It takes courage to borrow $500 million simply to buy more bitcoin. That’s what MicroStrategy (MSTR.O) boss Michael Saylor is doing with a junk-bond issue that was increased in size on Tuesday. The value of the company’s holdings of the cryptocurrency already make up over half of its $6 billion enterprise value. With bitcoin volatile and its accounting wacky, it could make for a crazy ride.
The company still lists its primary activity as enterprise analytics software, and analysts at Jefferies point to executives’ statements that the enhanced profile and leading-edge reputation associated with its bitcoin investments are helping that business. But MicroStrategy is becoming mostly about what Saylor has called “digital gold.” That dates back to a review of the company’s capital allocation last July.
This week’s bond proceeds are earmarked to buy more bitcoin. It’s a volatile asset at the best of times. For evidence of that, MicroStrategy noted in a filing on Monday that it would face an impairment charge on its holdings of at least $285 million this quarter, multiples of what it has ever reported in quarterly net profit.
But that also highlights the oddities of bitcoin accounting. The cryptocurrency is classified as a long-lived intangible asset, which means the balance-sheet value can only fall and must be written down if at any time the market price falls below the company’s cost. Increases in value are only realized and reported once bitcoin is sold.
It makes for contradictory messages. On the one hand, MicroStrategy faces an impairment charge because bitcoin prices have dropped since it made some of its purchases – by nearly 50% in two months in fact. On the other hand, the company is still sitting on more than $3 billion-worth of crypto assets before buying more using the latest bond proceeds, for which it paid $2.3 billion and which it carries on its books at around $1.7 billion, Breakingviews calculates.
If it were all sold, the $1 billion-plus gain would make the company’s bottom line unrecognizably large. Other bitcoin owners like electric-car maker Tesla (TSLA.O) and payments group Square (SQ.N) share the accounting tangle, but for them it’s a matter of a fraction of 1% of their worth. For MicroStrategy, owning bitcoin may be a selling point but it’s no longer the tail wagging the enterprise-software dog. The crypto has become the canine.
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– MicroStrategy increased the size of a junk-bond sale to help it buy more bitcoin, selling $500 million of debt rather than the originally planned $400 million, the company said on June 8.
– The offering was priced at an annual yield of 6.125%. The debt is secured by MicroStrategy’s assets and bitcoin purchased in the future, but the security excludes the company’s existing holdings of the cryptocurrency.
– MicroStrategy, which produces business-analytics software, spent the last year steadily amassing bitcoin holdings after announcing a new capital allocation strategy in July 2020 and making its first investment a month later. It has since made multiple purchases of the digital currency.
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