© Reuters SEC rejects MicroStrategy’s Bitcoin accounting as MSTR shares drop to one-year low
Do you think MicroStrategy, a Bitcoin hoarding software company, will do well in 2021 as the price of BTC goes from $29,000 to $68,000?
Not on paper. And not in the stock market today, either, where stock prices were recorded MicroStrategy Inc (NASDAQ:) its lowest level since December 2020.
The US Securities and Exchange Commission (SEC) has canceled the company’s accounting method, which would have allowed it to avoid using bitcoin’s depreciation.
According to Generally Accepted Accounting Principles (GAAP), you must adjust the value of Bitcoin on your balance sheet when the price goes down, which it did in the upsells. This is called weakness. However, if the price goes up, you won’t make such an adjustment, which means you can’t claim that your company is now more valuable because the value of your holdings has gone up.
In July when discussing the $23 million drop in the second quarter of 2021 from the $1.5 billion bitcoin purchase from Tesla, (NASDAQ:) it is an “accounting strangeness rather than an actual loss.” Regardless, the decrease in value affects the net worth of the company and its value in the eyes of investors.
“We object to your adjustment of impairment charges in your non-GAAP proceeding,” the Securities and Exchange Commission’s Corporate Finance Division wrote in a letter dated December 3 released yesterday. Please review to remove this modification in future filings.
The company responded on December 16 that it would. This means that MicroStrategy’s next quarterly earnings statement will show the company is less valuable on paper than it is currently claimed.
Bitcoin Fund MicroStrategy is ostensibly a cloud software company but in the past couple of years it has transformed itself into a de facto Bitcoin Fund. Under CEO Michael Saylor, the publicly traded company has bought as much as 124,391 BTC since August 2020, which is now worth about $4.5 billion. According to Saylor, the coins bought on and off over time, costing $3.75 billion to buy. Therefore, it is still profitable in terms of unrealized gains.
With more than half of the company’s vault in Bitcoin (at last count) ; Buying MSTR shares is one way that regular investors can learn about crypto assets. This exposure provided no benefit today because Bitcoin lost 11% of its value in 24 hours.
MSTR stock ended the day with an even worse drop, dropping 18% to $375.89 per share, and continuing lower in after-hours trading.
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