An Infinite Stock-Market Cheat Code? By Spencer Jakab
Stocks look set for a slightly lower open Friday. A gauge of prices that the Fed watches closely is due at 8:30 a.m. ET and could affect the mood. AI-related tech stocks are weaker than the rest after CoreWeave's IPO pricing disappointed.
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It's all fun and games until someone loses a billion.
GameStop, which briefly went from terminal decline to the center of the investing universe four years ago, is back on Wall Street's radar. Instead of being the instrument of inexperienced "YOLO" traders who ambushed hedge funds , it's doing the opposite-raising money from sophisticated investors and leaving its shareholders with the risk of ruin.
The videogame retailer is taking a page out of MicroStrategy's playbook by selling $1.3 billion in convertible bonds bearing no interest to buy bitcoin for its corporate treasury.
At first, MicroStrategy mostly sold richly valued stock to fund its purchases. Investors were willing to pay much more for its shares backed by bitcoin than for the cryptocurrency itself-an act of faith in its outspoken chairman and a way to thumb their noses at Wall Street wisdom .
More recently, MicroStrategy has relied mostly on convertible debt to buy bitcoin. It almost seems like an infinite cheat code : Borrow money for free, buy a scarce asset, help push its value higher, increase your stock price, use it to extinguish the debt-rinse and repeat.
But GameStop, which is new to this particular game, learned Thursday that there's no such thing as a free lunch. Its stock plunged, wiping $2.8 billion off of its market value-more than twice what it's borrowing.
One reason is the sheer recklessness of the idea. A more immediate one might be the mechanics of convertible bonds.
Sophisticated buyers like hedge funds don't care whether buying bitcoin with borrowed money is smart or dumb-or that the bond doesn't pay interest. They do care that GameStop's stock is volatile.
Options math, which helps investors price convertible bonds, relies on volatility as a key input. More volatility means the bonds are a low-risk way to lock in value.
But to make this financial arbitrage trade work, they also have to hedge their risk in GameStop's underlying share price, so they short the shares-borrowing and selling them with a promise to buy them back later. Since GameStop's issue is more than a tenth the size of its market capitalization, that means lots of selling.
It's ironic: The episode that put GameStop on the map harnessed its retail fan base's hatred of short-selling hedge funds. Since it's a private offering the convertible can't be sold to its small investors, but it could cost them.
The problem comes if it isn't converted before maturing in April 2030 and GameStop doesn't have enough bitcoin to sell or cash to satisfy the debt. In that case, the company will need to borrow more money, if it can, or repay the bond with shares-as many as it takes. This bond alone is worth four times as much as the whole company was before meme-stock mania.
The bond's owners should be made whole, but that might be another ugly day for its shareholders.
Stocks I'm Watching
Nvidia : What was until recently the hottest stock on Wall Street struggled more yesterday as the initial public offering of a customer, CoreWeave, saw tepid demand despite Nvidia's financial helping hand . CoreWeave begins trading on Friday after pricing its offering below the expected range and selling fewer shares than planned.
Lululemon : The trendy retailer's stock is doing the downward dog Friday morning despite decent results after the bell yesterday. Guidance was weaker than analysts expected .
Avis Budget Group : Who might benefit from steep auto tariffs? A company that already owns thousands of lightly used vehicles like this auto-rental company. Its stock jumped 20% Thursday.
Deutsche Bank : The German lender is shaking up its executive ranks, naming a new chief financial officer who will assume the post next year, and a new Americas head as of May. Shares fell 3%.
AppLovin : Shares of the mobile-advertising technology company added 2% premarket. They had fallen 17% Thursday, following a negative report from the short-selling firm Muddy Waters Research.
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About Me
My name is Spencer Jakab and I've been musing about money and markets for more than 30 years, including editing The Wall Street Journal's Heard on the Street column for a decade, writing two investing books and running a team of stock analysts at a global investment bank.
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March 28, 2025 06:51 ET (10:51 GMT)
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