Institutional Investors Maintain Conviction in Digital-Asset Strategies Despite Heavy Losses

The 2021 crypto market boom prompted many investors at the institution level to consider foraying into the digital assets space. The bulk sought exposure to the range of assets and similar offerings, while other bets indirectly on companies in the sector. Among others, MicroStrategy, Ark Invest, and Tesla set up notable digital assets-oriented investment strategies and have remained invested in the space, notwithstanding dormancy in recent days. Here is a look at the portfolios of these and other public company holders based on the latest filings.

MicroStrategy records a near $200M impairment charge in Q4

In their initial forecasts, analysts projected MicroStrategy to report a profit in its Q4 2022 numbers. The largest corporate holder of Bitcoin previously went against its HODL strategy, selling 704 Bitcoin for $11.8 billion on Dec 22 to generate tax benefits. Still, the firm added 810 BTC only two days later, bringing its total Bitcoin growth between the start of Nov and Dec 24 to 3,205 Bitcoin. Ahead of its Q4 results, market commentators expected the Saylor-led software company to turn a profit for the first quarter in two years whilst recording a slight dip in revenue compared to the year before. Forecasts by FactSet, in particular, projected revenue of $130 million and a net income of $10.7 million.

MicroStrategy released its 2022 Q4 financial results on Feb 2, revealing $197.6 million in impairment charges for its ownership of Bitcoin. The flagship asset lost as much as 65% of its value during this financial period, though it has been recovering this year, up 31% on the year-to-date chart. The mobile software and enterprise analytics service provider imputed the impairment charge to a net loss of $249.7 million, compared to $90 million in the corresponding period of the previous year. Markedly, the Saylor-led business intelligence company, which has stood out as one of the most consistent buyers of Bitcoin since August 2020, netted cash proceeds of $11.8 million from its first-ever sale of Bitcoin. This transaction carried out in Q4 resulted in gains of $0.9 million.

The company’s overall revenue outperformed projections, reaching $132.6 million compared to $134.5 million in Q4 of the prior year. In an earnings call, MicroStrategy chief financial officer Andrew Kang indicated that the firm is not relenting in its purchases despite cumulative paper losses of $2.153 billion on its Bitcoin since acquisition.

Bitcoin is still king

Kang said that the company might again look into the possibility of more transactions that would hinge on the volatility in BTC pricing or other market changes that align with its acquisition strategy. MicroStrategy’s performance metrics are calculated based on various benchmarks, and among them is Bitcoin’s performance. MicroStrategy’s stock has performed closely to Bitcoin – charting similar gain/loss trajectories in their respective markets.

 

The company had 132,500 Bitcoin at the end of Q4 2022, a 1.9% increase over the previous quarter. Notably, it wasn’t the only one that saw an impairment loss on its Bitcoin holdings.

Tesla sailed the markets’ hustle without selling any Bitcoin in Q4

Less than a week after releasing its Q4 and FY earnings report on Jan 25, Tesla, in a separate Jan 30 Form 10-K filing, disclosed it lost $140 million divesting into Bitcoin. The EV maker invested $1.5 billion in Bitcoin in Feb 2021, but as the crypto market retreated in prices, the carmaker decided to sell 75% of its holdings in July last year. Tesla remained dormant in Q4 as strong headwinds hit crypto markets. The automotive and energy company neither purchased nor sold more Bitcoin per its earnings report after selling 75% of its Bitcoin holdings in Q2 ($936 million to its books, turning a $64 million profit).

CEO Elon Musk said the move was necessary to enhance the company’s cash position due to the uncertainty of COVID-19 lockdowns in China at the time. Musk also explained that the decision wasn’t a judgment call on Bitcoin; rather, Tesla would remain open to growing its Bitcoin exposure in the future. In the recent filing with the SEC, Tesla reported it suffered a $204 million impairment loss as a result of the carrying value of Bitcoin and made a $64 million profit on the Bitcoin it sold for fiat. Held assets are typically subjected to periodic impairment assessments as part of standard accounting procedures to ascertain if their carrying value on the balance sheet exceeds their fair value. For context, Tesla reported a $101 million impairment loss on digital assets and $128 million in gains last year.

The electric car company noted that the impairment charges could affect the company’s future investment strategy regarding Bitcoin. Tesla reported that consistent with standard investment protocols and in accordance with established cash and cash-equivalent account management procedures, it retains the discretion to modify its digital asset portfolio at any time in response to the evolving demands of the business and based on an assessment of prevailing market conditions. The company’s Q4 report showed its 9,720 Bitcoin holdings and other assets had a value of $184 million, down 15.6% from $218 million in the quarter before as a result of the decline in the spot price.

 

The value of the world-leading digital asset token changed from just under $20,000 at the end of Q3 to about $16,500 by the end of the year. Tesla also reported adjusted earnings per share (EPS) of $1.19, surpassing the consensus estimate of $1.13, as reported by FactSet. However, the California-based automaker logged revenue of $24.3 billion for the quarter, falling short of the estimated $24.7 billion.

