MicroStrategy's second-quarter earnings revealed a staggering $8.22 billion net loss, a sharp reversal from the $10 billion profit reported the previous year. The company's newly introduced metric, BTC Hurdle ARR, highlights a troubling gap between Bitcoin returns and the cost of its credit.
New Metric Exposes Returns Below Borrowing Costs
The BTC Hurdle ARR, set by CFO Andrew Kang at 10.8%, is designed to measure the effective cost of credit for MicroStrategy's Bitcoin-backed financing. However, the company’s Bitcoin yield for the year came in at just 4.5%, well below this threshold. This means MicroStrategy is paying more on its debt and preferred shares than it is earning from its Bitcoin holdings, resulting in a negative net accretion of Bitcoin per share.
Kang explained that if the Bitcoin yield exceeds the hurdle rate, the company’s net Bitcoin per share would grow faster than Bitcoin itself. Currently, that’s not the case. While the 4.5% yield over the first half of the year annualizes to roughly 8%, it still falls short by about three percentage points.
Rising Credit Costs Drive Financial Pressure
The increasing cost of credit is a key factor behind MicroStrategy’s losses. This year, the company issued $7.53 billion in STRC preferred shares, a 254% jump, pushing dividend rates up to 12%. During the quarter, preferred dividends soared to $400.7 million, compared to just $49.1 million a year earlier. To cover these expenses, MicroStrategy liquidated approximately $218.4 million worth of Bitcoin.
The financial strain was evident in the quarter’s results, which included an $8.32 billion writedown on Bitcoin holdings. This pushed the net loss to $8.22 billion or $24.45 per diluted share, highlighting the challenges of leveraged exposure to Bitcoin amid volatile market conditions.
Despite these setbacks, MicroStrategy managed some operational wins: increasing its Bitcoin holdings by 11%, reducing convertible debt by 18%, boosting USD reserves by 12%, and raising book value per share by 5%. However, the cost of credit and Bitcoin’s underperformance remain critical headwinds.
