Bitcoin Holdings and Strategy - MicroStrategy considers itself the world's first Bitcoin development company, focusing on Bitcoin network development through financial markets, advocacy, and technology innovation[19] - In 2023, the company purchased approximately 56,650 bitcoins at an aggregate price of 1.902billion,withanaveragepurchasepriceof33,580 per bitcoin[26] - As of December 31, 2023, the company held approximately 189,150 bitcoins, valued at 3.626billiononthebalancesheet,withcumulativeimpairmentlossesof2.269 billion[27] - As of February 14, 2024, the company held approximately 190,000 bitcoins, acquired at an aggregate purchase price of 5.933billion,withanaveragepurchasepriceof31,224 per bitcoin[28] - The company's Bitcoin acquisition strategy involves using excess liquid assets and proceeds from debt or equity financings to purchase bitcoin, with no specific target for holdings[23] - The company did not sell any bitcoin in 2023 or during the period from January 1, 2024, to February 14, 2024[26] - The company holds its bitcoin with U.S.-based, institutional-grade custodians to mitigate counterparty risk and diversify custody arrangements[43] - The company carefully selects bitcoin custodians with strict security protocols, including multifactor authentication and offline "cold" storage for private keys, to mitigate risks of unauthorized access and cyberattacks[44] - The company conducts ongoing due diligence reviews of custodians, including reviewing Services Organization Controls reports and verifying financial solvency, regulatory compliance, and security protocols[45] - The company negotiates contractual terms to ensure its bitcoin holdings are protected from custodian bankruptcy or insolvency, based on existing law and regulatory regimes[46] - Bitcoin is viewed as an attractive asset due to its limited supply, potential as a hedge against inflation, and opportunity for value appreciation with increased adoption[47] - The Bitcoin network's decentralization mitigates risks like denial-of-service attacks and 51% attacks, but private keys remain vulnerable to phishing, hacking, and loss[48] - The company believes bitcoin serves as a store of value amid economic uncertainty, geopolitical tensions, and inflationary measures, with potential for appreciation if adoption grows[51] - Bitcoin holdings significantly impact the company's financial results, with potential material impairment charges and gains from sales above carrying costs[100] - The company generated a 553.6milliontaxbenefitin2023duetothereleaseofavaluationallowanceondeferredtaxassetsrelatedtobitcoinholdings[103]−AsofDecember31,2023,thecompanyhad757.6 million in deferred tax assets, with a 1.4millionvaluationallowance[104]−Bitcoin′spricevolatilityposesrisks,withhistoricaltradingpricesrangingbelow20,000 and above 50,000perbitcoininthepast12months[112]−Thecompanymayfaceincreasedtaxliabilitiesifbitcoinissoldaboveitscostbasis,potentiallyresultinginmaterialtaxobligations[105]−AdoptionofASU2023−08in2025willrequirethecompanytomeasurebitcoinatfairvalue,increasingfinancialresultvolatility[119]−Thecompany′sbitcoinacquisitionstrategyisuntestedoverextendedperiodsandunderdifferentmarketconditions,posingpotentialrisks[114]−Counterpartyrisks,includingcustodianinsolvency,couldimpactthecompany′saccesstoandownershipofcustodially−heldbitcoin[115]−Thebroaderdigitalassetsindustry′scounterpartyrisks,highlightedbyrecentbankruptciesandregulatoryactions,maynegativelyimpactbitcoinadoptionandprice[117]−Changesintheaccountingtreatmentofbitcoinholdingscouldleadtosignificantaccountingimpactsandincreasedfinancialresultvolatility[119]−Bitcoinpricevolatilitysignificantlyimpactsthecompany′sfinancialresultsandstockprice,withpastdecreasesin2022causingadverseeffects[121]−Thecompanycarried3.626 billion of digital assets on its balance sheet as of December 31, 2023, consisting of approximately 189,150 bitcoins, reflecting 2.269billionincumulativeimpairmentlossesduetobitcoinpricefluctuations[136]−Digitalassetimpairmentlosses,netofgainsonsale,amountedto1.286 billion for the year ended December 31, 2022, representing 76.9% of the company's operating expenses and contributing to a net loss of 1.470billionforthesameperiod[136]−ThecompanyexpectsincreasedvolatilityinitsearningsduetotheadoptionofASU2023−08,whichwillrequiremeasuringbitcoinholdingsatfairvalueandrecognizinggainsandlossesinnetincomeeachreportingperiod,effectivefromJanuary1,2025[135][137]−Thecompanyplanstopurchaseadditionalbitcoininfutureperiods,whichwillincreasetheproportionoftotalassetsrepresentedbybitcoinholdings,potentiallyleadingtogreaterearningsvolatility[137]−Approximately16,931bitcoinsserveascollateralforthecompany′s2028SecuredNotesasofFebruary14,2024,andthecompanymayconsiderissuingadditionaldebtorfinancialinstrumentscollateralizedbybitcoinholdings[145]−Thecompanymayfaceenhancedregulatoryscrutinyduetoitsbitcoinholdingsandrelatedtransactions,includingcompliancewithanti−moneylaunderingandsanctionslaws[144][145]−ThecollapseofFTXinNovember2022hasincreasedregulatoryfocusonthedigitalassetsindustry,potentiallyleadingtonewregulatoryrequirementsandenforcementactionsthatcouldimpactthecompany′sabilitytoholdandtransactinbitcoin[146]−Theunregulatednatureandlackoftransparencyinbitcointradingvenuesmayresultinfraud,securityfailures,oroperationalproblems,potentiallyleadingtoalossofconfidenceinbitcointradingvenuesandadverselyaffectingthevalueofthecompany′sbitcoinholdings[148]−Companyholdsapproximately190,000bitcoinsacquiredatanaggregatepurchasepriceof5.933 billion as of February 14, 2024, with plans to increase holdings[150] - Bitcoin holdings are less liquid than cash and cash equivalents, and may not serve as