Key takeaways

• Bitcoin vs. Stock Buybacks & Acquisitions: Bitcoin offers an alternative for corporations who don't want to decapitalize their treasury with buybacks or rush M&A activity.
• Low cost debt: Cash flow positive public companies can service debt to fund bitcoin purchases. These can be accretive to shareholders in bitcoin terms.
• Volatility is a feature, not a bug: Bitcoin volatility makes options on company stock valuable. A volatile and liquid options market can lower the cost of capital using convertible debt securities.
• Regulatory considerations: FASB fair market value guidance has made it easier for corporations to accurately reflect their Bitcoin treasury holdings on their financial statements.
  
  

Panelists

• Andrew Kang, CFO - MicroStrategy 
• Salman Khan, CFO - MARA
• Patrick Fleury, CFO - TeraWulf 
• Renae Cormier, CFO - Semler Scientific

Bitcoin as a store of value

MicroStrategy is a pioneer among companies adopting Bitcoin as a treasury standard to preserve value for shareholders.

Andrew shared that in 2020, MicroStrategy’s senior management and board began looking for ways to safeguard the company’s cash reserves from inflation and market instability. Although MicroStrategy had a conservative balance sheet - holding no debt and over $500 million in retained earnings - the team recognized that holding cash alone could erode value for shareholders. This led to the decision to adopt Bitcoin as a store of value.

Andrew explained that adopting bitcoin as a treasury standard has transformed MicroStrategy’s excess operational cash into a store of digital capital. “Over the last four years, our share price has increased over 1000% and has enabled us to grow our market cap from around 1.5 billion dollars to around 35 billion dollars”.

For Semler Scientific, MicroStrategy’s success served as inspiration. Similarly, Semler had excess operational cash sitting on its balance sheet and decided to adopt bitcoin as a treasury standard to preserve a store of value.

Renae stated: “We had over 60 million dollars on our balance sheet and we were holding it primarily in short-term T-bills. And when you’re looking at inflation and taxes, one could argue that we were destroying value for our shareholders.”

The same question arose at MARA, where executives weighed the benefits of traditional 4-5% returns on Treasury holdings against bitcoin’s potential to act as a resilient store of value.

Accounting standards are crystallizing but regulatory clarity is still needed

Last year, the FASB mandated fair value accounting for digital assets, marking a shift away from impairments and providing greater clarity around accounting standards.

Renae stated that this clarification made it easier for Semler to report on their bitcoin holdings: “With the new standards from the FASB coming out, it’s actually helped us. Now we have something that’s clear. We didn’t have any legacy assets on our books that we were accounting for as intangibles.”

However, regulatory authorities need to still provide greater clarity around the expected disclosures for public miners. Patrick identified that there is not a standardized approach expected by regulatory authorities like the SEC.

He explained that in the MD&A section of its reports, TeraWulf includes a table of the cost associated with mining a bitcoin. The SEC requested that depreciation of miners be included within the table in addition to the expenses listed by TeraWulf (power cost, SG&A, and site-level operating expenses).

He explained: “We depreciate our miners over 4 years but that’s not necessarily gospel. There is physical obsolescence to a miner but there’s also economic obsolescence.”

Miners that need immersion cooling or that are located in hostile operating environments will likely become physically obsolete faster. Additionally, with low-priced power, companies are more likely to endure a halving or two with a miner and therefore not become economically obsolete as fast. As a result, miners may be depreciated over four years but their life may be longer than this.

In response to the SEC’s request, TeraWulf placed a footnote in their public accounts that explained the process of depreciation. However, standardization of expected disclosures is a much-needed step.

Balance sheet management is needed when accruing debt

Both MicroStrategy and MARA have used debt financing such as convertible notes to buy bitcoin to hold on their balance sheet. As a result, both businesses were able to borrow at low interest rates, making it an attractive investment for many.

Salman explained the high level of interest in MARA’s convertible transaction: “When we did our convertible transaction, we on purpose went on a smaller scale. And it was oversubscribed significantly. That shows the level of investors in this space that like to invest in a balance sheet like this and have that convertible feature.”

Within commodity cycles, price volatility is a feature. Salman explained that while this can benefit businesses that are looking to borrow money as it enables them to raise capital at low interest rates, it can also create greater risk to the business.

He explained: “If you put debt on the balance sheet and keep investing in a depreciating asset, you can get in trouble ultimately.”

Balance sheet management is therefore important for businesses looking to adopt bitcoin as a treasury standard. Salman mentioned that last year MARA reduced its debt by 50% as part of its balance sheet management strategy. This year, MARA added more debt and bought bitcoin immediately after. It did buy $150m worth of bitcoin back in 2021 on the open market and has never sold it - it remains on MARA’s balance sheet today.

Evaluating the HODL strategy for bitcoin

Since MicroStrategy is the largest HODLER of bitcoin, Andrew gave some deeper insights into the types of businesses that might benefit from adopting bitcoin as a treasury standard.

He explained: “We had a profitable cashflowing business. We were looking to deploy that capital into something more profitable to cash”.

In his words, MicroStrategy was a well-established business that was very stable and growing slightly before it adopted bitcoin as a treasury standard. Its decision to hold bitcoin was based on the perception that bitcoin would be accretive for shareholders.

On the other hand, TeraWulf does not have a bitcoin HODL strategy. Patrick explained that TeraWulf’s strategy is to get the cost of mining bitcoin as low as possible to maximize the spread rather than holding on to bitcoin as a store of value.

Patrick explained that: “The tough part about bitcoin mining is that bitcoin can go to the moon but network hashrate will follow. And will follow quickly.”

With low priced power, bitcoin miners will make money irrespective of the trading price of bitcoin.

Patrick added that gaining exposure to bitcoin has become easy and efficient with the recently approved ETFs. 

He explained that TeraWulf did not want to pursue a HODL strategy due to the risk of shareholder dilution: “You buy our stock because we can mine it at $40,000 and sell it at wherever it is and reinvest that in growth. And that’s how we grow. And we don’t have to dilute.”

In contrast, Andrew highlighted the accretive quality of bitcoin for public companies. He explained that in MicroStrategy’s reporting for the past quarter, they included a metric around BTC yield:

“That effectively takes period over period the amount of bitcoin over the assumed diluted share count. This takes into account all the outstanding equity plus convertible debt. It takes into account new convertible debt offerings. This year alone that metric for us is 17.7% yield.”

From a corporate standpoint, MicroStrategy has been able to accelerate the value generation for shareholders and is anti-dilutive.