MicroStrategy and the Accounting Dilemma

MicroStrategy (MSTR) has a book value per share of $12.62, which is what each shareholder would theoretically receive if the company went bust and its assets were liquidated.

But we know that’s bogus accounting because the MSTR share price is $270.

Most of MSTR’s value comes from its 252,000 bitcoin. Far less of its value comes from its “core” business of data analytics.

The chart below shows MSTR’s price-to-book ratio, which is a measure of stock price / book value per share. Expressed another way, MSTR’s market value is nearly 15 times its tangible asset value. (Tesla, by way of comparison, also has a price-to-book ratio of around 14.7).

These tech companies are outliers. General Electric, which makes a huge range of products, has a price-to-book ratio of about 3. Oil company Shell’s ratio is around 1.

Source: YCharts

The Accounting Rules Dilemma

This is where accounting rules bring the profession into disrepute. Accounting bodies require companies to treat cryptocurrencies as “intangible” assets, which means they must be recorded at cost and written down if the price drops, but never adjusted upwards when prices increase.

Accountants love things that you can feel and touch and despise things that are digital.

According to bitcoin investment group ListedReserve, this explains why corporate treasurers would avoid bitcoin like the plague. “Who wants to have to explain that to the Board, ‘we bought an asset that as far as our P&L is concerned can only go down and never up?’”

You could only ever recognize a loss in your profit and loss account and not a gain.

New Accounting Rules Are Coming

This is all about to change in January 2025 when new American Accounting Standards Board rules allow companies to value these assets at market price. So MSTR’s book value will suddenly leap from $12.62 to $270 a share.

Voila. Just like that.

Accounting Tricks in Banking

Playing with accounting rules has spared banks from embarrassment, due to a little trick called “held to maturity”. It allows them to hold bonds on the balance sheet at their purchase price and ignore market fluctuations thereafter.

That little accounting trick has camouflaged around half a trillion dollars in losses on bonds since interest rates started rising. Were this properly reflected on the banks’ books, interest rates would likely be double what they are now.

MSTR has exposed this bookkeeping fantasy for what it is.