In the early hours of September 1, Beijing time, Washington DC chief prosecutor Karl Racine is prosecuting MicroStrategy and its co-founder and former CEO Michael Saylor for alleged tax evasion. Affected by this news, MicroStrategy shares continued to suffer today.

For the crypto world, MicroStrategy is a unique existence - forever long. According to the statistics of Bitcoin Treasuries, MicroStrategy currently holds more than 129,000 bitcoins, second only to Grayscale, block one, and MTGOX in the number of institutional holdings. The former CEO of the company, Michael Saylor, who is the subject of the lawsuit, is the main promoter of his buying of Bitcoin, and is also regarded as a powerful standard-bearer in the bull market to promote price increases.

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Executive tax evasion scandal

Chief prosecutor Karl Racine said publicly yesterday. "Saylor (MicroStrategy CEO) has lived in DC for over a decade and has never paid any income taxes. We would like to remind everyone that if you refuse to pay your taxes while enjoying all the benefits of living in our great city , we will hold you accountable."

And he didn't forget to add Saylor's relationship with the encryption world, "The CEO has become one of the most public supporters of Bitcoin and blockchain technology in the past few years, and he launched a campaign to promote the company's support." There are benefits of Bitcoin.”

MicroStrategy conspired to help Saylor evade approximately $25 million in taxes, according to prosecutors.MicroStrategy actually knew about Saylor, but instead of accurately reporting it to the tax authorities, MicroStrategy chose to cooperate with Saylor to facilitate his tax evasion.

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Bleeding MicroStrateg

Although the prosecution has just kicked off, the final result will go through a long process. But it has become a fact that MicroStrategy is facing a crisis. After all, MicroStrategy's cash flow is on the verge of drying up.

$100 million may not seem like a lot for a company with nearly $4 billion invested, but the tax department doesn’t support crypto payments. MicroStrategy's Q2 financial report this year shows that as of June 30, 2022, the company's cash and cash equivalents were only $69.4 million. And the company is still operating at a loss.

For the quarter, MicroStrategy's operating loss was $918.1 million, a 121% year-over-year increase from 2021. The net loss also continued to expand to US$1.062 billion, compared to only US$299.3 million in Q2 2021.

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Can Diamond Hands still HODL?

In the impression of investors, MicroStrategy is a strong diamond player, trumpeter, and HODLer of Bitcoin. In the bull market, this strategy can still be maintained. How long can MicroStrategy, which is losing blood, continue to HODL?

In June of this year, MicroStrategy transferred Bitcoin for the first time, transferring 2089.99 to a new wallet. This also once triggered speculation in the market that diamond hands will finally sell their bitcoins. However, no further progress has been announced.

For MicroStrategy, in addition to daily operating cash flow, its loan interest also needs to be continuously paid in legal currency. In the purchase of huge bitcoin reserves, less than half of the funds came from MicroStrategy's own capital reserves, and most of the rest came from loan purchases.

In March of this year, MicroStrategy received a $205 million loan from encrypted bank Silvergate with an interest rate of about 4%, most of which was collateralized by Bitcoin.

At the time of the loan, MicroStrategy maintained the LTV at 200%, and based on current prices, MicroStrategy would be required to make a margin call when the price was below $21,000. At present, Bitcoin has already fallen below this value many times. If Bitcoin continues to fall, MicroStrategy may also face more additional margin calls.

MicroStrategy also issued convertible notes totaling $1.75 billion at an interest rate of approximately 0.75%. In addition, there is a $500 million senior secured loan at 6.1%.

Based on the above debt estimates, MicroStrategy will have to pay approximately $35 million in interest annually starting in 2022.

In the past two years, MicroStrategy's quarterly net profit has basically remained at around US$10 million after excluding investment impairment losses. In other words, the profit of MicroStrategy's software business can roughly cover the loan interest every year.

All in all, MicroStrategy's operations are currently in a weak balance. If MicroStrategy is fined heavily, MicroStrategy has only 69.4 million cash reserves to use. At that time, I am afraid that only selling coins can afford to pay the fine.

At present, the tax agency's lawsuit against MicroStrategy has just kicked off. Can MicroStrategy, the famous diamond hand, still HODL this time?