Crypto for Advisors: Why crypto earnings reports can be misleading

Happy Thursday, advisors!

between “realized” figures in quarterly crypto earnings and what’s actually happening on the balance sheet. If you’re using quarterly income statements to gauge treasury behavior, you might be looking at the wrong number.

Then, in “Ask an Expert,” Kim Klemballa takes us through Strategy Inc. — the world’s largest corporate holder of bitcoin — and how their treasury-as-a-business model works.

Happy reading.

– Sarah Morton

Crypto earnings reports use the wrong ‘realized’ figure

When Strategy pre-announced its second quarter in a July 6 filing, it told investors to expect an $8.32 billion loss on digital assets: $8.31 billion unrealized, and $900,000 realized. When the results arrived on July 30, the press release described the entire $8.32 billion as an unrealized loss. The realized figure had disappeared into a rounding convention between one filing and the next.

That is a small thing, and it is the whole problem.

Strategy sold 1,363 bitcoin on June 29 and 30 for $80.8 million, an average of $59,256 a coin. Measured against the $75,578 blended purchase price the company disclosed as of June 30, coins of that quantity cost roughly $103 million to acquire. That is a gap of about $22 million on a single disposal. However, the realized loss reported for the entire quarter was $900,000. Both figures are defensible, but they are simply not the same measure, and only one of them is what the accounting standard means by ‘realized.’

ASU 2023-08 requires in-scope crypto assets to be carried at fair value with remeasurement through net income. Because the asset is marked up to the date of sale, the difference between the last mark and the proceeds is usually small and sometimes zero — it captures the movement since the previous measurement, not the economics of the position. The Financial Accounting Standards Board (FASB) anticipated this. In the Basis for Conclusions, the Board noted that some in practice treat that difference as a realized gain or loss, and said plainly that it does not represent the total realized gain or loss from disposition, which is the difference between the disposal price and the cost basis of the asset. That cost-basis figure is the one the standard requires companies to disclose annually.

How does the business model work?

Strategy still builds and sells AI-powered enterprise analytics software. It generates hundreds of millions in steady annual revenue (about $477 million). Rather than using software profits to buy crypto, MSTR issues corporate debt and sells new batches of common stock to institutional investors. MSTR immediately takes that raised cash and buys spot bitcoin.

Rather than hold spot bitcoin directly, many institutional investors buy MSTR stock instead. This demand often pushes the value of MSTR stock higher than the actual market value of the bitcoin it owns. MSTR uses this premium to continuously dilute its shares, buy more bitcoin and grow its “bitcoin per share” metric.

– Kim Klemballa, head of marketing, CoinDesk Data & Indices

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