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| Insights, news and analysis for the professional investor February 6, 2022 Supported by Bitcoin (BTC) - $41,713.07 Ether (ETH) - $3,015.93 Prices as of 2/6/22 @ 14:00 p.m. UTC If you were forwarded this newsletter and would like to receive it, sign up here.
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MicroStrategy took a $147 million impairment charge on its most recent quarterly report due to falling prices on the 124,391 bitcoin it held as of Dec. 31. That hasn’t stopped the company and CEO Michael Saylor. In recent days, the software company upped its holdings by another 660 bitcoin. In this week’s newsletter, CoinDesk research analyst Teddy Oosterbaan argues it may not be the worst move – if things pan out the way MicroStrategy expects.
– Lawrence Lewitinn, managing editor for global capital markets
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The Briefing Earlier in the week, MicroStrategy announced that it purchased $25 million in bitcoin in January. CEO Michael Saylor joined crypto podcast “UpOnly” to reveal the back story on his company’s move to accumulate 125,051 bitcoin in 2020 and 2021.
Founded in the late 1980s by Saylor, MicroStrategy is a publicly traded business intelligence and software provider, but it is now better known for the $4.7 billion in bitcoin it holds on its balance sheet.
Before buying all that bitcoin, it was already one of the largest independent publicly traded companies in its industry. In 2020, its revenue was nearly $480 million, and it had an enviable 8.29% Ebitda (earnings before interest, taxes, depreciation and amortization) margin in the trailing 12 months before its first BTC purchase. When discussing the company’s position during the “UpOnly” podcast, Saylor said, “It's profitable, that's what we are. We love it, we’ll keep doing it. But you can’t really scale it.”
He then claimed that while the company was profitable, it wasn’t viable to reinvest profits into hiring sprees or increasing marketing spending. That made MicroStrategy a cash cow that kept collecting cash on its balance sheet.
That sounds like a good problem to have, except it becomes a problem if those accumulated dollars start diminishing in value because of inflation.
The Federal Reserve’s response in 2020 to COVID with massive quantitative easing helped push the equities market to new highs, with investors favoring speculative growth stocks (TSLA) and tech monopolies (APPL, AMZN). Soaring stock prices allows those companies to make larger acquisitions and use their valuations to expand their operations with historically cheap capital, sending their stocks higher again, rinse and repeat.
One stock that wasn’t rallying was MicroStrategy’s. In fact, it was a laggard for several years even before the pandemic hit. From the start of 2017 to the beginning of March 2020, the S&P 500 was up nearly 31%, while MicroStrategy shares fell 31%. The Federal Reserve’s COVID QE response didn’t change things for MicroStrategy. As the S&P 500 and many growth stocks approached the highs again just three months after March 2020’s crash, MicroStrategy’s stock continued to fall.
In one of his many sailing analogies, Saylor likened his company’s performance to rowing a boat against the wind, blowing harder than one can row. Even worse, inflation began to pick up and the purchasing power of cash cows was falling hard against not only the stock market, but also against any assets they might buy. Thus, buying bitcoin was like turning the rowboat around and sailing with the wind.
On Aug. 11, 2020, MicroStrategy announced the purchase of 21,454 bitcoins for $250 million. While Saylor considered the purchase defensive, between Aug. 10, 2020 and the first week of 2021, the price of MSTR rose 263% from $146.63 to $531.64.
Those who didn’t want a stake in a company buying bitcoin were offered a way to cash out through a $250 million cash tender offer via a modified dutch auction, which saw around $60 million in redemptions. Since its first bitcoin purchase, MicroStrategy hasn't slowed down. The company has now purchased 0.66% of the entire supply of bitcoin at an average price of about $30,000. The accumulation included purchases at $57,000, which now appears to be near the top for this cycle.
Saylor acknowledged that MicroStrategy has developed a reputation for buying at local tops. If the company’s bitcoin thesis is correct, buying tops will be a part of a strategy that could prove to be very profitable in the long run, even if the company takes a short-term hit on earnings. Under the generally accepted accounting principles, a company is required to take an impairment charge on a digital asset if the asset’s market price falls below the company’s purchase price, while no gain can be realized until the asset is sold. So while the numbers are deceiving, MicroStrategy took a $147 million impairment charge during last year’s fourth quarter.
More importantly, if all of its hopes pan out, MicroStrategy may maintain its purchasing power, hedging against inflation and potentially even outperforming the broader stock market. In the past week, Saylor and MicroStrategy’s chief financial officer have both assured the public that they will continue to buy bitcoin and use it in a productive way that adds more value for shareholders.
While many criticize bitcoin’s volatility and tendency to drop by 50% on a whim, Saylor appears to be unconcerned. His response to the criticism is that either you can die a slow death, facing the blows of a devaluing dollar and a soaring stock market, or you can fight. If bitcoin’s price can outpace inflation, it is a good investment as opposed to holding cash. While it may be a long shot, if bitcoin’s adoption becomes widespread in the near term, MicroStrategy will have put itself in a better position than the vast majority of public companies.
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Takeaways A $320 million exploit left Solana’s Wormhole bridge empty of wrapped ether before Jump Trading backstopped the stolen funds. TAKEAWAY: Cross-chain bridging again proves to be dangerous as an exploiter was able to falsely mint 110,000 wrapped ether on Solana and bridge the assets back to Ethereum. The exploit could have had extended effects through Solana’s DeFi ecosystem as wETH on the chain would have essentially been worthless. However, Jump Trading’s crypto arm was able to backfill the lost funds before any disaster.
The Internal Revenue Service offered potential insight to proof-of-stake network rewards being non-taxable until profits are realized. TAKEAWAY: While the case does not set precedent for future decisions, the IRS has refunded two taxpayers for rewards they gained while staking to secure the Tezos blockchain. If a decision is made to not tax staking rewards until sale, the ruling could take massive forced selling pressure off proof-of-stake networks.
Crypto options volumes surged to new highs in January as prices and spot volume fell. TAKEAWAY: The crypto derivatives market is still in its infancy, as it is largely unregulated and withheld from retail in the United States. Prominent trader Sam Trabucco of Alameda recently noted that options have very little effect on the underlying price of crypto assets because of the lack of volume. If the trend continues and options contracts continue to gain a larger share of the wider trading volume, market conditions may significantly change.
Coinbase and Genesis Trading highlighted massive institutional interest in the crypto space, from bitcoin to NFTs. TAKEAWAY: Brett Tejpaul of Coinbase noted that his institutional team has grown over 10 times in size to 150 people, while the CEO of Genesis, Michael Moro, mentioned that the company's derivatives business is eight times larger than one year ago. (Genesis is a CoinDesk sister company.) Outside of institutional trading, retailers becoming interested in offering NFTs has led companies to be more comfortable holding crypto, whether it be ether, bitcoin or stablecoins.
Bitcoin broke above $40,000 for the first time in two weeks as traders look to decide if the market has bottomed. TAKEAWAY: Equity and crypto markets have seen some relief after taking a beating during January, with investors wary of the U.S. Federal Reserve’s intervention. Within the coming months we will likely see if multiple interest rate hikes have already been priced into the market or if there is significantly more downside than expected.
Chart of the Week
The OGs of NFTs get animated with the biggest stars from around the world in this entertaining new series from CoinDesk TV. Tune in Tuesdays in February at 4 p.m. ET.
Podcasts Worth Listening To The Breakdown, With NLW
Opinionated
New Money
Odd Lots (Bloomberg)
The US Dollar, Inflation, and Recession (Feat. Travis Kimmel)
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