Bitcoin plunge spells trouble for Michael Saylor's MicroStrategy

Bitcoin plunge spells trouble for Michael Saylor’s MicroStrategy

Having once lost $6 billion on the peak of the dotcom bubble, software program entrepreneur Michael Saylor isn’t any stranger to volatility within the monetary markets.

In 1999, MicroStrategy, Saylor’s software program agency, admitted to overstating its revenues and erroneously reporting a revenue when it truly made a loss. The fiasco shaved over $11 billion off MicroStrategy’s inventory market worth in a single day.

Now, greater than twenty years later, MicroStrategy is once more going through questions over a few of its accounting practices — this time in relation to a $4 billion guess on bitcoin.

The world’s largest cryptocurrency briefly tumbled under $21,000 Tuesday, a key stage at which MicroStrategy can be confronted with a margin name that buyers concern might price the agency tens of millions.

MicroStrategy was not instantly obtainable for remark when contacted by CNBC.

$1 billion loss

Saylor first obtained into bitcoin in 2020, when he determined to start out including the cryptocurrency to MicroStrategy’s stability sheet as a part of an unorthodox treasury administration technique.

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His perception was a typical one among the many crypto trustworthy — that bitcoin gives a retailer of worth uncorrelated with conventional monetary markets.

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

Bitcoin’s price plunged 10% to $20,843 on Tuesday, extending a brutal sell-off and dragging it deeper into levels not seen since December 2020. That comes after crypto lending firm Celsius halted withdrawals on Monday, citing “extreme market conditions.”

MicroStrategy has bet billions on the cryptocurrency — $3.97 billion, to be exact. As at 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. That translates to an unrealized loss of more than $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 has to 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, to continue its bitcoin buying spree. To secure the loan, MicroStrategy posted some of the bitcoin it held on its books as collateral.

Silvergate did not immediately return a request for comment.

On an earnings call in May, MicroStrategy Chief Financial Officer Phong Le explained that if bitcoin were to fall below $21,000, it could be faced with a margin call where it’s forced to cough up more bitcoin as collateral for the loan. Bitcoin briefly slipped below that level Tuesday.

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

Saylor later insisted the company has more than enough bitcoin to cover its collateral requirements. The cryptocurrency would need to slump to $3,500 before it had to come up with more collateral, he added.

Shares of MicroStrategy, considered by some as a proxy for investing in bitcoin, tumbled more than 25% on Tuesday, taking its year-to-date losses to over 70%. That’s even worse than bitcoin’s performance — the No. 1 digital coin has roughly halved in price since the start of 2022.

Saylor hasn’t yet commented on bitcoin’s drop below $21,000. He posted a new profile picture on Twitter Monday showing his face with lasers coming out of his eyes — a nod to a meme signaling bullishness on bitcoin.

A few hours after, Saylor tweeted: “In #Bitcoin We Trust.”

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