How to turn a software firm into a bitcoin wallet

A Bitcoin wallet with QR codes and coins can be seen in an illustration image taken on July 11, 2014 at La Maison du Bitcoin in Paris. REUTERS / Benoit Tessier

It takes courage to borrow $ 500 million just to buy more bitcoin. That’s what MicroStrategy does (MSTR.O) Boss Michael Saylor is doing a junk bond issue that was topped up on Tuesday. The company’s cryptocurrency holdings are already worth more than half of its company’s $ 6 billion worth. With Bitcoin volatile and its bookkeeping insane, it could turn into a crazy ride.

The company still lists its primary activity as business analytics software, and analysts at Jefferies point to statements made by executives that the improved profile and leadership reputation associated with its Bitcoin investments is helping this business. But MicroStrategy is mostly about what Saylor called “digital gold”. That goes back to a review of the company’s capital allocation last July.

This week’s bond proceeds are for buying more Bitcoin. It’s a volatile asset at the best of times. As evidence of this, MicroStrategy stated in a filing on Monday that it will be subject to an impairment loss on its holdings of at least $ 285 million this quarter, many times what it has ever reported in quarterly net income.

But that also highlights the oddities of Bitcoin accounting. The cryptocurrency is classified as a long-lived intangible asset, which means that the balance sheet value can only decrease and must be written off if the market price at any time falls below the company’s cost. Increases in value are only realized and reported after Bitcoin has been sold.

It creates contradicting messages. On the one hand, MicroStrategy is facing a decline in value because Bitcoin prices have fallen since several purchases – by almost 50% in two months. On the flip side, the company is still sitting on more than $ 3 billion worth of crypto assets before moving on to the recent bond proceeds, which it paid $ 2.3 billion for and which it paid around $ 1, Leads 7 billion US dollars in his books, buys more, calculates Breakingviews.

If everything were sold, the profit of over $ 1 billion would make the bottom line of the company undetectably large. Other Bitcoin owners like the electric car maker Tesla (TSLA.O) and payment group Square (SQ.N) share the accounting clutter, but for them it’s a fraction of 1% of their value. For MicroStrategy, owning Bitcoin may be a selling point, but it’s no longer wagging its tail with the corporate software dog. The dog has become the crypto.

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MicroStrategy increased the size of a junk bond sale to buy more Bitcoin and sold $ 500 million in debt instead of the $ 400 million originally planned, the company said on June 8.

– The offering was valued at an annual return of 6.125%. The debt is backed by MicroStrategy’s assets and bitcoins that are purchased in the future, but the security excludes the company’s existing holdings of the cryptocurrency.

– MicroStrategy, maker of business analytics software, has steadily built bitcoin holdings over the past year after announcing a new capital allocation strategy in July 2020 and making its first investment a month later. Since then, it has made multiple purchases of the digital currency.

– For previous columns by the author, Reuters customers can click

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