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.

We reached out to the company for comment and will update this when we hear back.

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 effect on MicroStrategy's vast bitcoin portfolio

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.

The effect on MicroStrategy's balance sheet

As bitcoin’s price has fallen, so has MicroStrategy’s stock price.

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.

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