MicroStrategy, the company founded by Michael Saylor, recently announced ambitious plans to acquire an additional 42 billion USD worth of Bitcoin (BTC) over the next three years.
That strategy includes a 21 billion USD stock offering announced last week to raise capital to buy the cryptocurrency. But according to an analysis CoinShares released on its research blog Monday, that plan is not without its risks.
According to CoinShares, MicroStrategy’s ability to successfully execute its Bitcoin acquisition plan depends on several factors.
The company is delving even deeper into the cryptocurrency market with this move, which reflects both a significant bet on Bitcoin’s appreciation and considerable exposure to volatile crypto markets.
MicroStrategy relies on favorable conditions to finance Bitcoin purchases
According to CoinShares analysts Alexandre Schmidt and Satish Patel, the software company is relying on favorable financing conditions and demand for its convertible notes to sustain its plans.
They also point out that debt service costs are rising; while MicroStrategy was able to issue debt in the form of zero-coupon convertible bonds in 2021, coupon rates have been rising on new issues.
A report from CoinShares further emphasizes that MicroStrategy is heavily tied to its Bitcoin holdings, which entails significant risks. If the company chooses to sell some of its Bitcoin holdings, it could see the “premium” to its valuation disappear.
However, Michael Saylor, the company’s CEO, reiterated that he has no interest in selling the company’s Bitcoin holdings. He stated that “Bitcoin is the exit strategy.”
MicroStrategy praised for its Bitcoin exposure, even with risks
According to the CoinShares report, any sales of Bitcoin by the company could trigger significant tax events. This is especially true because, in the future, the firm could be taxed on unrealized gains from its crypto portfolio.
CoinShares further points out that the company’s Bitcoin business may have outgrown its software business. Cash flows from the original operations may not be sufficient to cover future coupon payments on debt.
Despite these concerns, the company’s stock has received praise from investors, even after the announcement that it will result in shareholder dilution.
Last week, Wall Street broker Canaccord stated that MicroStrategy represents one of the best ways for equity investors to gain exposure to Bitcoin.
Following the announcement, MSTR shares rose around 8% in early trading on Tuesday, while the price of Bitcoin approached 70,000 USD.
