Strategy Faces Narrow Margins Ahead of Third-Quarter Earnings Report

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Strategy, formerly known as MicroStrategy, is poised to release its third-quarter earnings on Thursday, post-market close in the United States. As the preeminent corporate holder of Bitcoin, the company finds its Bitcoin reserves hovering just 6% above their average purchase cost at current market valuations.

Bitcoin Holdings Near Break-Even

According to an announcement dated October 26, Strategy holds 848,517 Bitcoins in its coffers, acquired at an average price of $75,446 each. With Bitcoin trading around $80,000, the total value of these holdings reaches approximately $68 billion. Contrastingly, the company spent roughly $64 billion on these acquisitions, translating to a paper profit of merely $4 billion.

Strategy, well-recognized for its substantial Bitcoin holdings, stands out as the largest institutional stakeholder in this domain.

Strategy’s 848,517 BTC were acquired at an average cost of $75,446 each, and with Bitcoin trading near $80,000, the company’s paper profit hovers around $4 billion.

Weakened Start for the Fourth Quarter

The outset of the fourth quarter paints a more challenging outlook for the company. A filing from October 5 indicated that as of the end of September, each Bitcoin was valued at around $83,500. Since then, declines in Bitcoin’s price have resulted in an approximate $3 billion paper loss, with two months remaining in the quarter.

This scenario has rekindled interest in the correlation between Strategy’s stock and Bitcoin’s price, as the company’s valuation is heavily influenced by its Bitcoin positioning rather than direct operating income.

Tax Assets Regain Significance

The tax component of Strategy’s financials reveals a pivotal aspect. In June, when Bitcoin’s price dipped below the firm’s average cost, Strategy wrote down a $4.12 billion tax asset that could offset future tax liabilities. In the third quarter, this asset was reinstated, contributing approximately $4 billion to profits.

Calculations suggest that if Bitcoin’s price falls below $75,446, this tax advantage could become active again. Should the price drop to around $58,500, the full $4 billion tax credit may be restored.

The $4.12 billion tax asset previously written off in June was re-added in the third quarter, boosting company earnings by about $4 billion.

ETF Holders Underwater

Strategy is not alone in this precarious position. Glassnode data indicates that investors in U.S.-traded spot Bitcoin ETFs have an average purchase cost around $81,500, slightly above Bitcoin’s prevailing market price.

Meanwhile, Strategy refrained from acquiring additional Bitcoin in the week ending October 25. Instead, it diverted resources towards repurchasing STRC preferred shares.