MicroStrategy (MSTR) Stock On Free Fall As SEC Rejects Its Bitcoin Accounting Strategy

The U.S. Securities and Exchange Commission (SEC) is adding more fuel to the already widespread fire in the broader cryptocurrency market. On Friday, January 21, the SEC rejected MicroStrategy’s Bitcoin accounting standards noting that the company cannot strip out Bitcoin’s wild swings from its unofficial accounting standards.

The news comes just as Bitcoin corrected 7% for the second consecutive day eroding more than $100 billion of investors’ wealth. The BTC correction comes amid a broader sell-off taking place on Satoshi Street as well as the equity market.

Enterprise software maker MicroStrategy started buying Bitcoin in September 2020. Since then, the company’s founder Michael Saylor has been aggressively adding Bitcoin to MicroStrategy’s balance sheet. As of date, MicroStrategy is holding a total of 124,391 BTC with its recent purchase last month.

Following the SEC’s statement, the MicroStrategy (NASDAQ: MSTR) tanked a straight 18% on Friday and closed at $375. The MSTR is showing an additional 3.5% drop in the after hours market trading. 

SEC Objects MicroStrategy’s Non-GAAP Reporting Measures

But in its Form 10-Q, MicroStrategy uses non-GAAP measures for the quarter ending September 30, 2021. This shows its investors what their income would have been if the company didn’t have to impair its Bitcoin purchases, which is largely volatile.

The U.S. SEC has objected to this as per its comment letter released this Thursday, says Bloomberg. The publication further adds:

U.S. generally accepted accounting principles, or GAAP, offer no rules for reporting the value of digital assets. Nonbinding guidance from the American Institute of CPAs says companies should classify the currency as an intangible asset, as outlined in ASC 350.

This means businesses that don’t qualify as investment firms would record cryptocurrency at historical cost and then only adjust it if the value declines. Once their holdings get written down, or impaired, companies can’t revise the value back up if the price recovers.

Now, with a highly volatile asset class like Bitcoin comes a problem. On the books, the value can only be recorded as shrinking but not growing. Now with massive BTC holdings by MicroStrategy, any downward swing in the Bitcoin price can adversely affect the company’s bottom line.

During Q3 2021, MicroStrategy reported a net loss of $36.1 million. However, with the impairment of its Bitcoin holdings, the company’s unofficial, or non-GAAP income flipped to $18.6 million. But MicroStrategy believes that if the company shows a decline in BTC value, it would lead to an “incomplete assessment” of its BTC holdings.

The enterprise software maker said that it would be “less meaningful to management or investors”. the company further wrote:

“We further believe that the inclusion of bitcoin non-cash impairment losses may otherwise distract from our investors’ analysis of the operating results of our enterprise software analytics business”.

However, the SEC has disagreed and completely objected to this nature of reporting. The SEC has asked MicroStrategy to get rid of its current non-GAAP reporting measures from future filings. MicroStrategy has agreed to comply with this.

MicroStrategy Is Not Selling Its $5 Billion Bitcoin Stash

As heavy correction continues in the crypto space, Bitcoin is now down more than 40% from its all-time high levels of $69,000. However, MicroStrategy’s Michael Saylor said that the company isn’t selling anything from its $5 Billion worth of BTC holdings. Speaking to Bloomberg this Thursday, Saylor said:

“Never. No. We’re not sellers. We’re only acquiring and holding Bitcoin, right? That’s our strategy.”

He further added that he isn’t worried about the recent market correction in crypto. On his Twitter, Saylor adds: “If you are going to invest in #bitcoin, a short time horizon is four years, a mid time horizon is ten years, & the right time horizon is forever”. 

Looking at MicroStrategy’s aggressive Bitcoin purchases, we can expect them to buy the current Bitcoin dip.