The U.S. Securities and Exchange Commission (SEC) is adding fuel to the fire already spreading in the broader crypto market. On Friday, January 21, the SEC rejected MicroStrategy’s Bitcoin accounting standards, noting that the company was unable to remove Bitcoin’s wild fluctuations from its unofficial accounting standards.
The news comes as Bitcoin corrects 7% for the second day in a row eroding over $100 billion in investor wealth. The BTC correction comes amid a broader sell-off taking place on Satoshi Street as well as the stock market.
Enterprise software maker MicroStrategy started buying Bitcoin in September 2020. Since then, company founder Michael Saylor has actively added Bitcoin to MicroStrategy’s balance sheet. As of now, MicroStrategy is holding a total of 124,391 BTC with a recent purchase last month.
Following the SEC statement, MicroStrategy (NASDAQ: MSTR) is up 18% consecutively on Friday to close at $375. MSTR is showing a further 3.5% decline in after-hours market trading.
SEC Subjects MicroStrategy Non-GAAP Reporting Measures
But in its Form 10-Q, MicroStrategy uses non-GAAP measures for the quarter ended September 30, 2021. This shows its investors what their earnings would look like if the company does not have to discount the purchase price of Bitcoin, which is very volatile.
According to Bloomberg, the SEC has objected to this according to their comment letter published on Thursday this week. The publication added:
Generally accepted accounting principles of the United States, or GAAP, provide no rules for reporting the value of digital assets. Non-binding guidance from the American Institute of CPAs states that companies should classify currency as an intangible asset, as outlined in ASC 350.
This means that businesses that do not qualify as investment companies will record the cryptocurrency at cost and then adjust only if the value decreases. Once their holdings are written off or impaired, companies cannot modify the backing value if the price recovers.
Now, with a highly volatile asset like Bitcoin that is a problem. On the books, the value can only be recorded as shrinking, not increasing. Currently with the large amount of BTC held by MicroStrategy, any downward movement in the Bitcoin price could adversely affect the company’s bottom line.
For the third quarter of 2021, MicroStrategy reported a net loss of $36.1 million. However, with the weakening of Bitcoin holdings, the company’s unofficial or non-GAAP earnings rose to $18.6 million. But MicroStrategy believes that if the company shows a drop in BTC value, it will lead to an “insufficient assessment” of their BTC holdings.
The maker of the enterprise software says it will “make less sense to management or investors”. The company added:
“We also believe that the inclusion of bitcoin’s non-cash losses may distract investors’ analysis of the performance of our enterprise software analytics business.”
However, the SEC disagreed and strongly objected to the nature of this report. The SEC has asked MicroStrategy to remove current non-GAAP reporting measures from future filings. MicroStrategy has agreed to comply with this.
MicroStrategy Doesn’t Sell Its $5 Billion Bitcoins
As the heavy correction continues in the crypto space, Bitcoin is now down more than 40% from its all-time high of $69,000. However, Michael Saylor of MicroStrategy says that the company is not selling anything from its $5 billion worth of BTC. Speaking to Bloomberg this Thursday, Saylor said:
“Never. Is not. We are not a seller. We just buy and hold Bitcoin, right? That is our strategy.”
He added that he is not worried about the recent market correction in crypto. On his Twitter, Saylor add:”If you are going to invest in #bitcoin, the short time horizon is four years, the intermediate horizon is ten years, & the appropriate time horizon is forever”.
Looking at MicroStrategy’s aggressive Bitcoin purchases, we can expect them to buy into the current Bitcoin drop.