Bitcoin dive creates problems for Michael Saylor’s MicroStrategy

After losing $ 6 billion at the height of the dotcom bubble, software founder Michael Saylor is no stranger to financial market volatility.

In 1999, MicroStrategy, Saylor’s software company, admitted to overestimating its revenue and incorrectly reporting profits when it actually made a loss. The failure shaved off $ 11 billion of MicroStrategy’s market capitalization in a single day.

Now, more than two decades later, MicroStrategy is once again facing questions regarding some of its accounting practices – this time in relation to a $ 4 billion bet on bitcoin.

The world’s largest cryptocurrency briefly fell below $ 21,000 on Tuesday, a key level where MicroStrategy would be met with a possible 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.

In a tweet Tuesday, Saylor said that MicroStrategy “predicted volatility and structured the balance so that it could continue to #HODL through adversity.” HODL is a slang term in crypto aimed at discouraging investors from selling.

Saylor first entered bitcoin in 2020, when he decided to start adding the cryptocurrency to MicroStrategy’s balance sheet as part of an unorthodox financial management strategy.

His belief was common among cryptocurrencies – that bitcoin provides a value store that is not correlated with traditional financial markets.

It has proven to be a risky game, with digital currencies now moving at a locked pace with stocks and other assets plunging amid fears of an aggressive interest rate hike cycle from the Federal Reserve.

Bitcoin’s price plunged 10% to $ 20,843 on Tuesday, expanding brutal sales and dragging it deeper into levels not seen since December 2020. It comes after cryptocurrency firm Celsius stopped withdrawals on Monday, citing “extreme market conditions” .

MicroStrategy has invested billions in the cryptocurrency – $ 3.97 billion, to be exact. As of March 31, MicroStrategy held 129,218 bitcoins, each purchased at an average price of $ 30,700, according to a company file.

With bitcoin currently trading at $ 22,818, MicroStrategy’s cryptocurrency will now be worth just over $ 2.9 billion. That means an unrealized loss of more than $ 1 billion.

To add to MicroStrategy’s problems, the company is now facing what is known as a “margin call”, a situation where an investor must commit to more funds to avoid losses on a trade extended with borrowed cash.

The company took out a $ 205 million loan from Silvergate, a cryptocurrency-focused bank, to continue its bitcoin buying spree. To secure the loan, MicroStrategy posted some of the bitcoins it had on its books as collateral.

Silvergate did not immediately return a request for comment.

At a earnings interview in May, MicroStrategy Chief Financial Officer Phong Le explained that if bitcoin were to fall below $ 21,000, it could be met with a margin call where it would be forced to cough up more bitcoin – or sell some of its holdings – to meet their holdings. collateral requirements. Bitcoin fell briefly below this level on Tuesday.

“Bitcoin needs to be cut in half or around $ 21,000 before we have a margin call,” Le said at the time. “That said, before it reaches 50%, we can contribute more Bitcoin to the security package, so it never gets there.”

It is not yet clear whether MicroStrategy has promised more funds to secure the loan.

In June, Saylor insisted that the company has more than enough bitcoin to meet its security requirements. The cryptocurrency had to fall to $ 3,500 before it had to come with more security, he added.

Shares in MicroStrategy, which is considered by some to be a proxy for investing in bitcoin, fell more than 25% on Tuesday, taking losses to over 70% so far. It’s even worse than bitcoin’s performance – the No. 1 digital coin has roughly halved in price since the start of 2022.

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