Inside MicroStrategy’s Mad Rush Towards Bitcoin
As far as strategies go, MicroStrategy has taken a big one, in remarkable contrast to its own name.
Earlier in the week, the company added close to 13,005 Bitcoins to its crypto kitty for $489m in cash (averaged at $37,617 per Bitcoin), including expenses. This has increased MicroStrategy’s total Bitcoin holding/hodling to approximately 105,085 valued at around $3.6bn at the current prices.
Companies investing in cryptocurrency isn’t uncommon. In fact, corporate support towards cryptocurrencies’ valuation and usage has only picked up in recent years, with many of them even integrating their payment systems with crypto standards.
What sets MicroStrategy’s recent Bitcoin acquisition apart is how the company financed this purchase. The company sold $400m worth of bonds to institutional investors and used those proceeds to buy more Bitcoin. This makes it the first-ever bond sale done with the explicit intention of buying cryptocurrency.
While a section of the crypto-investing community has commended it as a bold move, many critics aren’t happy to have an established corporation help fuel the ongoing crypto rage with such speculative purchases.
Let’s see about their concerns.
A Brief on MicroStrategy
This is a software enterprise company based out of Virginia that offers business intelligence, mobile software and cloud-based services. It is the company responsible for integrating Analytics capabilities into the apps that we use in iPhone, iPad, Android and BlackBerry devices.
Michael Saylor, the co-founder and CEO of the company, has been an avid and vocal crypto enthusiast since its early years. His support for Bitcoin predates even that of Elon Musk’s. In fact, Tesla’s disclosure about buying $1.5bn worth of Bitcoin came a month after an interesting Twitter exchange between both the CEOs involving the merits of crypto assets.
Since MicroStrategy’s maiden Bitcoin purchase in August 2020, the company’s stock has leaped by 364%.
Saylor insists on companies buying more Bitcoins for their corporate treasury. This has worked out so far for MicroStrategy, he says, and led to substantial increases in revenue and shareholder returns.
The Sayl Towards Crypto
Given the immense volatility in crypto markets, critics are wary of unprecedented moves made by companies to chase their crypto pursuits, like selling junk bonds to buy more Bitcoin.
MicroStrategy has essentially borrowed $488m from the market by issuing notes which come due in 2028. The notes were sold at a yield of 6.125%, which is a fairly high interest rate especially given the credit profile of MicroStrategy.
Last year, the company sold more than $1.6bn of convertible bonds to purchase cryptocurrency.
On Monday, the company also said that it will sell up to $1bn of its Class A shares to spend on “general corporate purposes”, i.e acquisition of more Bitcoin.
Essentially, Bitcoin purchase has now become the company’s official corporate strategy. It has even adopted Bitcoin as its “primary treasury reserve asset”. It’s also starting a separate subsidiary, MicroStrategy LLC, to hold the company’s existing Bitcoin portfolio.
Boom. Bust. Buy. Broke?
Crypto has entered a bit of haze over the last month compared to its unabated rally last year. So much so that even the news of MicroStrategy’s bullish buy didn’t do much to mitigate the slump in Bitcoin prices. Rather, they took a 10% dive the same day, courtesy of China’s ongoing crackdown on crypto assets.
This means that MicroStrategy’s purchase may have come at a bad time. If crypto prices keep falling then the company may have to write down the value of the Bitcoins it just purchased. Bloomberg estimates this write-down value at close to $77m, going by the market price of Bitcoin which is currently tumbling below MicroStrategy’s purchase price.
Now, $77m might be chump change for a $5.7bn-valued company like MicroStrategy. But one needs to understand that the ever-fluctuating Bitcoin prices are the key here. The company has already admitted to taking a charge of $284.5m in its next earning report due to the losses stemming from these fluctuations. This amount is more than Microstrategy’s cumulative earnings since 2011.
Holding crypto assets has also raised accounting problems for many firms of late. Bitcoins are “indefinite-lived intangible assets” which means that even the slightest decline in their values below the purchase price will require the company to write down their value and take an impairment charge. For MicroStrategy, the total Bitcoin-related impairments are projected to be close to $500m which is a staggering amount!
HODLing or Hoarding?
MicroStrategy’s offhand approach to manage its finances has surprised many. The company has barely shown revenue growth in the last decade (revenues rose to $485m in 2020 from $455m in 2010). But since its Bitcoin purchase last year, it has outperformed almost every other major software company in terms of stock valuation.
This is a remarkable anomaly. As per The Wall Street Journal, the company’s core software operation (minus Bitcoin) is valued at $1bn at the most, which is a fifth of its total market valuation. Since Bitcoin peaked in April 2021 following the Coinbase IPO, MicroStrategy has lost 40%+ of its value.
So we see how and maybe why the company’s outsized valuation from Bitcoin could have a hand behind its inane rush to pocket more and more crypto assets, even to the extent of being highly leveraged.
But Saylor seems emphatically optimistic about his investments. He even rationalises it to the Federal Reserve’s recent relaxation in the inflation policy. Inflation erodes the purchasing power of a bond’s future cash flows. As a result, investors demand a higher interest rate, which means lower bond prices. This explains why the yield on MicroStrategy’s recent bond sale is above 6% compared to the average junk bond yields which hover around 4%.
Be that as it may, the large dependence of the company on Bitcoin’s price swings is not a healthy sign. Crypto investments may turn rewarding but the volatility always undercuts their value. Plus, the excessive betting on crypto when done by collateralising its core software business makes MicroStrategy look like a Bitcoin tracking stock rather than a software stock.
Moreover, the accounting headaches caused by the holding of crypto assets makes it more difficult for companies to manage and monetise them. So they are largely held as reserve assets with show value.
Given these scenarios, one might understand where and how MicroStrategy’s crypto bets could possibly go wrong. In fact, the resounding concerns (and visible condescension) of the industry in judging this bet can be heard in this poignant summary by the Financial Times:
"We have been forced to write about MicroStrategy and its yachtophile CEO Michael Saylor a few times lately. For those not in the know, that’s the company that decided to invest billions of Federal Reserve-backed strings of 1s and 0s into bro-backed strings of 1s and 0s, and turn its equity into a HODL proxy."
(Originally published June 24th 2021 in transfin.in)