MicroStrategy’s BTC Paper Gains

Until fairly recently, the only way institutional investors could gain access to BTC was to purchase Grayscale BTC Trust product, which came with lock-ins and a whole bunch of other restrictions that led to the growth of the “Grayscale Premium” – the difference between what BTC cost as an underlying asset, and how much investors were willing to pay for it in an institutional wrapper.

But short of a U.S. BTC ETF, investors had few choices for exposure to BTC in the U.S., that is until MicroStrategy came along.

Ostensibly, MicroStrategy is an enterprise software company, but it’s big bets on BTC have dramatically changed the complexion of the firm.

Yet investors looking to take a bet on BTC who are buying MicroStrategy have to also note that by some estimates, just 23 cents out of every dollar in MicroStrategy’s share represents a direct exposure to BTC.

That bet however has paid off in spades, with MicroStrategy sitting on massive paper gains from its bet on BTC, despite having to write off millions in accounting charges at the same time.

With 105,085 BTC, and based on yesterday’s prices, MicroStrategy is sitting on paper profits of US$1.4 billion – but that assumes you can sell 105,085 BTC at one go without crashing the market – a big assumption.

Nonetheless, MicroStrategy’s second quarter earnings reveal that its paper gains on its BTC bet is over double what the enterprise software firm has posted in cumulative earnings in the last 25 years according to data compiled by Bloomberg.

MicroStrategy’s nominal gain in its BTC holdings is also over three times the revenue generated by the company since it adopted BTC as its primary treasury asset last August.

According to one report, MicroStrategy holds approximately 105,085 BTC as of June 30, with an average cost of US$26,080 and the company has plans for doubling down and going all in on its digital asset strategy.

But MicroStrategy’s BTC holdings aren’t free, with cumulative impairment losses of US$689.6 million also associated with its cryptocurrency bet.

Impairment losses occur as the result of unusual or one-time events, that seriously damage the price of an asset and impairment exists when an asset’s fair value is less than its carrying value on the balance sheet.

Because BTC is particularly volatile, a good accounting practice would be to test if it’s impaired and an impairment loss recorded, if testing reveals that such impairment exists.

An impairment loss records an expense in the current period which appears on the income statement and simultaneously reduces the value of the impaired asset on the balance sheet.

For investors who are long-only BTC, then these impairments on MicroStrategy’s balance sheet are nothing to be overly concerned about.