One of the most vocal proponents of converting company funds to bitcoin, Michael Saylor, who heads MicroStrategy, recently borrowed $400 million to purchase more bitcoin for company treasury. Notably, it is the first time a company is financing its cryptocurrency purchase by means of junk bond sales.
Saylor, who is one of the pioneers of officially focusing a company’s corporate strategies on bitcoin, said that the Federal Reserve’s recent relaxations in the inflation policy drove this decision.
Inflation erodes the purchasing power of a bond's future cash flows. Hence, investors demand a higher interest which, in turn, drives the bond prices lower.
At present, the short-term interest rates are set at near-zero levels. The Fed indicated these rates won't be raised unless employment levels have reached an optimally sustainable level and inflation is at 2%. With the current inflation rates to remain above 2% for some time now, higher volatility in these short-term rates is expected.
Path-Breaking?
Per the company’s annual report, which deals in various business intelligence applications, “In 2020, our company determined that there was a tectonic shift taking place in the financial markets and overall economy. To meet the cost of capital and to enhance the value of the company, we took the innovative approach of adopting bitcoin as our primary treasury reserve asset. We were the first publicly traded company to pursue this strategy and purchase bitcoin on a large scale. Economists, bankers, journalists, stockholders, customers, and prospects have taken note, and their reactions have been overwhelmingly positive. “
As of April 5, 2021, the company held around 91,000 bitcoins, representing 0.433 percent of all the bitcoins that can be mined, at $24,311/each, worth $2.226 billion. The company’s solid rally around bitcoin, coupled with the cryptocurrency’s dream run last year meant its returns boomeranged to almost 273%.
However, it has seen a slight dip in the months leading up to this announcement. Currently trading at $465.67, the company has seen a dip of about 35% in its returns over the last 3 months. MicroStrategy’s exclusive focus on bitcoin has also drawn flak from many experts, who have raised questions about the company’s broader strategy apart from bitcoin
“The $400 million in debt isn’t being used to fund an acquisition or growth. It’s being used to speculate on a volatile asset,” Marc Lichtenfeld, chief income strategist at the Oxford Club critiqued regarding the policy.
Currently, the firm has a total impairment charge of more than $500 million, according to Bloomberg. Impairment charges come into effect in the face of drastic reductions in the recoverable value of a fixed asset, something that is frequent in the highly volatile cryptocurrency world.
The firm likely wrote down the value of its bitcoin assets once its market value fell below the price at which the company acquired the coin at. With notes available to qualified institutional buyers, the proceeds will be directed towards the company’s cryptocurrency policies. The company has already issued convertible bonds worth $1 billion. These notes have a maturity period of 7 years and cannot be purchased for 3 years.
“Since this pivot in our treasury strategy, we have formalized a new strategy in the operation of our business— acquiring and holding bitcoin. We believe that our bitcoin strategy is complementary to our analytics software and services business, as we believe that our bitcoin and related activities in support of the bitcoin network enhance awareness of our brand and can provide opportunities to secure new customers for our analytics offerings. We are also exploring opportunities to apply bitcoin‐related technologies such as blockchain analytics into our software offerings”, the company’s official filing explained
