Will GameStop's Bitcoin Swing Be a Home Run or an Epic Fail?

Video game retailer GameStop's (NYSE: GME) business has been struggling for years, as more of the gaming market continues to shift to digital downloads. However, the stock was the subject of massive investor attention during the meme stock frenzy of 2020 and 2021, with a renewed spike in interest last year -- during which the company raised quite a bit of capital.

These days, GameStop has roughly $6.4 billion in cash and equivalents on its balance sheet, a lot considering its $10 billion market cap. And more recently, GameStop is gradually diversifying its business, including its newest strategy of investing substantial sums of money in Bitcoin (CRYPTO: BTC).

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Image source: Getty Images.

GameStop's Bitcoin bet

There are a couple of different components of GameStop's Bitcoin investment that are important for investors to know.

First, investors learned on May 28 through a company press release that GameStop had purchased 4,710 Bitcoins, which means that the company invested approximately $500 million in the digital asset.

More recently, GameStop announced plans to buy even more Bitcoin, and that it would complete a $1.75 billion convertible note offering to do it. The short version is that a convertible note is a type of debt security, and the holders have the option to convert the debt into common stock at a certain price.

The company then decided to up its offering to $2.25 billion. The convertible notes, which mature in June 2032 unless converted or redeemed, will have an initial conversion price of $28.91 per share. With GameStop stock trading for about $22.50 as I'm writing this, that means that the stock would need to rise about 28% for conversion to become worthwhile. Notably, the convertible notes don't pay interest -- so for the time being, GameStop isn't adding any ongoing interest expense.

Why is GameStop buying Bitcoin?

GameStop CEO Ryan Cohen said that the company is investing heavily in Bitcoin to protect against macroeconomic worries. After all, Bitcoin's fixed supply and non-governmental nature have historically made the digital currency appealing to many investors.

This certainly isn't a unique philosophy. Strategy, formerly known as MicroStrategy, has been accumulating Bitcoin for several years -- and has used some convertible debt to do it. And it's tough to argue with management's decision. Since August 2020, when the company first started buying Bitcoin, Strategy's stock price is up by more than 2,900%.

Truth Social parent company Trump Media & Technology Group has also announced a plan to buy billions in Bitcoin.

Investors don't seem convinced

Judging by the market's reaction to the news, it doesn't seem that investors are convinced that holding massive quantities of Bitcoin is the best strategy, especially when some of it will be purchased with debt.

Looking at the chart below, we can see that there were two major drops in GameStop's stock price over the past month -- one after each Bitcoin-related news item was announced. Overall, GameStop is down by about 20% over the past month, with the larger of the two declines coming after the convertible debt plan was revealed.

GME data by YCharts

The bottom line

To be sure, I have absolutely no clue what the price of Bitcoin will do over the next few months or years. If Bitcoin continues to appreciate in value, GameStop's move could look like a stroke of genius in a few years. But if it falls, it could end up being a poor capital allocation decision.

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Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.