MicroStrategy shares falls as the company announced a fresh $400 million debt raising to purchase Bitcoin.

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After peaking at $1,135 in early February, the company’s stock has plunged by more than 60%.

MicroStrategy stock has dropped by more than 63 percent since February due to a poor balance sheet, an exorbitant debt burden, and over-leveraged exposure to Bitcoin. Nonetheless, the business intelligence firm has overlooked the consequences of its inflated valuations, and it now intends to acquire more debt and use the profits to purchase Bitcoin (BTC).

MicroStrategy announced on June 7 that it “intends to raise $400 million aggregate principal amount of senior secured notes in private offering […] to acquire additional Bitcoins.” The company already holds more than 92,000 BTC, worth about $3.31 billion at current exchange rates — almost 1.5x its principal investment.

BTC/USD (blue) vs. MSTR (orange) YTD performance. Source: TradingView

MSTR fell 2.17 percent to $469.29 a share following the opening bell on the New York Stock Exchange on June 7. It was trading for $1,135, its year-to-date high.

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Making no money

MicroStrategy previously stated that it is creating a Bitcoin portfolio as an insurance policy against the further depreciation of the world’s major currencies. However, by making back-to-back Bitcoin transactions, the corporation has successfully shielded itself against more than simply a drop in the value of the US dollar. Unprofitable business lines are a good place to start.

 

MicroStrategy’s net income growth plunged 121.90% in 2020. Source: Wall Street Journal

A look into MicroStrategy’s alternative asset holdings also shows that the company is overly skewed toward Bitcoin, with real estate accounting for less than 0.2% of the total investments.

Its most recent quarterly report also reveals a poorer financial sheet as of March 31, with a debt-to-equity ratio of 4.55 – a large debt burden of $1.66 billion versus a $0.37 billion equity value.

MicroStrategy is holding assets worth $2.44 billion as of March, out of which $1.947 billion is Bitcoin. Source: WSJ

This is especially dangerous when considering Bitcoin’s price volatility. MicroStrategy does not produce enough money to cover its debts and relies heavily on Bitcoin earnings to do so. On top of that, it now wants to raise an additional $300 million, despite the fact that its convertible notes are not due to maturity until 2028.

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Juan De La Hoz, a closed-end fund/exchange-traded fund strategist, is concerned that MicroStrategy would go bankrupt if Bitcoin falls by more than 50% in the future, citing the flagship cryptocurrency’s significant drops in 2014 and 2018. To avoid insolvency, MicroStrategy would most likely liquidate its Bitcoin assets, according to the analyst.

Hoz added that he would neither invest in cryptocurrencies through leverage nor invest in a company that did so, hinting at his extremely bearish outlook for MicroStrategy and Bitcoin.

“It is simply too risky, you could lose it all, and I’d rather not take that chance.”

Bitcoin prices slept through MicroStrategy’s announcement early in the morning in the United States, before trading on the NYSE began. The BTC/USD exchange rate has remained sideways, with support above $36,000.

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