Coppola Comment: Microstrategy – treasury management or bitcoin ETF?

It does make sense for a company with an enormous cash pile to diversify its treasury management: supplementing operating earnings with income from external investments is far more sensible than sitting on a heap of cash equivalents, especially in these days of zero interest rates. But the mystery is why Microstrategy – a company making little money, generating little free cash and repeatedly reporting operating losses with disappointing sales and high operating costs – has no use for this cash. It is hardly generating much in the way of sales or income. Surely some of the cash could be productively invested into developing new product lines and upgrading existing ones?

In August 2020, Microstrategy announced that it would make bitcoin its primary reserve asset. And it proceeded to buy $425 million worth of bitcoin, reducing its cash reserves by approximately 90% in the process. But August 2020 turned out to be not the best time to buy; bitcoin’s price promptly dropped, and by the end of September Microstrategy had been forced to impair the carry value of its newly-acquired bitcoin assets by $44.2m. It’s perhaps unfortunate that this happened so soon after acquisition, but bitcoin’s volatility means there will inevitably be substantial impairments from time to time. Microstrategy now has little free cash to absorb these shocks, and it still isn’t earning much in the way of income. Converting so much of its cash reserve to bitcoin has considerably increased its cash flow risk.

Despite the impairment (or, perhaps, because of it), Microstrategy hung on to its bitcoins. And in December, as bitcoin’s price started to rise rapidly, Microstrategy announced its intention to borrow $650 million to invest in yet more bitcoin. The debt offer completed on 11th December and Microstrategy duly spent the money acquiring bitcoin. It has now spent a total of $1.13bn on bitcoin, and its bitcoin holdings, worth some $2.7bn at today’s prices, are by far its largest asset.

Michael Saylor, a co-founder who leads Microstrategy, has good reason to insist his company is simply using bitcoin as part of its treasury management. The Securities and Exchange Commission (SEC) has blocked every application to establish a bitcoin ETF so far, and says it won’t approve one while bitcoin’s price remains open to manipulation. But the SEC has no jurisdiction over a viable if disappointing company that sells some real goods and services (though not enough to make a decent profit). Investing its entire cash reserves in a single, highly volatile, speculative asset might not be prudent as a treasury strategy, but it’s not the SEC’s job to tell corporate managers how to run their business. The treasury of a cash-rich company like Microstrategy looks like an ideal place to conceal a bitcoin ETF.

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