MicroStrategy Q3 earnings: BTC bet is becoming an existential risk

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MicroStrategy’s (NASDAQ: MSTR) third-quarter earnings reveal that founder Michael Saylor continues to double down on his BTC bet while showing signs that trouble may lie ahead for the so-called’ business intelligence’ company.

According to the earnings report released Wednesday, MicroStrategy has acquired 6,067 BTC since the end of Q2 for a total of $167 million at an average price of $27,531 per coin. This adds to an already sizeable hoard that has been accumulating since 2020 and brings the total to 158,400 BTC at an average price of $29,586. All in all, MicroStrategy has spent $4.69 billion on BTC.

However, the company overall is suffering through a $2.23 billion loss in value of the BTC on its books.

Luckily for MicroStrategy, revenues were up 3% last year, climbing to $129.5 million for Q3, buoyed by outsized increases in software licensing revenues and subscription services revenues, which rose 16% and 28%, respectively.

Less lucky for MicroStrategy is that the company’s BTC strategy may have led them straight into rough waters, depending on the outcome of the U.S. Securities and Exchange Commission’s (SEC) outstanding Bitcoin ETP applications.

Microstrategy’sde facto ETP plan is backfiring

MicroStrategy bet on Bitcoin in a big way in 2020, adding billions of BTC to its balance sheet in what is widely considered an attempt to turn the MSTR stock into a de facto Bitcoin exchange-traded product (ETP). With U.S. regulators refusing to approve any spot BTC ETPs, thanks to fraud and market manipulation concerns, Microstrategy’s gargantuan BTC holdings created a situation where buying company shares was one of the only ways for investors to gain exposure to BTC without having to hold the coins themselves.

One of the downfalls of this approach is that as a company, MicroStrategy is subject to federal income tax, which impacts the bottom line value of each stock; a spot Bitcoin ETP would not have the same expense. In the absence of an ETP approval, however, MSTR is still arguably better than nothing.

Indeed, that strategy initially worked wonders for MicroStrategy’s stock price, as BTC began a bull run in 2020, which saw MSTR shares triple in value.

Now, however, MicroStrategy faces a new concern. The SEC, which had judiciously denied all applications to approve a spot BTC ETP from multiple companies, was recently ordered to come up with a better justification for continuing to deny spot ETPs while greenlighting ETPs containing BTC futures. Many have taken this as a sign that the SEC is on the cusp of approving its first BTC ETP. If true, it would all but eradicate MSTR’s value proposition as an investment.

MicroStrategy itself is aware of the risk: it was included in the company’s most recent 10-K filing with the SEC as a potential risk to the stock:

“To the extent that our Class A common stock is viewed as an alternative-to-Bitcoin investment vehicle and trades at a premium to the value of our Bitcoin holdings, that premium may also be eliminated, causing the price of our Class A common stock to decline,” reads the filing.

MicroStrategy may be insulated from the immediate effects of this phenomenon, however. An ETP approval is almost certain to come with a spike in BTC prices, as happened when word got out that the SEC had been ordered to reconsider its prior rejections. This would help offset some of the damage done by the loss of MicroStrategy’s status as the only ETP-like show in town, but in the long term, there is little reason for investors to use MicroStrategy to gain exposure to BTC once they can simply purchase ETP stocks.

It would also leave MicroStrategy wholly exposed to future fluctuations in BTC price, and the digital asset industry has repeatedly shown that there is always a fresh scandal around each corner, waiting to topple one digital asset company or another while taking the price of BTC with it. And between the SEC’s increasing awareness that BTC likely constitutes a digital asset security and the inconvenient truth that unbacked Tether stablecoins are being used to artificially inflate the price of BTC, the risk of a BTC coup de grâce has never been higher, which would likely amount to a coup de grâce for MicroStrategy without its status as a de facto ETP to prop it up.

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