Is Michael Saylor a genius?
Some seem to think so at least based upon the response to the model he set up for Microstrategy. Since it was so successful, others are copying what he did. How will this work out?
Bitcoin getting added to balance sheets could be a good idea. However, what happens if Bitcoin becomes the company "savior"? This is something that we have to consider.
It is being reported that 3% of all Bitcoin is in the hands of 61 publicly traded companies. This could be a positive except it is not exactly the who's who of corporations.
Here is where a potential problem could arise. It is also what we take a look at in this article.
The Microstrategy Risk: Bitcoin On Balance Sheets
There is a huge difference between Apple or Google adding BTC to the balance sheet and a lesser known company simply using it as a replacement for its business model. In other words, this is not a supplement to existing operations. Instead, it is a total replacement.
Certainly, while the bull is running, everything looks dandy. The value keeps appreciating, presenting shareholders with increasing stock prices.
However, what happens if there is a significant pullback, especially if this is for an extended period of time?
Here is where companies can get themselves in hot water.
Bitcoin is known for its volatility. This is what makes it such an exceptional trading vehicle. The challenge is many of these companies are using it as the basis for the business existence. These are no longer traditional companies. CEOs opted to turn them basically into investment funds, with a single asset as the holding.
What happens when these companies go underwater?
Standard Chartered is starting to warn about this.
But now, Standard Chartered is sounding the alarm on what appears to be a mad rush to stack balance sheets with BTC which inked its all-time high of just under $112,000 a couple of weeks ago. The bank warns that if bitcoin sheds 22% of its value relative to a firm’s average BTC purchase price or if bitcoin dips below $90,000, half of a subset of sixty one public companies currently employing a BTC treasury strategy will go “underwater,” in other words, the market value of company shares will be less than the value of bitcoin held.
“ Bitcoin price volatility in and of itself may drive the BTC price below the average purchase prices of many new treasuries; half of these would be underwater if prices fell below USD 90,000,” the report explains. “Based on the 2022 example of Core Scientific, we estimate that prices more than 22% below average purchase prices could lead to liquidations.”
The answer could be bankruptcy.
Bailing Incompetence Out
It would appear this is a move to bail the incompetent out.
Since many companies are joining the party late, their Bitcoin price is relatively high. Saylor has the benefit of some early purchases, maintaining a much lower cost figure on average. Thus, he has a bit more room to maneuver.
Others might not be so lucky.
If the price falls, liquidation could be forced. This would mean a sizeable loss could be felt. When this happens, companies end up cornered. Often the only path out is bankruptcy court.
Let us contrast this with a viable business that uses Bitcoin to supplement its operations. It is common for balance sheets to have many different assets as successful companies seek to put their excess cash to work.
It is interesting that Meta shareholders overwhelmingly turned down the chance to invest in Bitcoin as part of the company treasury. Obviously, Meta has a successful business. If it had decided on Bitcoin purchase, it would simply be a holding. The business model of the corporation would still be in place.
Looking at the headline, we still fail to see Apple, Google, Amazon, or Nvidia taking this step. There might be some Bitcoin floating around but nothing significant. To me, that is very telling.
If a company decides to put a percent or two of its cash position in BTC, no problem. When the decision is to leverage things by issuing debt to buy more Bitcoin, problems could arise.
The latter might be a move to cover the incompetence of the company.
A 22% drop in Bitcoin price is nothing. According to Standard Chartered, this could cause significant pain for many investors in this companies that placing Bitcoin at the core of this business strategy.
From this perspective, Bitcoin might not be as safe as it appears.