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Bitcoin plunge spells trouble for Michael Saylor’s MicroStrategy

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Michael Saylor, chairman and chief executive officer of MicroStrategy, first got into bitcoin in 2020, when he decided to begin adding the cryptocurrency to MicroStrategy’s balance sheet as a part of an unorthodox treasury management strategy.

Eva Marie Uzcategui | Bloomberg | Getty Images

Having once lost $6 billion at the peak of the dotcom bubble, software entrepreneur Michael Saylor is not any stranger to volatility within the financial markets.

In 1999, MicroStrategy, Saylor’s software firm, admitted to overstating its revenues and erroneously reporting a profit when it actually made a loss. The fiasco shaved over $11 billion off MicroStrategy’s stock market value in a single day.

Now, greater than twenty years later, MicroStrategy is again facing questions over a few of its accounting practices — this time in relation to a $4 billion bet on bitcoin.

The world’s biggest cryptocurrency briefly tumbled below $21,000 Tuesday, a key level at which MicroStrategy could be faced with a possible margin call that investors fear could force the corporate to liquidate its bitcoin holdings.

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

In a tweet Tuesday, Saylor said MicroStrategy “anticipated volatility and structured its balance sheet in order that it could proceed to #HODL through adversity.” HODL is a slang term in crypto geared toward discouraging investors from selling.

$1 billion loss

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

His belief was a typical one among the many crypto faithful — that bitcoin provides a store of value uncorrelated with traditional financial 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 rate of interest mountain climbing 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. It 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 a mean price of $30,700, in accordance with an organization filing.

With bitcoin currently trading at $22,818, MicroStrategy’s crypto stash would now be price just over $2.9 billion. That translates to an unrealized lack of greater than $1 billion.

Margin call

So as to add to MicroStrategy’s woes, the corporate now faces what’s generally known as a “margin call,” a situation where an investor has to commit more funds to avoid losses on a trade augmented with borrowed money.

The corporate took out a $205 million loan from Silvergate, a crypto-focused bank, to proceed its bitcoin buying spree. To secure the loan, MicroStrategy posted a few of the bitcoin it held on its books as collateral.

Silvergate didn’t immediately return a request for comment.

Read more about tech and crypto from CNBC Pro

On an earnings call in May, MicroStrategy Chief Financial Officer Phong Le explained that if bitcoin were to fall below $21,000, it might be faced with a margin call where it’s forced to cough up more bitcoin — or sell a few of its holdings — to fulfill its collateral requirements. Bitcoin briefly slipped below that level Tuesday.

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

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

In June, Saylor insisted the corporate has good enough bitcoin to cover its collateral requirements. The cryptocurrency would wish to slump to $3,500 before it needed to give you more collateral, he added.

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

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