Bitcoin Treasury Firm Strategy Warns Investors

Bitcoin treasury firm Strategy, formerly MicroStrategy, warns investors about potential profitability risks from Bitcoin price volatility and changing tax rules. The company holds 478,740 BTC valued at over $46 billion, detailing concerns in its latest 10-K filing with the Securities and Exchange Commission (SEC).

Bitcoin Price Swings Threaten Profitability

Strategy reported a net loss for 2024, primarily due to a $1.79 billion digital asset impairment. The company indicated that returning to profitability could prove difficult, especially if Bitcoin prices plunge. A significant decrease in Bitcoin’s market value could hit the firm’s liquidity, potentially forcing it to sell Bitcoin at unfavorable prices.

Additionally, Strategy’s enterprise analytics software business didn’t generate positive cash flow in 2024. The firm might need to rely on equity or debt financing to meet financial obligations, largely hinging on the value of its Bitcoin holdings. If Bitcoin prices fall drastically, obtaining financing could become difficult.

Fair-Value Accounting Set to Reshape Financial Reporting

Previously, companies had to mark down Bitcoin values during market downturns but could not adjust them upward unless sold. However, starting January 1, 2025, Strategy will adopt the Financial Accounting Standards Board (FASB) fair-value accounting rules.

Under this approach, unrealized Bitcoin gains and losses will be recognized in net income each reporting period, creating a $12.75 billion adjustment to the company’s retained earnings. While providing a clearer financial picture, the new accounting method introduces increased earnings volatility, directly impacting reported financial results and investor sentiment.

Tax Hikes and Regulatory Landscape Add to Uncertainty

Strategy faces significant tax challenges due to the Inflation Reduction Act (IRA) of 2022, which introduced a 15% Corporate Alternative Minimum Tax (CAMT). If the company does not get an exemption, it might be subject to CAMT starting in 2026. Concerns about potential tax liabilities related to unrealized Bitcoin gains could impose a financial burden, requiring significant cash payments affecting earnings and liquidity.

Massive Bitcoin Holdings Under Scrutiny

Strategy is the largest corporate holder of Bitcoin, having acquired about 258,320 BTC in 2024 at an average price of $85,447 per Bitcoin, representing over 2.2% of Bitcoin’s total supply. The firm’s debt stands at $7.27 billion, with annual interest expenses of $35.1 million expected to rise under its Bitcoin strategy. Despite profitability and tax concerns, Strategy’s stock price surged over 350% in the past year.

Disclaimer: This article is informational and does not constitute financial advice. Coin Edition is not responsible for any losses incurred. Readers are advised to exercise caution before taking any actions.