a reliable source of liquidity during market instability[155] - Bitcoin price experienced a significant decline in 2022, and future declines could have a pronounced impact on the company's financial condition[150] - The emergence or growth of other digital assets, including stablecoins and CBDCs, could negatively impact bitcoin's market price and the company's financial condition[151][153][154] - Security breaches or cyberattacks on the company or its third-party service providers could result in the loss of bitcoin and adversely affect financial condition[156][157][158] - The company's bitcoin holdings are insured for only a small fraction of their total value, and insurance may not cover losses in insolvency proceedings[160] - Regulatory changes reclassifying bitcoin as a security could lead to the company being classified as an "investment company" under the Investment Company Act of 1940, imposing additional regulatory controls[162][163] - A significant decrease in the market value of bitcoin holdings could adversely affect the company's ability to service its indebtedness[164][166] - The company's bitcoin acquisition strategy exposes it to the risk of non-performance by counterparties, including execution partners and custodians[167] - The company faces significant counterparty risks related to its bitcoin holdings due to recent bankruptcies and regulatory actions in the digital asset industry, including those involving Three Arrows Capital, Celsius Network, Voyager Digital, FTX Trading, and Genesis Global Capital[168] - The company's custodially-held bitcoin could become part of a custodian's insolvency estate if one or more custodians enter bankruptcy or similar proceedings, potentially impacting its business and financial condition[169] Financial Performance and Risks - The company's cash and cash equivalents stood at 46.8millionasofDecember31,2023,comparedto43.8 million as of December 31, 2022[27] - The company held 46.8millionincashandcashequivalentsasofDecember31,2023,comparedto43.8 million as of December 31, 2022[136] - The company had 236.7millionindeferredrevenueandadvancepaymentsasofDecember31,2023,whichmaynotberepresentativeofactualrevenueinfutureperiodsduetocustomerchangesordelays[174]−Thecompany′stopthreeproductlicensestransactionsin2023totaled8.9 million, representing 11.8% of total product licenses revenue, down from 13.1million(15.13 billion worth of digital assets, including bitcoin, in September 2023[122] - Regulatory uncertainty and potential new laws could materially impact bitcoin's price and ownership, including President Biden's executive order on cryptocurrencies in March 2022[123][124] - The SEC has proposed amendments to the definition of "exchange" to include digital asset trading systems, which could have a sweeping impact on the industry[126] - The European Union's Markets in Crypto Assets Regulation (MiCA) became effective in June 2023, with sustainability standards for consensus mechanisms like Bitcoin's proof-of-work[126] - The SEC filed complaints against Binance Holdings Ltd. and Coinbase, Inc. in June 2023, alleging various violations of securities laws[126] - The UK's Financial Services and Markets Act 2023 (FSMA 2023) became law in June 2023, subjecting cryptoassets to regulated activities and financial promotion orders[126] - The Federal Reserve established a Novel Activities Supervision Program in August 2023 to enhance oversight of crypto-related activities by banking organizations[131] - The White House released a framework for digital asset development in September 2022, encouraging regulatory actions and the development of innovative technologies[125] - The SEC Chair announced in April 2022 efforts to register and regulate digital asset platforms like securities exchanges[126] - The SEC approved the listing and trading of spot bitcoin ETPs on January 10, 2024, with a trading volume of $4.6 billion on the first trading day, which may adversely affect the market price of the company's class A common stock[139][142] Privacy and Data Security - The company faces significant risks related to privacy and data protection laws, including potential enforcement actions from the FTC and other regulatory agencies, which could result in fines and compliance requirements[215][216] - The company stores a substantial amount of customer and employee data, including personal data, on its networks and cloud environments, subject to expanding privacy regulations in the EU, China, and the US[215] - The company is subject to GDPR requirements, which include potential fines of up to €20,000,000 or 4% of global annual revenue, whichever is higher, for non-compliance[218] - The company transitioned to reliance on Standard Contractual Clauses (SCCs) for lawful data transfers from the EU to the US following the invalidation of the U.S.-EU Privacy Shield[218] - The company faces risks of enforcement actions from State Attorneys General and other regulatory agencies for privacy and data security violations[216] - The company may be required to pay fines and adhere to specific privacy and data security practices as part of potential FTC enforcement actions[216] - The company is subject to HIPAA regulations for handling protected health information, with potential civil and criminal penalties for non-compliance[215] - The company faces risks of sanctions, fines, and liabilities from government entities or private plaintiffs in litigation due to data breaches or non-compliance with privacy laws[217] - The company is monitoring the development of new privacy and data security rules by the FTC, which may impact its business practices[216]
MicroStrategy(MSTR)2024-02-14 16:00