Bitcoin’s laser-eyed king is blind to a $1 billion loss

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MicroStrategy Inc. is two things: a publicly traded enterprise software company whose annual revenue has barely budged in five years, and a publicly traded Bitcoin trading vehicle that borrowed money to buy a volatile cryptocurrency and lost a cumulative $2 billion in the process.

The results of this dubious experiment were chilling – all the more so because of Chief Michael Saylor’s willful blindness to the consequences.

The company’s latest $1 billion quarterly loss, equivalent to about two years of revenue, was almost entirely due to a drop in the value of its bitcoin stash. Given that rising interest rates have proven that crypto is anything but a hedge, one would have expected MicroStrategy to cut its losses and stick to software. After all, even Tesla Inc. threw away most of its bitcoin pile, prioritizing money in an environment of war and more expensive goods.

O, you of little faith. MicroStrategy’s response to all of this pressure, including an increase in interest from short sellers, has been to stick to its buy Bitcoin bet and create two leadership roles. Saylor, the staunch proponent of crypto’s digital gold ideology, was named executive chairman, while Phong Le was named chief executive to focus on day-to-day operations in the more prosaic world of cloud computing.

Ideally, separate roles at the top should allow for more checks and balances. But Saylor remains an executive and the primary supervisor of the company’s “Bitcoin acquisition strategy.” The also praised the company’s belief in the “long-term store of value” of crypto. The company insisted that the sale was not an option, preferring to pledge more of its reserve as collateral to satisfy lenders.

The strategy therefore remains the same. Even scarier were the justifications for why.

After initially portraying the Bitcoin purchases as defensive, Saylor asserted that they have become a source of shareholder value and a new strategic direction. Picking a start date of August 2020, when MicroStrategy spent $250 million on 21,454 of the tokens, Saylor said the company’s stock price outperformed parent company Amazon.com Inc. from Google Alphabet Inc., the parent company of Facebook Meta Platforms Inc., Apple Inc. and Bitcoin itself.

This conveniently ignores other less flattering data. The increased volatility in MicroStrategy’s stock price since the Bitcoin dive means that it has also underperformed all of the above, and more, poorly over the past year. Its negative one-year total return of 55.5% is worse than that of all but one of the 10 similar-sized peers in a Bloomberg software industry basket. His implied cost of borrowing has also increased since he took on more crypto risk, making it more expensive to refinance or issue new debt.

To defend this as good for the company’s balance sheet or for its shareholders is truly Panglossian. Its cumulative impairments of $1.989 billion now exceed the $1.988 billion book value of its remaining 129,699 Bitcoins.

Still, it’s Saylor’s follow-up that should really ring the alarm bells. Acknowledging the wild swings in his company’s stock, he took a similar attitude to Oscar Wilde: it’s better to talk about a debt-fueled reckless bet on digital currencies than not talk about it at all.

Saylor said buying Bitcoin has made MicroStrategy a more “interesting” company, which is “attracting attention and attracting capital.” The more the C-suite, analysts, journalists and investors argued over his strategy, the less he needed to publicize it. “What you don’t want is to be irrelevant to the world, when nobody knows you and nobody cares whether you’re successful or not and nobody knows what you’re doing,” Saylor said. , which was already known as a symbol of hubris during the dotcom boom.

This is certainly a new version of fiduciary duty. This suggests that it will take more profit and market pressure for MicroStrategy to start managing its Bitcoin stash sensibly, rather than according to Saylor’s devotion to what he calls “a swarm of cyber hornets in the service of the goddess of wisdom”. It also raises serious questions about how the stock market has become home to the kind of business that even the hedge fund world might balk at.

Saylor’s hope is that in the realm of the Bitcoin blind, the man with the laser eyes is king. But right now it’s MicroStrategy that doesn’t seem to see things clearly.

More from Bloomberg Opinion:

Credit card rewards are not free. Buyers don’t care: Marc Rubinstein

Uber embodies the post-Covid inflationary economy: Jared Dillian

Corporate hope protects tech sector, for now: Tim Culpan

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

More stories like this are available at bloomberg.com/opinion

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