Why bitcoin's volatility could be a problem for MicroStrategy's financial future

Bitcoin continued its bender Friday, though the drop is not as steep as about a week ago, when the cryptocurrency fell to the $26,000 range — reflecting a 15% drop in value from the average price Tysons software company MicroStrategy has paid to purchase its massive bitcoin holdings.

While the price of any security can be volatile, particularly one as still as unknown as cryptocurrency, the recent price drop-off saw bitcoin lose as much as 27% of its value at points in the last month. 

It since recovered to around $30,000 before seeing another slip Friday afternoon to $28,864 as of 2:30 p.m.

Yet MicroStrategy (NASDAQ: MSTR) founder and CEO Michael Saylor remains steadfast in his support of his business intelligence software company’s multibillion-dollar investment in bitcoin, calling it a “sturdy ship to sail the Seas of Fate” on Twitter while reiterating that he won’t sell the company’s holdings anytime soon. 

He told Yahoo Finance Live this week that he expects bitcoin "to go into the millions," resulting in MicroStrategy's posture of patience with the cryptocurrency's current ups and downs as more get educated in how it works. "We think it's the future of money," he said

MicroStrategy’s stock price, however, tells a different story than Saylor's statements, one that says the volatility in bitcoin’s price could become a problem for the local company.

The size of MicroStrategy’s holdings is rapidly increasing as buying and holding the currency has become a larger and larger part of the company’s strategy.

As of the end of March, MicroStrategy held 129,218 bitcoin, which it acquired for a total cost of $3.97 billion or $30,700 per bitcoin, net of fees and expenses. 

That’s compared with 90,859 bitcoins it had about a year earlier, which it had purchased for a total cost of $2.19 billion or an average price of $24,063 each. A year before that, it wasn’t holding any bitcoin.

It's pursued a number of strategies to finance its billions in bitcoin buys. In March, it took out a $205 million term loan from Silvergate Capital Corp. 

(NYSE: SI), a financial services company specifically focused on serving the crypto industry. The loan, which is under MicroStrategy subsidiary MacroStrategy, was collateralized by $820 million worth of bitcoin, according to documents filed with the Securities and Exchange Commission. 

MacroStrategy has to maintain a loan-to-collateral ratio of 50% or less at all times — meaning if the value of bitcoin falls to the point where that ratio isn't upheld, it will need to put up more bitcoin for collateral.

Before that, it utilized $1 billion from stock sales as per an open-market sale agreement made last June with New York investment bank Jefferies LLC and other debt offerings.

At one point on May 12 — the same day bitcoin’s price was trading at its lowest in the recent drop — MicroStrategy's own shares hit their 52-week low of $134.09 apiece. 

Its stock had rebounded again into the $200s since then, but Friday afternoon's 4.4% bitcoin price drop coincided with MicroStrategy's nearly 9% stock price drop to $190 per share at 2:30 p.m.

The company had previously also seen the upside of the strategy when bitcoin prices were growing. MicroStrategy saw its stock price closing in the $800 range last November, logging a 52-week high of $891.38.

But the recent crash has another effect on MicroStrategy in the form of impairment losses. 

If MicroStrategy made purchases when bitcoin was trading at a higher price than it is now, it will need to mark down the value of those holdings on its balance sheet if it hasn’t done so already.

In total, it has reported $1.1 billion in digital asset impairment losses, meaning the carrying value of its bitcoin was $2.9 billion as of the end of the first quarter. 

That’s compared with a market value of $5.9 billion on March 31, according to documents the company filed with the Securities and Exchange Commission.

All those losses are adding up; the company saw weaker financial results in the first quarter of 2022 compared with a year earlier, and that was partly due to higher impairment losses connected to its bitcoin holdings.

Total revenue for MicroStrategy's first quarter was $119.3 million, down just shy of 3% from $122.9 million in the first quarter of 2021. 

Meanwhile, the company had a net loss of $130.8 million, up 19% from its $110 million loss during the same period a year earlier. 

And it listed $170.1 million in digital impairment charges, compared with $194.1 million in the first quarter of 2021.

Companies that choose to buy crypto should do so with plenty of thought, said Keith Kaetzel, an audit partner at accounting giant KPMG, in a May 2 interview — well before bitcoin's market volatility began — about the general, growing trend of companies purchasing cryptocurrency. 

Kaetzel, who recently wrote about nonfungible tokens for the firm, did not address any individual company during the interview, including MicroStrategy, but instead addressed overall market takeaways.

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