Coinshares Notes Potential Risks In MicroStrategy’s Bold $42B Bitcoin Acquisition Plan

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In a research blog on Monday, Coinshares revealed that MicroStrategy’s (MSTR) ambitious plan to buy $42 billion more worth of Bitcoin is not without risks. The company announced a $21 billion at-the-money offering of its own stock last week to raise capital to buy more Bitcoin. This is a part of its larger plan to buy another $42 billion of Bitcoin over the next three years. 

According to Coinshares, MicroStrategy’s ability to successfully execute on its bitcoin acquisition plan is dependent on a number of factors. 

Favourable Financing Conditions

    Firstly, it noted that the software company needs “financing conditions to remain favourable, and necessitates demand for their convertible notes,” analysts wrote, which will allow the company to acquire bitcoin without diluting shareholders and at a lower cost of capital. However, it noted that, in 2021, MicroStrategy was able to raise debt capital at zero-coupon convertibles, but coupon rates have been going up with new issues.

    Microstrategy’s Heavy Reliance On BTC Holdings

    Secondly, it pointed out that MicroStrategy is heavily reliant on its bitcoin holdings. If the company decides to sell part of its bitcoin reserves, it risks losing its valuation premium.

    Bitcoin disposals may also trigger tax events, which can be significant, given the US$7.7 billion capital appreciation of its bitcoin holdings since the beginning of its bitcoin purchases. In addition, in the future the company may be liable to be taxed on the unrealised gains related to its bitcoin holdings, the report noted. 

    However, Saylor has said previously that he is not interested in selling his company’s bitcoin holding noting that “Bitcoin is the exit strategy.”

    BTC Business May Outgrow Software Business

    Coinshares noted that the company’s “bitcoin business may have outgrown its software business,” and added that cash flows from the legacy operations may not be enough to cover future coupon payments.

    Despite the potential dilution from the large financing, investors have continued to show confidence in the firm’s stock. The MSTR shares were about 8% higher in early trading on Tuesday as bitcoin price touched $70,000.

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