonds depends on a company’s stock price. If the stock doesn’t do well, the bonds lose value too.
Convertible bonds are also not very retail-friendly. They are usually issued in large amounts, which makes them hard for individual investors to afford. On top of that, their terms — like how and when bonds can be converted into shares — can be confusing for people who aren’t financial experts. This keeps many smaller investors from being able to take part.
For companies, figuring out how to structure and price these bonds is tricky. They have to set interest rates and conversion terms that will attract investors but not create problems down the line, like too much dilution or financial strain.
Taxes can be another headache. Convertible bonds often come with complicated tax rules, especially in places where capital gains and dividends are taxed differently.
How Tokenization Can Improve Convertible Bonds
Tokenization could be the much-game changer that convertible bonds require. Anything physical or digital can be converted into tokens on a blockchain, this is called tokenization.
This means a company like MicroStrategy could issue digital tokens instead of traditional bonds. These tokens would represent the convertible bond and would include all the terms, such as the interest rate and conversion price. Smart contracts, which are self-executing programs on a blockchain, would handle the bond’s rules and automate processes like interest payments and share conversions.
Tokenized bonds could also be traded easily on blockchain platforms, allowing investors to buy and sell them instantly, without waiting for days of settlement like traditional financial markets. This would make convertible bonds more liquid and attract a wider range of investors.
Say a company called GreenTech that wants to raise funds through tokenized convertible bonds. Instead of issuing paper bonds, GreenTech creates digital tokens that represent the bonds. These tokens are sold on a blockchain platform, and investors can purchase them using fiat currency or cryptocurrencies like Bitcoin or Ethereum.
As part of the bond agreement, GreenTech’s smart contract specifies that the tokens will pay 3% annual interest. If GreenTech’s stock price rises to a certain level, investors can use the tokens to convert their bonds into shares. The entire process is automated by the smart contract, which ensures instant payouts and share allocations.
For the investors, this means no delays, no middlemen, and complete transparency. For GreenTech, it means reduced costs and access to a global pool of investors.
Tokenized financial instruments are already being tested and used in the real world.
Société Générale, a major French bank, has issued tokenized bonds on the Ethereum blockchain. These bonds use smart contracts to manage interest payments and other features.
What TokenFi Is Building
TokenFi’s vision for tokenization aligns closely with that of BlackRock’s CEO Larry Fink has called it “the next generation for markets,” and for good reason. Tokenization brings real-world assets — like real estate, bonds, or commodities — onto blockchain systems, making them more accessible, transparent, and easier to trade.
TokenFi is creating tools to make this process as simple as possible. Our upcoming Real World Asset (RWA) Tokenization Module will allow people to easily convert physical assets into digital tokens without needing any technical skills. The focus is on making tokenization quick, safe, and user-friendly.
For example, TokenFi plans to use Chainlink Proof of Reserves, a tool that ensures the digital tokens truly match the real-world assets backing them. This technology checks in real-time to make sure there’s no fraud or manipulation, giving users complete confidence in their investments.
Another feature is cross-chain interoperability, which will let users move their tokenized assets across different blockchains instantly.
