The processes by which single-wall carbon nanohorns are transformed by iron nanoparticles at high temperatures to form “nanooysters”, hollow graphene capsules containing metal particles that resemble pearls in an oyster shell, are examined both experimentally and theoretically. Quantum chemical molecular dynamics (QM/MD) simulations based on the density-functional tight-binding (DFTB) method were performed to investigate their growth mechanism. The simulations suggest that the nanoparticles self-encapsulate to form single-wall nanooysters (SWNOs) by assisting the assembly of dangling carbon bonds, accompanied by migration of the metal particle inside the carbon structure. These calculations indicate that the structure of the oyster consists primarily of hexagons along with a few pentagons that are predominantly formed near the former nanohorn edges as a result of their fusion. Experimental observations of large diameter nanoparticles inside multiwall carbon shells indicate that migration and coalescence of many iron particles must occur, perhaps by the convergence of smaller SWNOs or carbon-coated Fe-nanoparticles, whereby the void space is generated by the corresponding increase in the carbon shell surface area to metal nanoparticle volume.