To learn more about Bitcoin, check out our Investing in Bitcoin guide.

Meta not backing down despite $13.7B in losses in its metaverse business last year

Formerly Facebook, Mark Zuckerberg’s social media creation rebranded as Meta in 2021 to focus on exploring metaverse initiatives. This journey into the virtual world has proved costly for the company, as it reported a loss of $13.7 billion in 2022. Reality Labs, the virtual reality and augmented reality division of Meta, had an annual revenue of $2.16 billion, representing a YoY decrease from the 2021 figure of $2.27 billion. Notwithstanding this dip in performance, the tech giant is not planning to deviate from its established strategy intending to leverage the long-term opportunities it sees in this space. CFO Susan Li confirmed that Meta anticipates this division’s full-year losses to spiral further this year as the company intends to continue pumping capital into its metaverse business.

In contrast, rival tech giant Microsoft this week pulled the plug on its Industrial Metaverse project that was launched in October. In addition to terminating the initiative aimed at developing enterprise software interfaces that could be used to drive metaverse-related projects, the computer tech corporation dismissed the involved team of about 100 in the process, according to a Thursday report by The Information.

PayPal puts its stablecoin project on hold

On Friday, Bloomberg reported that global financial services provider PayPal has halted its stablecoin project following a probe into Paxos, its crypto partner, by the New York Department of Financial Services. Alongside the update on the NYDFS investigation into the Pax dollar and Binance USD stablecoin issuer on Thursday, PayPal said it remains committed to bringing its stablecoin offering – pegged 1:1 to the US dollar – with approval from relevant regulators.

In its annual report filed with the SEC this week, the global payments giant revealed a massive crypto holding of $604 million for customers through its hold-and-sell crypto service launched for US customers in Oct 2020. The figure represented 67% of its total financial liabilities as of the end of the year – another $298 million accounted by derivatives. The filing showed $291 million of the safeguarding liability was accounted for by Bitcoin, followed by Ethereum’s native token Ether representing $250 million. PayPal has suffered the adversity of the gloom macro-environment, previously revealing in a Jan 31 corporate announcement a 7% staff reduction affecting 2,000 employees. PayPal CEO Dan Schulman also recently communicated his exit at the end of the year from the company he has guided since 2015, adding to executives leaving the industry in different sectors.

To learn more about Ethereum, check out our Investing in Ethereum guide.

Ark Invest racks up more Coinbase stock

Elsewhere on Friday, Ark Invest reported that it bagged another 162,325 Coinbase shares and 263,504 Robinhood shares to its portfolio worth around $9.267 million and $2.63 million. The purchase is the latest in a ‘buy the dip’ streak that the digital assets investment asset has seemingly embraced thus far this year. Last July, Ark dumped over 1.4 million Coinbase shares across its funds, including the flagship Ark Innovation ETF. The firm also sold shares in the retail investing platform Robinhood worth over $500,000. CEO Cathie Wood, who leads the company, separately projected Bitcoin price to reach a $1 million valuation by 2030.

Friday’s scoop followed a dip in Coinbase stock as the market reacted to news of the US markets regulator fining Kraken exchange $30 million and restricting its crypto staking service to US clients. The move to increase its COIN position indicates an appetite for crypto-focused assets amid growing interest in the artificial intelligence (AI) sector. The latter fast-growing niche has drawn huge funds from individual and institutional investors who view it as the next disruptive and influential thing. A January survey by JPMorgan painted the picture of interest shifting to AI from blockchain, whose crypto market saw a heavy downturn last year

Shifting focus to AI and criticism from traditional finance

Speaking at a conference run by Afore Consulting on Feb 8, BNY Mellon head of digital assets Michael Demissie remarked that digital assets remain of interest among institutions. Demissie also pointed out the “buy and hold” strategy adopted by this group of investors, referencing an October survey by the US banking giant. The banking exec, however, decried the lack of clear and proper regulation as a stifling setback to the uptake of these digital assets. Notably, many other banks besides BNY Mellon have shown interest in digital assets despite the negative developments rocking the sector.

Bitcoin and crypto, in general, have still seen rejection from skeptic Wall Street elites, most recently Berkshire Hathaway’s Charlie Munger. The billionaire investor recently criticized Bitcoin as ‘gambling contracts’ in a Feb 1 Wall Street Journal post asking for its ban by the federal authorities. In response to Munger’s call for a federal ban on crypto, MicroStrategy’s former CEO Michael Saylor attributed Munger’s to a lack of understanding of digital assets.

“If [Munger] were a business leader in South America or Africa or Asia and he spent 100 hours studying the problem, he would be more bullish on bitcoin than I am,” the executive chairman said in a CNBC interview following the release of MicroStrategy’s fourth-quarter earnings results.

Similar unreceptive views on Bitcoin are shared by Munger’s investment partner Warren Buffett who has been equally critical of the disruptive technology behind cryptocurrencies.

 

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