Bitcoin Drop Causes MicroStrategy Problem for Michael Saylor

Michael Saylor, Chairman and CEO of MicroStrategy, first got into Bitcoin in 2020, when he decided to start adding cryptocurrency to MicroStrategy’s balance sheet as part of an unconventional treasury management strategy.

Eva Marie Ozkategi | Bloomberg | Getty Images

Having once lost $6 billion at the height of the internet bubble, software entrepreneur Michael Saylor is no stranger to volatility in financial markets.

In 1999 MicroStrategy, the software company Saylor, admitted to overstating its revenue and misreporting a profit when it actually incurred a loss. The fiasco slashed more than $11 billion from MicroStrategy’s stock market value in a single day.

Now, more than two decades later, MicroStrategy is once again facing questions about some of its accounting practices — this time in connection with a $4 billion bet on bitcoin.

The world’s largest cryptocurrency briefly fell below $21,000 on Tuesday, a key level at which MicroStrategy will face a margin call that investors fear could force the company to liquidate its bitcoin holdings.

MicroStrategy was not immediately available for comment when contacted by CNBC.

1 billion dollars loss

Saylor first got into bitcoin in 2020, when he decided to start adding cryptocurrency to MicroStrategy’s balance sheet as part of an unconventional treasury management strategy.

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His belief was popular among crypto-believers – that bitcoin provides a store of value unconnected to traditional financial markets.

This turned out to be a risky gamble, as digital currencies are now in full swing with stocks and other assets dropping amid fears of a rate hike cycle from the Federal Reserve.

Bitcoin plunged 10% to $20,843 on Tuesday, triggering a brutal sell-off and dragging it deeper not seen since December 2020. This comes after crypto lender Celsius halted withdrawals on Monday, citing “extreme market conditions.”

MicroStrategy has bet billions on cryptocurrency — $3.97 billion, to be exact. On March 31, MicroStrategy held 129,218 bitcoins, each purchased at an average price of $30,700, according to the company’s filing.

With Bitcoin currently trading at $22,818, MicroStrategy’s cryptocurrency stock will be worth just over $2.9 billion. This translates to an unrealized loss of more than $1 billion.

marginal calls

To add to MicroStrategy’s problems, the company is now facing what’s known as a “margin call,” a situation in which an investor has to put in more money to avoid losses in a trade backed by borrowed cash.

The company has secured a $205 million loan from Silvergate, a crypto-focused bank, to continue its bitcoin buying spree. To secure the loan, MicroStrategy posted some bitcoins that it kept on its books as collateral.

Silvergate did not immediately respond to a request for comment.

In an earnings call in May, MicroStrategy’s chief financial officer, Fong Lo, explained that if bitcoin drops below $21,000, he could face a margin call as he has to cough up more bitcoin — or sell some of his holdings — to meet his needs. Warranty requirements. Bitcoin briefly fell below that level on Tuesday.

“Bitcoin needs to cut half a dollar or about $21,000 before we have a margin call,” Lu said at the time. “However, before it reaches 50%, we can contribute more bitcoin to the escrow package, so it will never get there.”

It is not yet clear if MicroStrategy has pledged more funds to secure the loan.

In June, Saylor confirmed that the company had more than enough bitcoin to cover the collateral requirements. He added that the cryptocurrency would need to drop to $3,500 before it had to offer more collateral.

Shares of MicroStrategy, considered by some as a proxy for investing in Bitcoin, plunged more than 25% on Tuesday, taking their losses so far to more than 70%. This is worse than the performance of Bitcoin – the number. The price of a single digital currency has almost halved since the start of 2022.

Saylor has yet to comment on Bitcoin dropping below $21,000. He posted a new profile picture on Twitter on Monday showing his face with a laser sticking out of his eyes – a meme sign indicating a bullish trend on Bitcoin.

A few hours later, Saylor tweeted: “In Bitcoin we trust.”

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