This Crypto Stock Has a Business Beyond Digital Currency

Many things are possible in the world of cryptocurrencies. You can tokenize non-digital assets and put them on the blockchain. A dog-based memecoin that started as a joke just got its own ETF. And certain noncrypto companies can turn their fortunes around just by adding Bitcoin (CRYPTO: BTC) to their balance sheets.

Strategy (MSTR -2.43%), formerly MicroStrategy, pioneered the idea of Bitcoin corporate treasury companies. It still operates as a software company, but Strategy is now the largest corporate holder of Bitcoin in the world. Chairman Michael Saylor’s decision to go all in on Bitcoin back in 2020 means it is cryptocurrency, not software, that drives the company’s fortunes.

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Crypto gains eclipse software revenue — on paper

Strategy’s core business is providing data analytics software to improve business intelligence. Its second-quarter earnings report, released in July, shows almost $115 million in software revenue for the three months ended June 30. That’s less than 1% of its $14 billion in quarterly net income. The remaining 99% was driven by unrealized Bitcoin gains.

Strategy’s share price is up over 2,000% in the past five years, overshadowing Bitcoin’s 940% gain by quite some margin. Unlike a spot Bitcoin ETF, Strategy is designed to amplify rather than mirror the top cryptocurrency’s gains. It leverages its Bitcoin holdings to borrow money to buy more Bitcoin. For investors, there are a few important indicators to use when analyzing crypto corporate treasury companies. One is to compare the company’s market value with what its crypto holdings are worth — in this case, a market cap of almost $98 billion against crypto holdings of almost $74 billion.

What happens if Bitcoin falls?

For Strategy, and the 200 or so companies that followed it so wholeheartedly into the crypto lane, a prolonged dip in Bitcoin’s price could put pressure on the bottom line. Simply put, it could be hard to service debt and maintain shareholder confidence if Bitcoin falls. For example, Bitcoin’s rally meant Strategy could issue more shares without diluting shareholder value, but that could change if prices fall.