Michael Saylor, president and CEO of MicroStrategy, first entered bitcoin in 2020, when he decided to start adding cryptocurrency to MicroStrategy’s balance sheet as part of an unorthodox treasury management strategy.
Eva Marie Uzcategui | Bloomberg | Getty Images
After losing $ 6 billion at the height of the dot-com bubble, software entrepreneur Michael Saylor is no stranger to financial market volatility.
In 1999, Saylor’s software company MicroStrategy admitted that it had exaggerated its revenue and misreported a profit when it actually had a loss. The fiasco cut more than $ 11 billion in 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 relation to a $ 4 billion bet on bitcoins.
The world’s largest cryptocurrency briefly fell below $ 21,000 on Tuesday, a key level at which MicroStrategy would face a margin call that investors fear could force the company to liquidate its holdings in bitcoins.
MicroStrategy was not immediately available for comment when contacted by CNBC.
Loss of a billion dollars
Saylor first entered bitcoin in 2020, when it decided to start adding cryptocurrency to MicroStrategy’s balance sheet as part of an unorthodox treasury management strategy.
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Their belief was common among crypto faithful: that bitcoin provides a value reserve not correlated with traditional financial markets.
This has turned out to be a risky bet, with digital currencies now moving in step with stocks and other assets sinking amid fears of an aggressive cycle of rising Federal Reserve interest rates.
The price of Bitcoin fell 10% to $ 20,843 on Tuesday, extending a brutal sale and dragging it deeper to levels not seen since December 2020. This comes after cryptocurrency firm Celsius halted withdrawals on Monday, citing “extreme market conditions”.
MicroStrategy has bet billions on cryptocurrency: $ 3.70 billion, to be exact. As of March 31, MicroStrategy had 129,218 bitcoins, each purchased at an average price of $ 30,700, according to a company document.
With bitcoin currently trading at $ 22,818, MicroStrategy’s cryptographic storage would now be worth just over $ 2.9 billion. This translates into an unrealized loss of more than $ 1 billion.
Margin call
To add to MicroStrategy’s problems, the company is now facing what is known as a “margin call,” a situation in which an investor must commit more funds to avoid losses in an increased trade with borrowed cash.
The company took out a $ 205 million loan from Silvergate, a cryptocurrency-centric bank, to continue its anger at buying bitcoins. To secure the loan, MicroStrategy released a portion of the bitcoin that it had in its books as collateral.
Silvergate did not immediately return a request for comment.
In a earnings call in May, MicroStrategy chief financial officer Phong Le explained that if bitcoin fell below $ 21,000, it could face a margin call where it will be forced to take out more bitcoins – or sell some of their holdings- to meet their warranty requirements. Bitcoin fell slightly below that level on Tuesday.
“Bitcoin has to be cut in half or about $ 21,000 before it has a margin call,” Le said at the time. “That said, before it reaches 50%, we could add more Bitcoin to the guarantee package, so it never arrives.”
It is unclear whether MicroStrategy has pledged more funds to secure the loan.
In June, Saylor insisted the company had more than enough bitcoin to meet its collateral requirements. He added that the cryptocurrency should fall to $ 3,500 before it has more collateral.
Shares of MicroStrategy, considered by some to be an indicator for investing in bitcoins, fell more than 25% on Tuesday, bringing its year-over-year losses to more than 70%. This is even worse than the performance of bitcoin: the number 1 digital currency has shrunk by about half since the beginning of 2022.
Saylor has not yet commented on bitcoin’s fall below $ 21,000. On Monday, he posted a new profile picture on Twitter showing his face with lasers sticking out of his eyes – a look at a meme indicating the bullish on bitcoin.
Hours later, Saylor tweeted, “We trust #Bitcoin.”
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