MicroStrategy Inc. bought $101 million of Bitcoin after announcing that it would use perpetual preferred stock as well as common shares and debt to acquire more of the cryptocurrency.
The Tysons Corner, Virgina-based enterprise software company turned leveraged Bitcoin proxy has purchased Bitcoin for nine consecutive weeks, as co-founder and Chairman Michael Saylor aims to advance its Bitcoin holding strategy. It holds around $44.3 billion in Bitcoin.
MicroStrategy purchased 1,070 Bitcoin tokens at an average price of approximately $94,000 on Dec. 30 and Dec. 31, according to a filing with the US Securities and Exchange Commission on Monday.
The company also announced another $1 billion of impairment losses will be reported in the fourth quarter. This, in combination with the recent buying, means that Bitcoin on MicroStrategy’s balance sheet will increase by $17.9 billion to just under $24 billion at the beginning of the new year, as the company switches to fair-value accounting for its crypto holdings.
On Friday, the firm said it planned to raise up to $2 billion through through one or more offerings of perpetual preferred stock, which would be senior to its class A common stock, in the first quarter. The preferred stock offering is part of its plans to raise $42 billion of capital through 2027 using at-the-market stock sales and convertible debt offerings. MicroStrategy has already surpassed two-thirds of its equity goals, and Saylor said in December that the company is expected to shift more toward fixed-income markets in the first quarter.
Hedge funds have been driving some of the demand as they seek out MicroStrategy for convertible arbitrage strategies by buying the bonds and selling the shares short, essentially betting on the underlying stock’s volatility.
MicroStrategy needs to continue to raise capital to make Bitcoin purchases, as the underlying software business has had net losses in three of the past four quarters. By issuing perpetual preferred stock, the company can reach an investor base that wants lower volatility like insurance companies, pension funds, and banks, according to Benchmark analyst Mark Palmer.
MicroStrategy’s stock price closed at $330.66 on Friday, well below its record high of $473.83 on Nov. 20. Bitcoin prices have fluctuated recently, trading around $100,000 after reaching an intraday high of $108,316 in December.
MicroStrategy being a levered play on Bitcoin has meant that it can often follow the cryptocurrency’s price swings.
“That volatility itself is a key element of MicroStrategy’s approach because it enables the company to tap into the capital markets and particularly the convertible bond market more easily,” Palmer said. “If the company was not trading in this manner and that volatility did not exist, it would actually be more difficult for it to execute its strategy.”
While MicroStrategy’s fluctuations help with capital raising, retail investors are often more momentum driven, so tend to be more concerned about drops. Some investors have also had concerns around share dilution from the company’s recent aims to increase the number of authorized shares of Class A common stock from 330 million to 10.3 billion to be able to raise more capital for Bitcoin purchases. MicroStrategy’s share price fell as much as 9.6% on the day of the proxy filing in December.
As the company has less shares available to issue, it is looking for more flexibility to raise capital to continue buying Bitcoin, but this does present challenges for shareholders, according to Adam Kobeissi, founder of The Kobeissi Letter.
“It’s a lose-lose because on one hand you have people saying that it’s dilutive and they’re selling the stock because they don’t want the authorization to increase to pass,” Kobeissi said. “But on the other hand you have people saying if it doesn’t pass, then they can’t keep buying Bitcoin and the whole investment strategy is kind of broken.”
The vote on the share increases is set to take place on Jan. 21, according to a SEC filing on Friday. With Saylor being a large shareholder in the company, the amendment is expected to pass.
If passed, Kobeissi said the increased shares could make MicroStrategy’s stock even more volatile as the company will become more levered. While MicroStrategy has typically seen greater growth than Bitcoin, it has underperformed the cryptocurrency over the past month as the company faces other headwinds, rather than solely acting as proxy for Bitcoin.
Palmer, who has a “buy” rating on the stock, said he believes this share price drop due to the share increase proposal to be “a bit of an overreaction,” as the company’s strategy has been to issue shares to make accretive Bitcoin purchases which can accrue to the benefit of shareholders.
MicroStrategy had previously made over $1 billion purchases of tokens in weeks in November and December, but the purchases have been lower in recent weeks, even as Bitcoin prices have fallen from record highs. With MicroStrategy well ahead of its capital goals, Palmer doesn’t see this as cause for concern yet.
“We’ve seen a pull forward of the company’s strategy, which is not indicative of a slowdown in our view, it’s more a reflection of the aggressive approach that the company has taken, especially after the US elections,” Palmer said. “The company’s approach to buying Bitcoin is not programmatic, it is opportunistic.”
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