- A double-edged sword
- Collapsing premium
Michael Saylor has famously argued that Bitcoin’s volatility is “a feature, not a bug.” However, that feature is looking increasingly expensive for the company’s shareholders.
In Q3, the company saw the company post a $2.8 billion profit. In sharp contrast to this, the Tysons Corner-based firm is expected to swing to a massive multibillion-dollar loss, Bloomberg reports
A brutal 24% correction in Bitcoin prices during the quarter and new fair value accounting standards are the main culprits behind the sudden turnaround
A double-edged sword
Strategy Inc. adopted fair value accounting in Q1. This move was initially celebrated by crypto advocates for providing transparency
However, this method cuts both ways. It did boost earnings during bull runs, but it also mandates that companies book unrealized losses immediately when the market turns south.
Strategy’s operating loss is expected to hit the lower end of its guidance. In fact, it could potentially drag earnings down by as much as $7 billion.
Collapsing premium
Perhaps. More worrying for investors than the paper losses is the structural collapse of the company’s stock premium.
For years, Strategy Inc. traded at a significant premium to its Net Asset Value (NAV).
Investors would typically treat it as a leveraged Bitcoin ETF before spot ETFs were widely dominant. That dynamic has inverted.
The ratio of the company’s market cap and debt to its token holdings (mNAV) has slid to just above 1.
For the first time in two years, Strategy’s total enterprise value ($61 billion) is on the verge of dropping below the value of its Bitcoin stockpile.
The downturn has reignited fears about the sustainability of the “infinite leverage” model. Given that Bitcoin produces no yield and the software arm generates little free cash flow, investors are eyeing the company’s ability to service its debt and dividends without selling the corn.
To get ahead of the FUD, Strategy raised cash reserves on Dec. 1 by selling common shares
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