MicroStrategy bought another US$2.1 billion ($2.82 billion) in Bitcoin while its combination of equity and fixed income securities sales to finance the rapidly increasing acquisitions draws increased scrutiny.
It was the fifth consecutive Monday that the Tysons Corner, Virginia-based firm announced purchases of the digital asset. Co-founder and Chairman Michael Saylor has accumulated Bitcoin now worth more than US$41 billion over the past four years after deciding that the small enterprise software maker needed to embark on a different path to survive.
He accelerated the strategy shift in October by announcing plans to raise US$42 billion over the next three years through an evenly split combination of at-the-market stock sales and convertible debt offerings.
MicroStrategy acquired 21,550 tokens for an average price of approximately US$98,783 from Dec 2 through Dec 8, according to an US Securities and Exchange Commission filing on Monday.
The firm has quickly accelerated its Bitcoin purchases. While it took almost a year to amass its first 100,000 tokens, it only took two weeks to go from 300,000 tokens to 400,000. With its large stash of Bitcoin, its holdings are worth more than Nvidia’s cash holdings, and all but six of the non-financial companies listed on the S&P 500 Index.
With MicroStrategy’s recent increased Bitcoin purchases, the company has been buying tokens for an average purchase price above the average price of Bitcoin over four of the last five weeks it bought tokens.
See also: Bitcoin briefly slumps nearly 7% as traders hedge for pullback
The almost 500% surge in the company’s shares this year has fuelled demand from investors for the stock. At the same time, hedge funds have been snapping up the notes, which are used in market-neutral arbitrage bets that exploit the surging volatility of the underlying asset.
MicroStrategy has been among the most volatile US stocks this year. MicroStrategy fell 7.5% to US$365.34 on Monday.
See also: Bitcoin hits US$100,000 for first time on optimism over US support
The danger is the possibility crypto’s massive year-long rally reverses, in which case an ever-more leveraged bet on its value could have severe consequences for its owners. Bitcoin has surged more than 130% since last December.
The company’s reliance on Bitcoin to meet its financial needs could prove risky, said Min Jung, a research analyst at Presto Research.
“For now, Bitcoin’s favorable price movement allows MicroStrategy to sustain a positive feedback loop: rising MSTR stock prices enable additional fundraising, which funds further Bitcoin purchases, driving up Bitcoin prices and stock value,” he said. “While effective during a bull market, this strategy’s sustainability depends heavily on continued Bitcoin price appreciation.”
MicroStrategy didn’t immediately respond to requests for comment.
In an Oct 31 filling, the company noted that “a significant decline in the market value of Bitcoin could have a material adverse effect on our financial condition. Any material adverse effect on our financial condition caused by a significant decline in the market value of our Bitcoin holdings may create liquidity and credit risks for our business operations, as we would have limited means to obtain cash beyond the revenues generated by our enterprise analytics software business.”
If Bitcoin prices took a sudden downturn, MicroStrategy’s ability to service its growing debt could be threatened said Gracy Chen, CEO of crypto exchange Bitget. The fallout of that could expand beyond the company.
“The firm’s massive BTC holdings have also created a market concentration risk, where any large-scale sell-off could lead to significant price fluctuations, impacting not just Bitcoin but the entire cryptocurrency ecosystem,” Chen said.
Chart: Bloomberg
