A Bloomberg report by Olga Kharif and Tom Contiliano published earlier today paints a critical picture of MicroStrategy’s current situation. The company’s unique Bitcoin investment strategy, implemented by Co-Founder and former CEO Michael Saylor in 2020, now faces the implications of a newly approved accounting rule change, impacting both financial results and investor perception.

MicroStrategy Inc., the enterprise software giant, stands at a critical juncture due to CEO Michael Saylor’s bold decision nearly four years ago to pivot the company’s investment strategy towards Bitcoin. This move is set to introduce greater volatility into the company’s quarterly results following a recent change in accounting rules that mandates the valuation of digital assets like Bitcoin at market prices. Previously, MicroStrategy was required to report impairment charges when Bitcoin’s value dropped, without the ability to reflect price increases. The company has a grace period until 2025 to apply this significant accounting adjustment.

Should MicroStrategy opt to implement this change for its fourth-quarter reporting, the valuation of Bitcoin on its balance sheet is expected to see a substantial increase, thanks to recent acquisitions of the cryptocurrency and its nearly 60% price surge in the last quarter. However, it also exposes profitability to Bitcoin’s notorious volatility, potentially leading to unpredictable quarterly results. This adjustment comes at a time when analysts anticipate a $5.8 million loss in the company’s upcoming earnings report, according to Bloomberg surveys.

Initially met with skepticism, Saylor’s bold Bitcoin bet delivered impressive returns to shareholders, with MicroStrategy’s stock price soaring over 300% since July 2020. However, the landscape is changing. The emergence of spot Bitcoin exchange-traded funds (ETFs) in January 2024 provides investors with an easier and potentially cheaper way to access Bitcoin, potentially diminishing MicroStrategy’s premium.

The launch of 11 US-listed spot Bitcoin ETFs on January 11, as the report highlights, presents a significant challenge for MicroStrategy. These ETFs offer investors an easier, potentially cheaper, and lower-risk way to gain exposure to Bitcoin, potentially diminishing the premium previously enjoyed by MSTR shares (due to MSTR being essentially a proxy for a real US-listed spot Bitcoin ETF). Analyzing MSTR’s stock performance since the ETFs’ launch can provide some insights into this dynamic.

Since January 11, MSTR has seen a 11.69% decrease in its share price, which currently (as of 3:25 p.m. ET on February 6) is trading at $499.60 compared to its pre-ETF launch price of $566.67. In contrast, the broader market, as measured by the S&P 500, has gained 4.12% in the same period. Notably, Bitcoin itself has only seen a 2.25% decline during this timeframe. This suggests that MSTR’s performance has underperformed both the overall market and Bitcoin itself since the launch of these spot ETFs.

While it’s important to remember that the short timeframe since the ETFs’ launch makes it difficult to draw definitive conclusions, this initial performance does raise concerns about the potential impact of U.S. spot Bitcoin ETFs on MSTR’s long-term strategy and investor perception. As the report mentions, the company must effectively compete with ETFs by highlighting the unique value proposition of holding Bitcoin directly through MicroStrategy. The coming months and quarters will be crucial in determining whether MSTR can successfully adapt and navigate this evolving landscape.

As for FASB’s first direct accounting standard for reporting crypto assets (which was published in December 2023), while MicroStrategy has until 2025 to adopt the new standard, analysts like Lance Vitanza of Cowen urge immediate implementation. Vitanza argues it aligns with the company’s Bitcoin advocacy and potentially attracts hesitant institutional investors. MicroStrategy, however, remains silent on the timing, leaving the decision and its potential consequences hanging.

The new rule and rising spot Bitcoin ETFs present both opportunities and challenges. While the potential balance sheet boost is enticing, increased volatility could deter some investors. The company must effectively compete with the new spot ETFs by highlighting the unique value proposition of holding Bitcoin directly through MicroStrategy.