MicroStrategy Reported Impairment Charge of $727K on Bitcoin Holdings in Q3

MicroStrategy (MSTR) posted a minimal digital asset impairment charge of $727,000 on its bitcoin (BTC) holdings in the third quarter, down significantly from $917.8 million in the second quarter as the price of bitcoin remained relatively stable at the end of the second and third quarters, according to its latest earnings report.

The company's digital asset impairment reflects the decline in the price of bitcoin versus the price at which the bitcoin was acquired. Under standard accounting rules the value of digital assets such as cryptocurrencies must be recorded at their cost and then only adjusted if their value is impaired, or goes down. But if the price rises, that does not get reported unless an asset is sold.

In its earnings press release, MicroStrategy noted it was encouraged by the Financial Accounting Standards Board's recent support of the use of fair value accounting for bitcoin, which would allow companies to report losses and gains immediately, as they would other traditional financial assets. MicroStrategy's chief financial officer, Andrew Kang, said in a statement he thought such a change would "promote additional institutional adoption of bitcoin as an asset class."

Executive Chairman Michael Saylor echoed Kang's optimism on MicroStrategy's conference call Wednesday, adding that bitcoin will benefit as more clarity and guidance is offered. "It doesn't mean that we have enough guidance to change our accounting," Saylor said on the call, though when considering next steps, "we know we have unanimous support to adopt fair value accounting for bitcoin," he added.

Additionally, Saylor and CEO Phong Le expressed optimism about the payments potential of the Bitcoin Lightning Network, and for MicroStrategy to bring value in this area.

Between Aug. 2 and Sept. 19, MicroStrategy bought 301 bitcoins for about $6 million, according to a filing with the Securities and Exchange Commission. The purchase brought MicroStrategy's total holdings of bitcoin to almost 130,000. At bitcoin’s current price of about $20,440, the value of those holdings is approximately $2.66 billion. MicroStrategy's entire market capitalization is roughly $2.9 billion.

While MicroStrategy’s large purchases of bitcoin in 2021 and early 2022 were funded via the issuance of secured notes and sales of its common stock, the company’s much more modest acquisitions of bitcoin in the second and third quarter of 2022 were made simply using excess cash, the company reported.

As of Sept. 30, 2022, the original cost basis and market value of MicroStrategy’s bitcoin holdings were $3.983 billion and $2.532 billion, respectively, which reflects an average cost per bitcoin of approximately $30,639 and a market price per bitcoin of $19,480.51, the company reported.

Overall, MicroStrategy reported a third-quarter adjusted earnings loss of 96 cents a share versus analyst consensus estimate for a loss of 15 cents, on revenue of $125.4 million, short of estimates for $127.2 million.

Following the release of its results, MicroStrategy shares were rising about 2.3% to $263. Shares have tumbled around 51% year to date, slightly better than bitcoin’s roughly 56% drop over the same time period.

Michael Bellusci contributed reporting to this story.

UPDATE (Nov. 1, 20:40 UTC): Added information on MicroStrategy's digital asset impairment and updated its after-hours share price.

UPDATE (Nov. 1, 21:08 UTC): Added details on funding for MicroStrategy's bitcoin purchases and its overall results.

UPDATE (Nov. 1, 22:31 UTC): Adds commentary from the earnings conference call, updates stock price movement.