Now that Bitcoin is trading near $34,000, a lot of blockchain stocks are taking a pounding. This includes companies like MicroStrategy (MSTR), which has bought billions of dollars in Bitcoin. Most recently, the company announced it was raising an extra $400 million in debt to buy up even more Bitcoin. However, what if Bitcoin falls even further?
Thanks to this recent Bitcoin crash, MicroStrategy is also facing a potential impairment charge of at least $284.5 million for the quarter. If prices keep falling, could MicroStrategy go bankrupt?
How much bitcoin does MicroStrategy own?
MicroStrategy, a business software and intelligence provider led by CEO Michael Saylor, has been buying up an astronomical amount of Bitcoin. With a market cap of $4.3 billion, MicroStrategy owns over 91,579 Bitcoins at an average purchase price of around $24,000 per coin, meaning MicroStrategy has paid out more than $2.23 billion to acquire the crypto. Its purchase is now worth more than $3 billion.
Crashing Bitcoin prices have already cost MicroStrategy. During its latest quarter, the company reported a $194.1 million impairment charge on its Bitcoin investments, which led to a net loss of $183.2 million for the quarter. This quarter could see another $284.5 million impairment charge, assuming Bitcoin doesn’t fall even further.
Considering the company has only $83.5 million in cash on hand, MicroStrategy would either need to raise more debt to pay off future losses or sell some of its Bitcoin investment.
Why did MicroStrategy buy so much bitcoin, anyway?
Under Saylor’s leadership, MicroStrategy started building large cash reserves going into the COVID-19 pandemic. Like most blockchain enthusiasts, Saylor was worried about how central banks were handling the crisis and whether printing more money could lead to inflation.
Instead of buying up precious metals like gold with MicroStrategy's spare cash, he bought Bitcoin. As prices continued to rise, he used capital gains to continue purchasing more Bitcoin for the company. It was by late 2020 that Saylor became one of the biggest bulls in the crypto market.
Will MicroStrategy go bankrupt?
Considering more than half of MicroStrategy’s market cap is made up of Bitcoin, the company could easily go bankrupt if Bitcoin tumbles enough. However, the bigger problem for the company is the fact that it’s not profitable. Microstrategy is losing money quarter by quarter, and it doesn’t have enough revenue or cash on hand to keep eating those losses.
If we look at other industries that have seen massive impairment charges, such as the cannabis sector, most companies have managed to survive. Canopy Growth (CGC) and Aurora Cannabis (ACB) both reported billion-dollar impairments in the past. Despite their stock trading lower as a result, both companies are still in business. However, both companies had plenty of cash on hand—MicroStrategy doesn’t.
If there’s a massive crypto crash similar to 2018's, I’d say impairment charges could bankrupt MicroStrategy. However, if Bitcoin prices stabilize, MicroStrategy could survive.