Bitcoin’s plunge creates problems for Michael Saylor’s MicroStrategy

Michael Saylor, President and CEO of MicroStrategy, first got into bitcoin in 2020, when he decided to start adding the cryptocurrency to MicroStrategy’s balance sheet as part of a strategy. unorthodox cash management.

Eva Marie Uzcategui | Bloomberg | Getty Images

Having once lost $6 billion At the height of the dotcom bubble, software entrepreneur Michael Saylor was no stranger to financial market volatility.

In 1999, MicroStrategy, Saylor’s software company, admitted that it had overstated its revenue and incorrectly reported a profit when it had in fact made a loss. The fiasco slashed more than $11 billion from MicroStrategy’s 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 relation to a $4 billion bitcoin bet.

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

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

$1 billion loss

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

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His belief was common among crypto devotees – that bitcoin provides a store of value uncorrelated with traditional financial markets.

It turned out to be a gamble, with digital currencies are now moving in lockstep with stocks and other assets plunging amid fears of an aggressive cycle of interest rate hikes from the Federal Reserve.

Bitcoin’s price plunged 10% to $20,843 on Tuesday, extending a sharp selloff and dragging it deeper to levels not seen since December 2020. This comes after crypto credit firm Celsius halted withdrawals on Monday, citing “extreme market conditions”.

MicroStrategy has bet billions on 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 filing.

With bitcoin currently trading at $22,818, MicroStrategy’s crypto stash would now be worth just over $2.9 billion. This translates into an unrealized loss of over $1 billion.

margin call

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

The company took out a $205 million loan from Silvergate, a crypto-focused bank, will continue its bitcoin buying spree. To secure the loan, MicroStrategy deposited some of the bitcoin it held on its books as collateral.

Silvergate did not immediately return a request for comment.

During an earnings call in May, MicroStrategy chief financial officer Phong Le explained that if bitcoin fell below $21,000, he could face a margin call where he would be forced to cough up more. bitcoin – or sell some of its holdings – to meet its needs. warranty requirements. Bitcoin briefly slipped below this level on Tuesday.

“Bitcoin needs to be halved or around $21,000 before we have a margin call,” Le said at the time. “Having said that, before it hits 50%, we could contribute more Bitcoin to the collateral package, so it will never get there.”

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

In June, Saylor insisted the company had more than enough bitcoin to cover its collateral requirements. The cryptocurrency would need to drop to $3,500 before it needs to provide more collateral, he added.

Shares of MicroStrategy, seen by some as a proxy for investing in bitcoin, fell more than 25% on Tuesday, taking its year-to-date losses to more than 70%. That’s even worse than Bitcoin’s performance – the #1 digital coin has practically halved since the start of 2022.

Saylor has yet to comment on bitcoin’s fall below $21,000. He posted a new profile picture on Twitter on Monday showing his face with lasers coming out of his eyes – a nod to a meme signaling a bullish trend in bitcoin.

Hours later, Saylor tweeted, “In #Bitcoin We Trust.”

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