It takes braveness to borrow $500 million merely to purchase extra bitcoin. That’s what MicroStrategy (MSTR.O) boss Michael Saylor is doing with a junk-bond challenge that was elevated in measurement on Tuesday. The worth of the corporate’s holdings of the cryptocurrency already make up over half of its $6 billion enterprise worth. With bitcoin risky and its accounting wacky, it may make for a loopy experience.
The corporate nonetheless lists its major exercise as enterprise analytics software program, and analysts at Jefferies level to executives’ statements that the improved profile and modern fame related to its bitcoin investments are serving to that enterprise. However MicroStrategy is changing into principally about what Saylor has known as “digital gold.” That dates again to a assessment of the corporate’s capital allocation final July.
This week’s bond proceeds are earmarked to purchase extra bitcoin. It’s a risky asset at the most effective of instances. For proof of that, MicroStrategy famous in a submitting on Monday that it could face an impairment cost on its holdings of not less than $285 million this quarter, multiples of what it has ever reported in quarterly internet revenue.
However that additionally highlights the eccentricities of bitcoin accounting. The cryptocurrency is assessed as a long-lived intangible asset, which implies the balance-sheet worth can solely fall and have to be written down if at any time the market value falls under the corporate’s price. Will increase in worth are solely realized and reported as soon as bitcoin is bought.
It makes for contradictory messages. On the one hand, MicroStrategy faces an impairment cost as a result of bitcoin costs have dropped because it made a few of its purchases – by almost 50% in two months in reality. Alternatively, the corporate remains to be sitting on greater than $3 billion-worth of crypto belongings earlier than shopping for extra utilizing the newest bond proceeds, for which it paid $2.3 billion and which it carries on its books at round $1.7 billion, Breakingviews calculates.
If it have been all bought, the $1 billion-plus acquire would make the corporate’s backside line unrecognizably giant. Different bitcoin homeowners like electric-car maker Tesla (TSLA.O) and funds group Sq. (SQ.N) share the accounting tangle, however for them it’s a matter of a fraction of 1% of their value. For MicroStrategy, proudly owning bitcoin could also be a promoting level but it surely’s now not the tail wagging the enterprise-software canine. The crypto has turn out to be the canine.
Observe @richardbeales1 on Twitter
– MicroStrategy elevated the dimensions of a junk-bond sale to assist it purchase extra bitcoin, promoting $500 million of debt relatively than the initially deliberate $400 million, the corporate mentioned on June 8.
– The providing was priced at an annual yield of 6.125%. The debt is secured by MicroStrategy’s belongings and bitcoin bought sooner or later, however the safety excludes the corporate’s present holdings of the cryptocurrency.
– MicroStrategy, which produces business-analytics software program, spent the final 12 months steadily amassing bitcoin holdings after asserting a brand new capital allocation technique in July 2020 and making its first funding a month later. It has since made a number of purchases of the digital forex.
– For earlier columns by the creator, Reuters clients can click on on
Reuters Breakingviews is the world’s main supply of agenda-setting monetary perception. Because the Reuters model for monetary commentary, we dissect the large enterprise and financial tales as they break around the globe daily. A worldwide group of about 30 correspondents in New York, London, Hong Kong and different main cities offers professional evaluation in actual time.
Join a free trial of our full service at https://www.breakingviews.com/trial and comply with us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are these of the authors.