World Stock Watch

MicroStrategy’s Bold Bitcoin Bet: Weighing the Risks

MicroStrategy’s ambitious plan to acquire an additional $42 billion worth of bitcoin is making headlines, but it’s not without its challenges. According to a recent report by CoinShares, the software company’s success hinges on several key factors.

Financing Conditions: A Crucial Component

MicroStrategy needs favorable financing conditions to execute its plan, which involves raising capital through a $21 billion at-the-money offering of its own stock. Additionally, the company must attract investor demand for its convertible debt. Without these elements in place, the entire strategy could be derailed.

The Cost of Debt Servicing

Another risk factor to consider is the rising cost of servicing MicroStrategy’s debt. In 2021, the company was able to secure zero-coupon convertibles, but these rates have since increased with new issues. This could put a significant strain on the company’s finances.

Tied to Bitcoin Holdings

MicroStrategy’s fate is closely tied to its bitcoin holdings, which poses a risk if the company decides to sell some of its assets. This could lead to a loss of valuation premium, although CEO Michael Saylor has stated that he has no intention of selling the company’s bitcoin holdings, citing it as the “exit strategy.”

Tax Implications

Any disposals of bitcoin could trigger substantial tax events, which could have a significant impact on the company’s bottom line. Furthermore, MicroStrategy may be taxed on unrealized gains related to its crypto stack in the future.

Software Business vs. Bitcoin Business

CoinShares notes that MicroStrategy’s bitcoin business may have outgrown its software business, which raises concerns about whether cash flows from legacy operations will be sufficient to cover future coupon payments.

Investor Sentiment

Despite the risks, investors remain optimistic about MicroStrategy’s prospects. The company’s stock has been praised by Wall Street broker Canaccord, which views it as one of the best ways for equity investors to gain exposure to bitcoin. As the bitcoin price surges towards $70,000, MicroStrategy’s shares have seen a corresponding increase, rising around 8% in early trading.